Policy Design

for Humans
Behavioural
Economics 101
Dueling
with Desire
HOW TO MANAGE
PAGES 6, 32, 82 PAGE 20 PAGE 44 MACHINES PAGE 26

MANAGEMENT
The Magazine of the Rotman School of Management
UNIVERSITY OF TORONTO
SPRING 2017

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Why You I s su e
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Be
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 MANAGEMENT
SPRING 2017: THE BEHAVIOURAL ISSUE

To encourage commuters to take the

stairs, this subway station in Zhengzhou,
China turned its staircase into a piano,
which gets played when people walk
on it. Similar examples of choice archi-
tecture are popping up everywhere
from Starbucks (which makes it ultra-
easy for customers to recycle) to school
cafeterias, which are placing healthy
foods at eye level and sugary snacks
further out of students reach.

Features

6 20
Policy by Design: The Dawn
of Behaviourally-
Informed Government
by Dilip Soman, Katie Chen
and Neil Bendle
From Canada to Singapore, govern-
ments are embracing insights from
Behavioural Economics to improve
the lives of their citizens.
Behavioural Economics 101:
Judgment, Choice and Time
by George Loewenstein
Behavioural Economics increases
the explanatory power of Economics
by providing it with more realistic
psychological foundations.
A pioneer of the field explains.
26
Managing the Machines:
The Challenge Ahead
by Ajay Agrawal, Joshua Gans
and Avi Goldfarb
Artificial Intelligence is making
prediction cheap, posing a slew
of new challenges for managers
and employees alike.
 32
Changing the World,
One Nudge at a Time
by David Halpern
Want your customer to do something?
Make it easy! Governments are slowly
embracing this proven principle
and businesses should, too.
50
Value Investing, Human
Behaviour and Why You
Should Ignore the Market
by Eric Kirzner, Charles Brandes and
Kim Shannon
Eric Kirzner interviews two global
investing experts about the value
investing environment, market ef-
ficiency, and how some things like
human behaviour never change.
68
How to Increase Ethical
Behaviour in Organizations
by Ting Zhang, Pinar Fletcher, Francesca
Gino and Max Bazerman
Developing a vigilant mindset and
embracing four behavioural tools
can go a long way in reducing unethical
behaviour in organizations.
38
Consider This: Option
Awareness and the Psychology
of What We Consider
by Anuj Shah and Jens Ludwig
If we can understand what leads
people to consider a particular action,
we can design interventions that lead
them to think of different possibilities.
56
How Behavioural Biases
Affect Finance Professionals
by H. Kent Baker,Greg Filbeck and
Victor Ricciardi
A better understanding of human
psychology can assist finance profes-
sionals at all levels in achieving their
clients long-term financial objectives.
74
How to Turn Customer
Insight into Growth
by C. Barton, L. Koslow, R. Dahr, S. Chadwick,
M. Reeves and F. Lang
Most business leaders recognize
the importance of understanding
their customers. Why, then,
do so many companies focus inward
and overlook change signals?
44
Dueling with Desire: How to
Confront Want/Should Conict
by T.B. Bitterly, R. Mislavsky,
H. Dai and K. L. Milkman
The better we understand want/should
conflict, the more successful we will be
at designing effective interventions that
shift behaviours in beneficial directions.
62
Feedback: The Broken Loop
in Higher Education
and How to Fix It
by Mihnea Moldoveanu and Maja Djikic
Feedback is a proven enabler of learn-
ing. Yet in higher education today, it
is spotty, ill-timed or utterly missing.
Heres what to do about it.
82
The Persona Project and the
Future of Democratic Capitalism
by Jennifer Riel and Stefanie Schram
A deep understanding of peoples
values, their daily pain points
and ultimately, their unmet needs,
is key to shaping the future of
Democratic Capitalism.
 Rotman Management
Spring 2017
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Thought Leader Interview: Sales & Circulation Associate

Lori Mazza
Richard Thaler
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FROM THE EDITOR Karen Christensen
The
Behavioural
Issue
AT ITS CORE, every organization is in the same business: changing
behaviour. For-profit companies try to sway consumers to buy
their products; governments try to convince citizens to pay their
taxes on time; and an NGO might want to encourage families to
sign up for tuition support for their children.
Unfortunately, in most cases, leaders spend too much time
on the initial stages of the behaviour-change process: analyzing
the market, creating a strategy, and developing a product or ser-
vice. They pay far too little attention to what Rotman Professor
Dilip Soman who heads up Behavioural Economics in Ac-
tion at Rotman (BEAR) calls the Last Mile. This, he says, is
where the rubber hits the road: Whether it happens online or
in a brick-and-mortar environment, it is where the consumer
makes a choice to take action or not.
Traditional Economics assumes that people are much like
the robot featured on our cover: We have infinite computational
ability, are unemotional, impervious to loss and have an uncanny
ability to assign utility to everything we consume. The truth, it
turns out, is much messier: Behavioural Science shows that hu-
mans are myopic and impulsive; we are heavily influenced by
other people and by the status quo; and emotion, context and
loss-aversion amongst other things guide our decisions.
Understanding these dynamics can help to explain current
behaviours and influence future ones. In this issue of Rotman
Management, we seek to expand your understanding of behav-
ioural insights and how they can be applied to achieve your orga-
nizations goals.
Public officials around the world are embracing behav-
ioural insights to increase compliance, protect the environment
and more as Prof. Soman et al. show in Policy by Design,
on page 6. The UK government is widely considered to be the
global leader in the application of these insights, and on page 32,
David Halpern, head of its Behavioural Insights Unit, describes
the most powerful way to get someone to do something, in
Changing the World, One Nudge At a Time.
Cognitive biases are an issue in every industry but per-
haps even more so in financial services. Thats because financial
products are complex in nature; the payoffs usually occur over a
long period of time; and money is an inherently emotional topic.
On page 56, Kent Baker and co-authors look at How Behav-
ioural Biases Affect Finance Professionals.
Elsewhere in this issue, we feature Nudge co-author Rich-
ard Thaler in our Thought Leader Interview on page 14; and
in our Idea Exchange, the University of Pennsylvanias Angela
Duckworth looks at how grit relates to success on page 97; Rot-
man Professor Nina Maar interviews Varun Gauri about the
World Banks behavioural initiatives on page 113; and Rotman
faculty Lisa Kramer, Bing Han and Avni Shah discuss their re-
search findings.
As our contributors demonstrate in this issue, wherever
human behaviour is involved, there are opportunities for be-
havioural insights to overcome organizational challenges. And
as their evidence indicates, this is something business leaders,
policymakers and governments alike should be thinking a lot
more about.
A FINAL NOTE: This issue marks Rotman Managements 10th anni-
versary. We have now published 30 issues in the current format
all of which can be purchased on our website (rotmanmaga-
zine.ca). Thanks to all of our readers for your support to date. We
look forward to bringing you the latest in business thinking for
years to come!
Karen Christensen, Editor-in-Chief
editor@rotman.utoronto.ca
Twitter: @RotmanMgmtMag
rotmanmagazine.ca / 5
 Policy by Design:
The Dawn of Behaviourally-
Informed Government
Governments from Canada to Singapore are embracing findings
from Behavioural Economics to improve the lives of their citizens.
by Dilip Soman, Katie Chen and Neil Bendle
FROM REVENUE COLLECTION to trade policy to infrastructure
investment, the varied mandates of government are complicat-
ed and diverse. Yet at its core, the role of government is simple:
To maximize the welfare of citizens by improving their well-
being, creating fair and efficient marketplaces and planning for
the future.
Governments attempt to accomplish this by helping citi-
zens, organizations, their own agencies and local businesses
make good choices. As such, the government just like every
other organization that exists is in the business of behaviour
change. Indeed, almost every activity that a government under-
takes boils down to the need to encourage or discourage certain
behaviours. There are four particular types of behaviour change
that policymakers focus on:
1. COMPLIANCE. Getting people and businesses to behave in accor-
dance with prescribed standards and by certain deadlines.
2. CHOICE SWITCHING. Encouraging citizens to perform certain
tasks online or to save for the future.
3. CONSUMPTION. Promoting consumption takes many forms
from getting seniors to consume their medications to getting
young people to eat healthily.
4. ACCELERATION OF DECISIONS. In many situations, officials want
to accelerate decision making in important areas e.g., for
businesses to start implementing environmentally-friendly
policies.
Given the centrality of behaviour change to virtually everything
governments do, it is a matter of great surprise that until recently,
most governments had scarce capabilities in the science of behav-
iour or, as it is referred to nowadays, Behavioural Economics.
Sure, every government has a chief economic advisor and cadres
of traditionally-trained economists who develop and implement
policy; but since the ultimate goal of every governmental policy
rotmanmagazine.ca / 7
 Like businesses, governments and non-profits should
be constantly iterating on their service offerings.
is to influence behaviour, we are surprised at how few govern-
ments have invested in hiring a chief behavioural scientist.
The reason for the dominance of traditional Economics in
government can be explained by using the language that Rich-
ard Thaler and Cass Sunstein introduced in their 2008 book,
Nudge. In it, they make a distinction between two completely
different types of agents: Econs and humans. Econs are highly-
sophisticated decision makers who consume vast quantities of
information with ease and have infinite computing abilities
much like the robot on the cover of this issue. They also maxi-
mize self-interest, are forward-looking and consider the future
impact of every decision they make never letting emotions get
in the way. In short, they obey all of the laws of Economics.
In contrast, an abundance of research shows that humans
are emotional, impulsive, cognitively lazy, and have difficulty
dealing with large quantities of information or choice options.
As a result, a number of commentators have referred to Econs
as rational and to humans as irrational as if to suggest that information.
human decision making is inherently flawed.
Our view is slightly different. As one of us (Dilip Soman)
noted in his 2015 book [The Last Mile: Creating Social and Eco-
nomic Value from Behavioural Insights], the fact that humans do
not obey the laws of Economics is not a surprise. Humans were
never designed to solve complex inter-temporal maximization
problems or to sift, curate, analyze and act on large volumes of
data. The very assumption that humans actually behave like
Econs is itself an example of irrationality.
If citizens were indeed robot-like Econs, the task of behav-
iour change for governments would be relatively easy and could
involve three simple instruments:
1. RESTRICTIONS. Bans, legal restrictions and other forms of
regulation limit access to certain options, thereby creating
a behavioural shift towards the desired alternative.
2. INCENTIVES. These can be either positive incentives in the
form of carrots (i.e. subsidies or fee waivers) or negative
incentives in the form of sticks (i.e. surcharges or penal-
ties).
3. INCREASED INFORMATION. The provision of additional infor-
mation and sometimes, more options, is widely believed to
improve decision making.
8 / Rotman Management Spring 2017
The problem is, governments struggle with making policy deci-
sions work because these three tools are designed for Econs rath-
er than humans and the research is filled with examples of the
problems that result. For example, the Canada Learning Bond
a welfare program that supported childrens education with free
money garnered a take-up rate of only 16 per cent in the two
years after its launch; and in the U.S., several welfare programs
have suffered from similarly-low take-up rates.
Elsewhere, attempts to get citizens to pay their taxes on-
line or to get flu shots, donate organs, eat more vegetables, or
read privacy policies designed to safeguard their online infor-
mation have all fallen on seemingly-deaf ears, despite large
expenditures on advertising and communication. The reason
is simple: The vast majority of these policies and programs
are designed for Econs, rather than for humans who are forget-
ful, emotional and impulsive; influenced by their peers; con-
fused by too much choice; and loathe to consume too much
The best policy design, then, would assume that people will
likely forget, ignore, gloss over or misunderstand critical pieces
of information and build safeguards into the system against
such behaviour. Fortunately, recent advances in the world of be-
havioural insights have provided governments with a new tool-
kit to achieve this, and it is being embraced by governments the
world over.
The Basics of Choice Architecture
The term choice architecture made its debut in Nudge, where
Thaler and Sunstein argued that since we know from Psychol-
ogy that context influences choice, it should be possible to design
contexts to steer choices to a desired outcome. Choice architec-
ture therefore refers to the conscious and careful presentation of
different options available to a decision-maker, and interventions
to change the manner of option presentation are called nudges.
Choice architecture draws upon findings from behavioural
science to design environments in which humans make deci-
sions. For example, every policy initiative comes to the attention
of citizens with a pre-chosen default status: you either check the
box to donate your organs, or you dont. And studies have shown
that changing that default has significant effects on behaviour.
Enrollment in 401(k) pension plans in the U.S. is a prime
example. Signing up for a 401(k) can be a hassle, and retirement
seems far off in time for many people. By using a default opt-in
 Nudge Units Worldwide

Since the inception of the UKs Behavioural Insights Team in 2010, governments around the world have followed suit, creating their own
behavioural units dedicated to better understanding how policies and programs can be improved with the application of behavioural
science. Currently, more than 50 such behavioural units have been established in local or federal governments around the world.

UK: The Behavioural Insights Netherlands: Ministry

Canada: Team (BIT) and nudge units in Norway: Finland: Prime of Economic Affairs and
Federal & 14 departments GreeNudge Ministers Office Ministry of Infrastructure
Provincial & the Environment
Denmark: The Danish
teams Nudging Network

Germany:
NYC: BIT Chancellors Office
Chicago: Chicago
Nudge Unit North America
& ideas42
European Moldova: UNDP/BIT
U.S.: White House Social and collaboration
Behavioural Sciences Team Commission:
Behavioural Science Singapore: Prime
World Bank: Global and Foresight Team Italy: PMs Committee Ministers Office &
INsights Initiative (GINI) of Experts Ministry of Manpower
France: OECD
Behavioural Sydney: BIT
Science Australia &
Mexico: Coordination India: New BE unit
Behavioural
Presidents Guatemala: Insights Unit, New
Office Guatemalan Tax South Wales
Administration
Jamaica: Finance Australia:
Ministry (UNDP/BIT) Rio de Janeiro: Melbourne: Behavioural
Mayors Office Department of Economics Team
Premier and of Australian
Cabinet, Victoria Government (BETA)
SOURCE: BEHAVIOURAL INSIGHTS TEAM, 2016. WE THANK OWAIN SERVICE FOR PERMISSION TO ADAPT AND REUSE THE MAP.

FIGURE ONE

enrollment, employees have been automatically enrolled and
participation rates have increased significantly. Between 2010
and 2014, the number of companies with an 80 per cent partici-
pation rate or higher rose by 14 per cent.
Elsewhere, the UK government sought to apply choice archi-
tecture to the decision its citizens made regarding organ-donor
registration. The idea was that tweaks to processes and language
informed by behavioural science and tested for effectiveness
could significantly improve participation rates. This work was
spearheaded by the UKs Behavioural Insights Team (BIT), the
worlds first behavioural insights unit within government. The
most successful message out of those tested was the following:
If you needed an organ transplant, would you have one? By
invoking the concept of reciprocity, this simple question encour-
ages potential donors to think a bit more about the decision.
The result: BIT estimated that it would be able to add 100,000
names to the donor registry annually.
The Canadian province of Ontario has also succeeded in
increasing organ-donor registration rates by harnessing two
simple behavioural insights to design nudges: First, as seen in
the UK, a message that evokes empathy was used to get poten-
tial donors to think a bit more about the decision; and second,
simplifying the application form itself increased the likelihood
that this greater thought would be converted to action.

rotmanmagazine.ca / 9
 Testing different nudges provides an outlet to review the
status quo and improve interactions with the public.

Much like businesses, governments and non-profits should

Canadian Nudge Units constantly iterate on their service offerings and procedures.
Testing different nudges provides an outlet to review the sta-
Canada has created its own behavioural research teams tus quo and look for new ways to improve interactions with the
at both the federal and provincial levels.
public. Few would argue with this logic of continuous improve-
Hub Location ment, but if this is the case, why have so few governments em-
braced this approach?
Canada Revenue Agency (CRA) Ottawa The answer is likely inertia and the need to change mind-
sets. Given that many policymakers have been conditioned
Employment and Social Ottawa to think about citizens as Econs, they are also conditioned to
Development Canada (ESDC)
think that economic theory can predict the best way of creat-
Privy Council Office (PCO) Ottawa ing behaviour change. Once a policy or program has been ap-
Innovation Hub proved, the thought of having to test it for effectiveness in the
field and designing a scientific experiment to do so may seem
Ontario Behavioural Toronto daunting, unnecessary or threatening.
Insights Unit (BIU)
The fact is, using behavioural science to uncover policy in-
BC Unit Vancouver sights requires a certain degree of humility. Governments are
often divided into silos, with subject experts operating in each
FIGURE TWO area. The status quo expectation is that government branches
inherently know how to improve or implement new programs
because of their past experience, but when working for so
many citizens all of whom behave differently in different
The Role of Testing contexts past experience does not necessarily predict future
The gold standard of applying insights from behavioural science outcomes.
involves the use of Randomized Controlled Trials (RCTs). While As a result, the dangers of not testing are significant. An
the name might sound intimidating, RCTs are no different from example is the Scared Straight program of the 1970s in the
the trials used in the world of Medicine to test for the efficacy of U.S., whereby young people committing minor offences were
new drugs, or the A/B tests used by online businesses to test lay- taken to prisons and introduced to inmates, in hopes that the
outs of webpages. experience would scare them from committing future crimes.
With an RCT, various options designed to encourage certain Little testing was conducted on the effectiveness of the pro-
behaviours are tested amongst a sample population. This often gram which in hindsight, seems to have only normalized the
entails very subtle changes to materials or to the context, such as idea of a life of crime with some of the young people. The result
creating multiple versions of an intervention (say, an application of implementing a flawed policy was disastrously costly: the
form, a brochure and an application process) and then trying all Washington State Institute for Public Policy estimated in 2004
versions simultaneously. that every dollar spent on Scared Straight programs incurred a
One of the key strengths of applying behavioural insights further crime cost of $203.51.
is the ability to test nudges on a sample of real-life users, prior
to the full implementation of a program. This allows an organi- Challenges (and Solutions) in Conducting RCTs
zation to receive valuable feedback on the effectiveness of its Although RCTs are vastly beneficial in uncovering the effec-
proposed changes and to gauge potential impact before wide- tiveness of proposed behavioural nudges, governments may
spread implementation. face technical constraints, such as the availability of data.

10 / Rotman Management Spring 2017

 Behavioural Units: Sample Projects

UK Behavioural - Increasing organ donor registration by using messages that encourage reciprocity
Insights Team (BIT) - Increasing electoral registration using a lottery, with prize money to incentivize

White House Social - Increasing take-up of micro-loans for small farmers in need via outreach letters with customized
and Behavioural Sciences application steps
Team (SBST) - Ensuring eligible students have access to free/reduced-price meals under National School Lunch
Program by automatically enrolling qualified students

Organization for - Encouraging the use of behaviourally-informed regulatory policy

Economic Cooperation - Enhancing the consumer protection regime in Colombias communications market
and Development (OECD) -Coordinating behavioural research among governments, regulators and others to develop
policy recommendations

Privy Council Office - Increasing uptake of the Canada Learning Bond, money directly deposited into RESPS for low-
(PCO) Innovation Hub income families
- Increasing the number of women recruited into the Canadian Armed Forces
- Improving organizational culture within the public service for employees with disabilities

Employment and Social - Encouraging greater registration completion for new users of online Job Bank, an employment
Development Canada search portal
(ESDC)

Canada Revenue Agency - Encouraging channel shifting in tax filing from mail to digital, and increased usage of MyAccount, the
(CRA) online tax filing platform

Ontario Behavioural - Increasing the number of online license plate sticker renewals by highlighting the benefits of online
Insights Unit (BIU) renewal

FIGURE THREE

Hasti Rahbar, research advisor at Employment and Social
Development Canada (EDSC) told us that often, the data re-
quired for designing an appropriate nudge for a particular prob-
lem is not readily available or is not even being compiled.
In British Columbia, where the provincial government re-
cently launched its own behavioural unit, this was one of the
key challenges it faced as it started on its initial roster of proj-
ects. For understandable privacy reasons, data is often held
separately and securely, and this means that the process to
acquire data can take a longer than anticipated, says Heather
Devine, Head of BCs Behavioural Insights Group.
Governments may also struggle with the existence of
touchpoints, or points of contact between a government
and its citizens, which can include mail, phone and face-to-
face. Behaviourally-informed approaches can most easily be
implemented at these touchpoints. At the federal and provin-
cial levels, there are limitations to the number and variety of
touchpoints with citizens. Sometimes, the results of a proposed
behavioural intervention cannot be analyzed simply because
the touchpoints are not there.
Despite these limitations, the world of behavioural in-
sights and choice architecture design offers a number of other
avenues to test. If an RCT is not possible, perhaps a laboratory
experiment, a series of design workshops or a natural experi-
ment might be possible. As long as data is collected to compare
multiple nudges with the status-quo (i.e control) condition,
governments can learn, iterate, adapt and launch tested inter-
ventions.
Even though governments the world over have started to
embrace the power of applying behavioural insights to policy

rotmanmagazine.ca / 11
and the importance of testing, much more can be done to enable
progress in this space. Two key areas of best practice are:
Collaboration and joint initiatives between behavioural
units; and
Research by and consultation with academics.
In closing
Behavioural hubs in government are proving that innovation isnt
reserved for Silicon Valley or Fortune 500 companies. Along with
better data and an improved ability to test, behavioural insights
will play an increased role in improving policy and services to en-
sure a better life for every global citizen.

In many cases, the problems encountered in government are not

unique to a single level or branch of government, so collabora-
tion on projects can lead to shared learning and greater overall
improvement. In Canada, hubs at the provincial level are work-
ing on projects in tandem with hubs at the federal level, pool-
ing their resources and knowledge. There is also vast potential
in establishing hubs at the municipal level: Municipalities have
access to many more readily-available touchpoints, opening up a
wide variety of opportunities to incorporate and test behavioural
insights as they relate to policy improvement.
Another trend worldwide is the central role that academic
institutions can play. Behavioural units in the UK, U.S. and else-
where have tapped into the expertise of the academic commu-
nity to identify and develop a framework for problems, to design
trials and to analyze, interpret and iterate on the learnings. In
Canada, Behavioural Economics in Action at Rotman (BEAR)
collaborates with the Ontario government; Rotman Professor
Nina Maar was appointed as a behavioural scientist at the
World Bank; and she and one of the authors [Prof. Soman] serve
as advisory to the federal governments Innovation Hub at the
Privy Council Office.
The bottom line is this: Insights from Behavioural Econom-
ics can simplify procedures for citizens and better clarify what Dilip Soman is the Corus Chair in Commu-
they are being asked to do and why they should do it. As the world nication Strategy and Professor of Marketing
becomes increasingly digital, governments could seek to add an at the Rotman School of Management and
co-director of Behavioural Economics in
additional channel of communication through mobile technolo-
Action at Rotman (BEAR). He is the author
gies, such as SMS. Behavioural insights can also help significantly of The Last Mile: Creating Social and Economic Value from
in pressing policy areas such as poverty alleviation, education Behavioural Insights (Rotman-UTP Publishing 2015). Katie
and public safety. In the end, by using approaches tailored to Chen is a research assistant at BEAR and a student at Western
University. Neil Bendle is an Assistant Professor of Marketing
how citizens actually think and act not how policymakers be- at Western Universitys Ivey School of Business. This article is
lieve they should think and act governments can provide better based on a longer report entitled Policy by Design, available for download
services at a lower cost. at rotman.utoronto.ca/FacultyAndResearch/ResearchCentres/BEAR

12 / Rotman Management Spring 2017

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 One of the worlds leading behavioural economists describes
the origins of the field, the ongoing battle between our two selves
and the efficiency of financial markets.

Thought Leader Interview:

by Karen Christensen

You have described the goal of your research over the last
40 years as follows: To introduce humans into Economics.
Please explain.
The truth is, the people who populate Economics textbooks
bear very little resemblance to the humans we interact with on
a daily basis. Standard economic models describe people who
are as smart as the smartest economist, who are not affected
by emotion, and who have no issues with self-control. Thats
Homo Economicus; I call them Econs for short and I truly
dont know anybody like that. In reality, we do not have per-
fect willpower and we dont always choose what is best for us
which is why obesity and insufficient retirement savings are
We sorely need economic theories that account for this, and the
first such theory was Prospect Theory.
Traditionally, economists believed that every time we
make a choice, the net effect of the gains and losses involved
in that choice are somehow combined in our head to calculate
whether a particular choice is desirable or not. However, Pros-
pect Theory states that losses and gains are valued very differ-
ently by people and this affects our decisions.
Simply put, we give losses far more weight than gains. So,
if you were to gain $100 from one transaction but lose $80 in
another, you would end up feeling worse off, even though you
are $20 ahead. When it came out [in 1979], the great thing
ILLUSTRATION BY DELPHINE LEE

so common today.
You have said that Daniel Kahneman and Amos Tverskys
Prospect Theory provides a template for the type of theo-
ries we need today. How so?
As indicated, we struggle to determine what is best for us in the
long run and then, we struggle to have the willpower to imple-
ment that choice especially if it entails delayed gratification.
about Prospect Theory was that it proved that you could take a
scientific approach to human behaviour.
Describe how Daniel Kahneman who went on to be named
a Nobel Laureate in Economic Sciences became your men-
tor.
I first came across his work with the late Amos Tversky back in
1975. At the time, they were living in Israel, but I found out that

14 / Rotman Management Spring 2017


Heuristics: The Original Three
Anchoring: The common tendency to rely too heavily on the
first piece of information we are offered (the anchor) when
making a decision.
Availability: Giving preference to information and events
that are more recent, that were observed personally, and
that were more memorable.
Representativeness: The presumption that once people
or events are categorized, they share all the features of other
members in that category.
they were planning to spend a year at Stanford in 1977-78 so
I made it my business to get a posting there. I begged and
pleaded, and somehow managed to get a research grant to fund
my visit.
When Daniel and Amos arrived, I was already there ready
to pester them. Kahnemans office was just up the hill from
mine, so I made it a habit to wander up there to chat with him,
and would often find Tversky there, as well. We had a glorious
year together: They taught me Psychology and I taught them
Economics, and it turned into a 40-year friendship. Sadly, Amos
passed away in 1996.
Since Kahneman and Tverskys work on biases like availabil-
ity, representativeness and anchoring, a long list of other
biases has been identied (see page 17 for a sampling). You
have called this both a blessing and a curse. Please explain.
It is a blessing in that every bias provides a small glimpse into
how our minds work. To be clear, it was never Amos and Dannys
intention to suggest that people are stupid: They always said that
they liked to study errors in judgment for the same reason some
people study optical illusions: Because they teach us something
about human perception.
The curse in having such a long list of biases is that it leads
some people to think they can explain anything by cherry-pick-
ing a bias to fit the facts. But that is not what behavioural sci-
ence is about. It is a science: Its about making predictions and
testing them.
16 / Rotman Management Spring 2017
What is a choice architect?
A choice architect is anyone who has responsibility for organizing
the context in which people make decisions. They create an en-
vironment that provides individuals the freedom to choose, but
they still influence peoples behaviour. For instance, we advise
governments on how to use choice architecture to help make citi-
zens lives healthier or better in some way. But, of course, choice
architecture can also be used to take advantage of people. No
matter what industry you work in, if you indirectly influence the
choices other people make, you are a choice architect.
Describe the ongoing battle between our two selves: The
Planner and the Doer.
As Kahneman describes in Thinking, Fast and Slow, humans be-
have as if there were two distinct systems in their brains: One is
automatic and the other is reflective. I have used a similar frame-
work to describe how people deal with problems of self-control.
In my model there is a long-sighted, reflective Planner and a
short-sighted, impulsive Doer. When he sees something he
likes, he grabs it. The Planner, on the other hand, is the part of
you that thinks ahead and budgets your resources appropriately.
To-do-lists, grocery lists and alarm clocks are examples of our
Planner taking steps to control the actions of our Doer.
Unfortunately, the Planner doesnt always win. One the
goals of my work has been to teach people how to alter their envi-
ronments to give themselves the best chance to make good deci-
sions for the long run.
What is your favourite example of successful nudging?
In my view, the domain in which nudging and Behavioural Eco-
nomics in general has had the greatest impact to date is in the
design of defined-contribution savings plans. It used to be that
people had to fill out a pile of forms, but with default enrollments,
they only have to fill out a form if they do not want to enroll. This
has basically solved the enrollment problem: Opt-out rates are
now very low around 10 per cent.
When this started to happen, it was great, but we found that
the plans were auto-enrolling people at very low savings rates
in the U.S., often at a rate of just three per cent. As a way to nudge
people to increase their savings rates, Shlomo Benartzi and I in-
troduced a plan called Save More Tomorrow. Under this plan,
workers are offered the option to increase their savings rate at a
later date ideally, when they get their next raise. As such, once
an employee enrolls in the plan, her savings rate continues to in-
crease until she reaches some cap or opts out. In our first study
of this approach, savings rates more than tripled in three years.
The Save More Tomorrow plan is a collection of what I like

to call supposedly-irrelevant factors (SIFs) things that stan-
dard economic theory says should not influence choices: It
should not matter that the savings rate is increased in a few
months rather than right now; nor that the increases are linked
to pay increases; nor that the default is to stay in the plan; but of
course, all of these features matter. Putting off the increase in
saving to the future helps those who are present-biased; linking to
increases in pay mitigates loss aversion; and making staying in the
plan the default puts status quo bias to good use. More than half of
large plans around the world now use automatic enrollment and
automatic escalation.
When are nudges most needed?
People need a nudge most when a choice and its consequences
are separated in time, and as a result, both investment goods and
sinful goods are prime candidates for nudges. Investment goods
include dieting, exercise and flossing your teeth. In each case, the
costs are borne immediately, but the benefits are delayed, and as
a result, people tend to err on the side of doing too little. Sinful
goods include things like cigarettes, doughnuts and alcohol;
basically, you get the pleasure now and suffer the consequences
later. Nudges are also needed most when decisions are difficult
or rare especially when there is no prompt feedback.
My number-one mantra for choice architects is, Make it
easy. If you want to get someone to do something, make it easy to
do that thing. For instance, if you want them to eat healthier food,
put healthier options in your cafeteria, make them easier to find,
and make them taste better.
Many people believe that the nancial markets are the most
efficient of all markets. Are they?
I would agree but they will never be perfectly efficient, because
like all markets, humans are involved. As a result, there are pe-
riods where they get overly excited and periods when they get
overly depressed. Also, the lack of predictability in stock market
returns does not imply that stock prices are correct. The infer-
ence that unpredictability implies rational prices is what Robert
Shiller once called one of the most remarkable errors in the his-
tory of economic thought.
What about the Efficient Market Hypothesis (EMH)?
EMH has been essential to the history of research on financial
markets, but the danger it presents is when people consider it to
be literally true. If policymakers believe bubbles are impossible,
for instance, they will fail to take appropriate steps to dampen
them. Looking back at what was happening in 2007, it would
have been appropriate to raise mortgage-lending requirements
The SEEDS of Bias
Dr. David Rock and his colleagues at the Neuroleadership
Institute have developed the SEEDS Model, which shows
that biases fall into five key categories. Below are samples
for each catagory.
SIMILARITY BIASES
In-group Bias: Perceiving people who are similar to you
(in ethnicity, religion, socioeconomic status, profession, etc.)
more positively. (We can trust her; her hometown is near
mine.)
Out-group Bias: Perceiving people who are different from
you more negatively. (We cant trust him; look where he
grew up.)
E XPEDIENCE BIASES
Confirmation Bias: Seeking and finding evidence that con-
firms your beliefs and ignoring evidence that does not. (I trust
only one news channel; it tells the truth about the political
party I despise.)
Halo Effect: Letting someones positive qualities in one area
influence overall perception of that individual. (He may not
know much about people, but hes a great engineer and a
hard-working guy; lets put him in charge of the team.)
E XPERIENCE BIASES
False Consensus Effect: Overestimating the universality of
your own beliefs, habits, and opinions. (Of course I hate broc-
coli; doesnt everyone?)
Hindsight Bias: Seeing past events as having been predict-
able in retrospect. (I knew the financial crisis was coming.)
DISTANCE BIASES
Affective Forecasting: Judging your future emotional
states based on how you feel now. (I feel miserable about it,
and I always will.)
Temporal Discounting: Placing less value on rewards as
they move further into the future. (They made a great offer,
but they cant pay me for five weeks, so Im going with some-
one else.)
SAFETY BIASES
Loss Aversion: Making a risk-averse choice if the expected
outcome is positive, but making a risk-seeking choice to avoid
negative outcomes. (We have to take a chance and invest in
this, or our competitors will beat us to it.)
Framing Effect: Basing a judgment on whether a decision
is presented as a gain or as a loss, rather than on objective
criteria. (I hate this idea now that I see our competitors walk-
ing away from it.)
rotmanmagazine.ca / 17
 Choice architecture applies to just about everything
in the economy and in society.
in cities where price-to-rental ratios seemed most frothy; in-
stead, we saw a period in which lending requirements were
unusually lax.
Of course, in the face of predictable human error, a firm
can take one of two approaches: It can try to teach consumers
about the costs of the error, or it can devise a strategy to exploit
the error. The latter will almost always be more profitable. No
one has ever gotten rich convincing people not to take out an
unwise mortgage. My hope is that people nudge for good as
I write in my book whenever someone asks me to sign it.
How do you dene mental accounting, and what are some of
your key ndings in this area?
Simply put, mental accounting is the study of how people spend
money. For me, this has involved observing the way people han-
dle their financial affairs and noticing all the various ways
that they dont do it like a professional would. For example,
people often buy things simply because they seem to be a great
deal not because the product is going to provide enormous
satisfaction. Deep in our closets, many of us have stuff that we
bought at 50 per cent off that we probably shouldnt have
bought even if it were free.
Another key finding is that people put their money into dif-
ferent categories; and then, they are often reluctant to spend
money from one pot when they need it for another pot. We
behave differently in different circumstances: When we are on
vacation, we easily spend money, even though it is the same
money that will be scarce when we get home. Or, we might use
different monthly budgets for groceries and eating at restau-
rants, for example, and constrain one kind of purchase when
the budget runs out, while not constraining the other even
though both draw upon the same resource (i.e. your income).
We also found that grocery shoppers spend less when paying
with cash than with their debit or credit cards.
A recent study of CFOs found that they had no ability to
predict stock market returns, and that they also had no self-
awareness about this lack of predictive skill. What are the
implications of this nding?
Sadly, its not clear what can be done about it: Overconfidence
is a fact of life. That particular study asked the CFOs to forecast
stock market returns and give an 80 per cent confidence limit
meaning a range that the correct answer would lie between the
two numbers 80 per cent of the time. What they found is, their
forecast included the right answer about one third of the time.
18 / Rotman Management Spring 2017
We see overconfident forecasts all the time. In last falls
American election, some forecasters were saying that Hillary
Clinton had a 99 per cent chance of winning which, even
without the benefit of hindsight, was a ridiculous forecast.
What is your message for the critics who feel that nudging is
heavy-handed and unnecessary?
I would tell them that whether they like it or not, there is no
avoiding nudging or choice architecture. Take a school caf-
eteria, for example: Someone has to arrange and display the
food; it cant just be presented randomly unless you want
the kids to spend their entire time looking for something to eat.
That is choice architecture in action, and it applies to just about
everything in the economy and in society.
When nudges are used in the business arena, I do believe
that companies need to be sure the choice architecture they use
is transparent, and not a deliberate attempt to induce custom-
ers to make a poor choice. A key feature of responsible nudg-
ing is to make sure that all default options are easily reversible.
If you are suggesting people enroll in a pension plan because
you believe that they would do so if they had the knowledge
and willpower to make a good choice and if they can get out
of it with one mouse click then, little harm done. But if the
user has to make three phone calls and then walk across town
to find the office where they have to fill out a long form in order
to undo something, that is not acceptable.
My Nudge co-author Cass Sunstein and I really hope that
an understanding of choice architecture and the power of
nudges will lead people to think of creative ways to improve hu-
man lives in all sorts of domains: Workplaces, corporate boards,
universities and even families might be able to use, and benefit
from, small exercises in what we call libertarian paternalism.
Looking ahead, you have said Behavioural Macroeconomics
is at the top of your wish list. Please explain.
In my view, Macroeconomics is stuck where Economics was 30
years ago, with models of Econs, even though the policies that
emerge from it affect humans. Fortunately, this is beginning
to change, and if we continue to apply Behavioural Econom-
ics tools to the study of Macroeconomics, we might be able to
prevent the next global financial crisis. Or, at the very least,
have a better sense of how to deal with it, when it happens.
You have also said that the term Behavioural Economics will
likely vanish from our lexicon one day. Why is that?
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rotmanmagazine.ca / 19
 Behavioural Economics 101:
Judgment,
Choice and Time
Behavioural Economics increases the explanatory power of
Economics by providing it with realistic psychological foundations.
A pioneer of the eld explains.
by George Loewenstein
WHEN ECONOMICS WAS FIRST IDENTIFIED as a distinct field of study
in the late 19th century, Psychology did not yet officially exist as
a discipline. Nevertheless, many economists moonlighted as the
psychologists of their times.
Adam Smith, best known for The Wealth of Nations, wrote
a less well-known book, The Theory of Moral Sentiments, which
laid out psychological principles of individual behaviour that are
arguably as profound as his economic observations. The book is
bursting with insights about human psychology many of which
presage current developments in Behavioural Economics. For
example, Smith commented that We suffer more... when we fall
from a better to a worse situation, than we ever enjoy when we
rise from a worse to a better. Loss aversion!
Research in the field of behavioural decision research on
which Behavioural Economics draws more than any other sub-
field of Psychology typically falls into two categories: judgment
and choice. Judgment research deals with the processes people
use to estimate probabilities, while choice research deals with the
processes people use to select among actions, taking account of
any relevant judgments they may have made.
In this article, I will focus on the key findings from these
two foundational aspects of Behavioural Economics and discuss
some of the fields most promising developments.
Judgment Research: Key Findings
Will the Fed raise interest rates? Will you lose your job in a down-
turn? Will you be able to find another house you like as much as
the one you must bid for right away? Will it rain during your va-
cation to London? Judging the likelihood of events is central to
economic life.
Cognitive psychologists have proposed several heuristic
mechanisms that lead to judgments that sometimes violate pure
rationality. For example, people often judge the probabilities of
future events based on how easy those events are to imagine or
to retrieve from memory. This availability heuristic contributes to
many further biases. One is hindsight bias: Because events which
rotmanmagazine.ca / 21
 A good heuristic provides fast, close-to-optimal answers when time
or cognitive capabilities are limited; but it can also lead to errors.
actually occurred are easier to imagine than counterfactual
events that did not, people often over-estimate the probability
they previously attached to events that later happened. This bias
leads to second-guessing or Monday-morning quarterbacking,
and may be partly responsible for lawsuits against stockbrokers
who have lost money for their clients (i.e. the clients think the
brokers should have known).
A more general bias is the curse of knowledge: People who
know a lot find it hard to imagine how little others know. The
development psychologist Jean Piaget suggested that the diffi-
culty of teaching is caused by this curse. Anybody who has tried
to learn from a computer manual has seen the curse of knowl-
edge in action. Another heuristic for making probability judg-
ments is called representativeness: People judge conditional
probabilities by how well the data represents the hypothesis or
the example represents the class. Like most heuristics, repre-
sentativeness is an economical shortcut that delivers reasonable
judgments with minimal cognitive effort in many cases but
sometimes goofs badly and is undisciplined by normative prin-
ciples. Prototypical exemplars of a class may be judged to be
more likely than they truly are (unless the prototypes extremity
is part of the prototype).
For example, in judging whether a certain student described
in a profile is, say, a Psychology major or a Computer Science ma-
jor, people instinctively dwell on how well the profile matches the
Psychology or Computer Science major stereotype. Many studies
show how this sort of feature-matching can lead people to un-
derweigh the base rate in this example, the overall frequency
of the two majors.
Another by-product of representativeness is the law of small
numbers, whereby small samples are thought to represent the
properties of the statistical process that generated them. If a
baseball player gets hits 30 per cent of his times at bat, but is zero-
for-four so far in a particular game, then he is due for a hit in
his next at bat in this game, so that this games hitting profile will
more closely represent his overall ability.
The so-called gamblers fallacy whereby people expect a
tail after a coin lands heads three times in a row, is one mani-
festation of the law of small numbers. The flip side of the same
22 / Rotman Management Spring 2017
misjudgment (so to speak) is surprise at the long streaks which
result if the time series is random, which can lead people to
conclude that the coin must be unfair, when it isnt. Field and
experimental studies with basketball shooting and betting on
games show that people, including bettors, believe that there
is positive autocorrelation that players experience the hot
hand when there is no empirical evidence that such an ef-
fect exists.
It is important to note that heuristics can be good or bad:
A good heuristic provides fast, close-to-optimal answers when
time or cognitive capabilities are limited; but in some situations,
it also violates logical principles and leads to errors.
Choice Research: Key Findings
Standard preference theory incorporates a number of assump-
tions. For example, it assumes that preferences are reference in-
dependent i.e., they are not affected by an individuals current
state or context. It also assumes that preferences are not influ-
enced by variations in the way that options are presented.
Both of these assumptions have been disproven by be-
havioural researchers. For example, numerous framing effects
show that the way choices are presented to an individual often
determine the preferences that are then revealed. The classic
example is Daniel Kahneman and Amos Tverskys Asian dis-
ease problem, in which people are informed about a disease that
threatens 600 citizens and asked to choose between two unde-
sirable options. In the positive frame, they are given a choice
between (a) saving 200 lives for sure, or (b) a 1/3 chance of sav-
ing all 600 with a 2/3 chance of saving no one. In the negative
frame, people are offered a choice between (c) 400 people dying
for sure, or (d) a 2/3 chance of 600 dying and a 1/3 chance of no
one dying. Despite the fact that A and C, and B and D are equiva-
lent in terms of lives lost or at risk, most people choose A over B,
and D over C.
Another phenomenon that violates standard theory is called
an anchoring effect. The classic demonstration of this effect was
identified in the context of judgment rather than choice. Subjects
were shown the spin of a wheel of fortune that could range be-
tween 0 and 100 and were asked to guess whether the number
of African nations in the United Nations was greater than or less
than this number. They were then asked to guess the true value.
Although the wheel of fortune was obviously random, subjects
guesses were strongly influenced by the spin of the wheel. As
Kahneman and Tversky interpreted it, subjects seemed to an-
chor on the number spun on the wheel and then adjusted for
whatever else they thought or knew, but adjusted insufficiently.
Anchoring effects have also been demonstrated for choices
as opposed to judgments. In one study, subjects were asked
whether their certainty equivalent for a gamble was greater than
or less than a number chosen at random, and then were asked
to specify their actual certainty equivalent for the gamble.
Again, the stated values were correlated significantly with the
random value.
Many studies have also shown that the method used to elicit
preferences can have dramatic consequences, sometimes pro-
ducing preference reversals situations in which A is preferred
to B under one method, but A is judged as inferior to B under a
different elicitation method. The best known example contrasts
how people choose between two bets versus what they separate-
ly state as their selling prices for the bets. If bet A offers a high
probability of a small payoff and bet B offers a small probability
of a high payoff, the standard finding is that people choose the
more conservative bet A over bet B, but are willing to pay more
for the riskier bet B when asked to price them separately.
Another form of preference reversal occurs between joint and
separate evaluations of pairs of goods. People will often price or
otherwise evaluate an item A higher than another item B when
the two are evaluated independently, but evaluate B more highly
than A when the two items are compared and priced at the same
time. Context effects refer to ways in which preferences between
options depend on what other options are in the set. For exam-
ple, people are generally drawn to compromise alternatives
whose attribute values lie between those of other alternatives.
All of these findings suggest that preferences are not the
pre-defined sets of indifference curves represented in Mi-
croeconomics textbooks: In reality they are often ill-defined,
highly malleable and dependent upon the context in which
they are elicited.
A theme emerging in the behavioural research is that, al-
though people often reveal inconsistent or arbitrary preferences,
they typically obey normative principles of economic theory
when it is transparent how to do so. Researchers refer to this as
coherent arbitrariness and illustrated the phenomenon with a se-
ries of studies in which the amount of money subjects demanded
to listen to an annoying sound was sensitive to an arbitrary an-
chor (a random amount of money that was based on their social
security number). Although the impact of this number revealed a
degree of arbitrariness in subjects valuations, subjects, sensibly,
demanded much more to listen to the tone for a longer period of
time. Thus, while expressed valuations for one unit of a good are
sensitive to an anchor that is clearly arbitrary, people also obey
the normative principle of adjusting those valuations to the quan-
tity in this case, the duration of the annoying sound.
As indicated, most of the evidence that preferences are
constructed comes from demonstrations that some contextual
features that should not matter actually do matter. Whether it be
the composition of a choice set, the way gambles are framed
as gains or losses from a reference outcome, or whether people
choose among objects or value them separately, all have been
shown to make a difference in expressed preference.
TIME DISCOUNTING. A subset of the choice research has become one
of the key topics in Behavioural Economics: How individuals trade
off costs and benefits that occur at different points in time.
The standard assumption is that people rationally weight
future utilities by an exponentially-declining discount factor.
Richard Thaler was the first to empirically test the constancy
of discounting with human subjects. Prof. Thaler told subjects
to imagine that they had won some money in a lottery held
by their bank: They could take the money now or earn inter-
est and wait until later. They were asked how much they would
require to make waiting just as attractive as getting the money
immediately.
Prof. Thaler then estimated implicit (per-period) discount
rates for different money amounts and time delays under the
assumption that subjects had linear utility functions. Discount
rates declined linearly with the duration of the time delay.
rotmanmagazine.ca / 23
 Preferences are often ill-defined, highly malleable and
dependent upon the context in which they are elicited.
Later studies replicated the basic finding that discount rates fall
with duration.
The most striking effect was an immediacy effect: Discount-
ing is most dramatic when one delays consumption that would
otherwise be immediate. Hyperbolic time discounting implies
that people will make relatively far-sighted decisions when plan-
ning in advance when all costs and benefits will occur in the
future but will make relatively short-sighted decisions when
some costs or benefits are immediate. The systematic changes in
decisions produced by hyperbolic time discounting create a time-
inconsistency in intertemporal choice not present in the expo-
nential model: An agent who discounts utilities exponentially
would, if faced with the same choice and the same information,
make the same decision prospectively as he would when the time
for a decision actually arrives. In contrast, somebody with time-
inconsistent hyperbolic discounting will wish prospectively that in
the future he will take far-sighted actions; but when the future
arrives, he will behave against his earlier wishes, pursuing imme-
diate gratification rather than long-run well-being.
Most big decisions in life savings, educational invest-
ments, hiring, health and diet have costs and benefits that oc-
cur at different points in time. Many authors have discussed the
issues of self control and stressed their importance for econom-
ics. An important question in modelling self-control is whether
agents are aware of their self-control problem (sophisticated
agents) or unaware (naive agents). There are certainly many
times in which people are partially unaware of their own future
misbehaviour, and hence overly optimistic that they will behave
in the future the way that their current self would like them to.
Researchers have shown that awareness of self-control problems
can powerfully moderate the behavioural consequences of quasi-
hyperbolic discounting.
Naivete typically makes damage from poor self-control
worse. For example, severe procrastination is a creation of
over-optimism: One can put off doing a task repeatedly if the
perceived costs of delay are small Ill do it tomorrow; there is
little loss from not doing it today and hence accumulate huge
delay costs from postponing the task many times. A sophisticated
agent aware of his procrastination will realize that if they put it
24 / Rotman Management Spring 2017
off now they will put if off in the future, and hence will do the task
immediately.
However, in some cases, being sophisticated about ones
self-control problem can exacerbate yielding to temptation. If
you are aware of your tendency to yield to a temptation in the fu-
ture, you may conclude that you might as well yield now; by the
same token, if you naively think you will resist temptation in the
future, you might feel licensed to indulge in the present.
An anomaly to this is negative time discounting. If people like
savouring pleasant future activities, they may postpone them to
prolong the pleasure (and they may also try to get painful activi-
ties over with quickly, to avoid dread).
The Rise of Behavioural Finance
Until fairly recently, financial theory bet all of its chips on the
belief that investors are so rational that any observed historical
patterns that could be used to beat the market are detected the
Efficient Markets Hypothesis. In 1978, Michael Jensen called
this hypothesis the most well-established regularity in social
science. But, shortly after his grand pronouncement, the list of
anomalies began to grow.
One important anomaly is the equity premium puzzle: Av-
erage returns to stocks are much higher than returns to bonds
(presumably to compensate stockholders for higher perceived
risks). To account for this pattern, Shlomo Benartzi and Rich-
ard Thaler assumed a combination of decision isolation inves-
tors evaluate returns using a one-year horizon and aversion to
losses. These two ingredients create much more perceived risk to
holding stocks than would be predicted by expected utility.
Another anomaly is the magnitude of volume in the mar-
ket. The so-called Groucho Marx theorem states that people
should not want to trade with people who would want to trade
with them but the volume of stock market transactions is stag-
gering. For example, Terrance Odean has noted that the an-
nual turnover rate of shares on the New York Stock Exchange is
greater than 75 per cent, and the daily trading volume of foreign-
exchange transactions in all currencies (including forwards,
swaps and spot transactions) is equal to about one-quarter of
the total annual world trade and investment flow. Odean then
presents data on individual trading behaviour which suggests
that the extremely high volume may be driven, in part, by over-
confidence on the part of investors.
Early heretics like Nobel Laureate Robert Shiller, who ar-
gued empirically that stock price swings are too volatile to reflect
only news, and Werner DeBondt and Richard Thaler, who dis-
covered an important over-reaction effect based on the psychol-
ogy of representativeness, had their statistical work audited
with special scrutiny (or worse, were simply ignored). Today, a
younger generation of academics and finance professionals is ea-
gerly sponging up as much psychology as they can to help explain
how efficient markets truly are.
In closing
Critics have pointed out that Behavioural Economics is not a uni-
fied theory, but instead, a collection of tools and ideas. This is
true. It is also true of neoclassical Economics. A worker might rely
on a single tool say, a power drill but also use a wide range of
drill bits to do various jobs. Is this one tool or many?
Likewise, economic models do not derive much predictive
power from the single tool of utility-maximization. Precision
comes from the drill bits such as time-additive separable util-
ity in asset pricing including a childs utility into a parents utility
function to explain bequests, rationality of expectations for some
applications and adaptive expectations for others, homothetic
preferences for commodity bundles, price-taking in some mar-
kets and game-theoretic reasoning in others, and so forth.
Sometimes these specifications are even contradictory. For
example, pure self-interest is abandoned in models of bequests,
but restored in models of life-cycle savings; and risk-aversion is
typically assumed in equity markets and risk-preference in bet-
ting markets. Such contradictions are like the contradiction
between a Phillips-head and a regular screwdriver: They are
different tools for different jobs. The goal of Behavioural Eco-
nomics is to develop better tools that, in some cases, can do both
jobs at once.
In the end, all Economics rests on some sort of implicit psy-
chology. The only question is whether the implicit psychology
in Economics is good psychology or bad psychology. Given
what we know to be true, it is simply unwise, and inefficient, to
do Economics without paying at least some attention to good
psychology.
George Loewenstein is the Herbert A. Simon University
Professor of Economics and Psychology at Carnegie Mellon
University, co-director of its Centre for Behavioural Decision
Research, and Director of Behavioural Economics at the Cen-
tre for Health Incentives at the Leonard Davis Institute of the
University of Pennsylvania. This article is an adaptation of his seminal chapter
in Advances in Behavioural Economics (Princeton University Press, 2003) writ-
ten with Colin F. Camerer, the Robert Kirby Professor of Behavioural Finance
and Economics at the California Institute of Technology.
rotmanmagazine.ca / 25
Managing the Machines:
The Challenge
Ahead
AI is making prediction cheap, posing a host of
new challenges for managers and employees alike.
by Ajay Agrawal, Joshua Gans and Avi Goldfarb
IN CASE YOU HAVENT NOTICED, we are in the midst of a renaissance
in artificial intelligence (AI). Major tech companies like Google,
Facebook, Amazon, Microsoft, Tesla and Apple are promi-
nently including AI in their product launches and acquiring AI-
based startups by the dozen.
At one end of the spectrum are people who view this as an
augmentation of human labour, and on the other, those who see
it as a replacement of human labourwith the consequent follow-
on logic of excitement to fear. In both cases, proponents point to
an advance an AI that plays Go, or one that can drive a truck
and define a future path by extrapolating from the human tasks
that it enhances or replaces.
Economic history has taught us that this is a flawed ap-
proach. Instead, when looking to assess the impact of radical
technological change, one approach stands out: Ask yourself,
What is this reducing the cost of? Only then can you figure out
what might really change.
To understand how important this framing can be, lets step
back one technological revolution ago and ask the question.
Moores Law Intel co-founder Gordon Moores prediction
that the number of transistors per square inch on integrated cir-
cuits would continue to double each year has dominated infor-
mation technology for the past four decades. So, what have these
advances reduced the cost of?
The answer: Arithmetic. This answer may seem surprising,
as computers appear to do so much more: They allow us to com-
municate, to play games and music, to design and to create art.
All true, but at their heart, computers are direct descendants of
electronic calculators. That they appear to do more is testament
to the power of arithmetic.
This relationship was more obvious in their earliest days,
when computers focused on arithmetic operations related to the
census, artillery tables and other largely military applications.
And prior to the invention of the PC, computers were humans
who spent their days solving arithmetic problems related to these
applications. What digital computers did was make arithmetic so
inexpensive that thousands of new applications for arithmetic
were implemented and discovered from data storage to word
processing to digital photography.
AI presents a similar opportunity: To make something that
rotmanmagazine.ca / 27
 When looking to assess the impact of a radical technological
change, ask yourself, What is it reducing the cost of?
was once expensive very cheap and with it, to make resources
that were once scarce, abundant. For AI, that task is prediction
the ability to take information that you have and use it to gener-
ate information that you do not have. In this article, we will show
how this will change what workers and managers do.
Prediction: Its Not Always About the Future
We most often think of prediction as determining what will hap-
pen in the future. For example, machine learning might be used
to predict whether a bank customer will default on a loan. But
there is also a great deal of useful data that we do not have that is
not about the future. For example, mass retailer Target famously
predicted which of its customers were pregnant, based on their
purchasing behaviour. This was not about predicting the future; it
was about filling in missing data in a way that proved very useful
to the company. Similarly, medical diagnosis can be viewed as a
prediction problem, whereby doctors use data on symptoms to
diagnose disease.
The use of data for prediction is not new. The mathemati-
cal ideas behind machine learning are decades old and many
of the algorithms are even older. So, what has changed?
Recent advances in computational speed, data storage,
data retrieval, sensors and algorithms have combined to dra-
matically reduce the cost of machine-learning-based predic-
tions. Together, these improvements mean that prediction
through machine learning is becoming a cost-effective means
of conducting a variety of tasks. For example, until recently,
classifying images required a human to perform the classifica-
tion a time-consuming (and not easily scalable) process, but
image classification is now becoming an automated task. Simi-
larly, fraud detection in banking is moving from a costly human-
based process to a much less expensive and more easily-scaled
machine-based process.
While it is straightforward to claim that the latest AI de-
velopments involve a dramatic improvement in the ability of
machines to predict, this only matters in a context where pre-
diction is important. What role does prediction play in the per-
formance of tasks in the workplace? By answering this question,
we can anticipate the avenues by which a reduction in the cost
28 / Rotman Management Spring 2017
of prediction will change human and machine roles in other
areas, outside of prediction.
Let us consider the anatomy of a task. A task may be any-
thing from drive a car between points A and B to set prices for a
multi-product retailer. The locus of a task is a component called
an action that, when taken, generates an outcome. However, ac-
tions are not taken in a vacuum. Importantly, the way an action
is translated into an outcome is shaped by underlying conditions
and the resolution of uncertainty.
For example, to drive a car between two points involves a
myriad of decisions that impact things like how quickly that task
is achieved. Most notably, it involves adjusting for traffic condi-
tions. The driver performing the task observes the immediate en-
vironment for example, the behaviour of cars ahead of it on the
road and these observations are the data she uses to forecast
(i.e. predict) where those cars might be as her car moves forward.
On the basis of this forecast, the driver then takes different ac-
tions to minimize the risk of accidents or to avoid bottlenecks.
In so doing, she applies judgment in combination with prediction.
While an experienced driver may not learn much from her own
behaviour, an inexperienced one will see how her action led to an
outcome and then, through a process of feedback, use that infor-
mation to inform future predictions.
Seen in this light, it is useful to distinguish between the value
of prediction and the cost of prediction. As indicated, AI advances
have significantly lowered the cost of prediction. Given data and
something to predict, it is now much less costly to derive an accu-
rate prediction. But of equal importance is what has happened to
the value of prediction. Put simply, prediction has more value in
a task if data is more widely available and accessible. The many
decades-long improvements in the ability of computers to copy,
transmit and store information have meant that the data avail-
able for such predictions has also improved leading to a higher
value for prediction in a wider variety of tasks.
Judgment the ability to make considered decisions still
has a distinct role to play: To determine the impact that different
actions will have on outcomes, given predictions. As it turns out,
this hinges directly on how clear the outcomes themselves are.
For some tasks, the precise outcome that is desired can be easily
described. For instance, in terms of labeling images, you want
the label to be accurate, which it either is or is not. In these sit-
uations, the separate need for judgment, as might be applied
by a human, is limited, and the task can be largely automated.
In other situations, describing the precise outcome is difficult,
because it resides in the mind of humans and cannot be trans-
lated into a format that a machine can understand which is
why it is often argued that AIs are less adept at handling emo-
tional tasks.
However, machine prediction can significantly impact more
pedestrian tasks. For instance, an AI that maps out the optimal
route to take to minimize travel time (i.e. apps like Waze) cannot
easily take into account the preferences of drivers who have to
do the work of driving. For instance, the AI may find a route with
many turns that reduces travel by a few seconds, but a human
driver may prefer a slower route with fewer turns or one that
takes him closer to the dry cleaning store, where he has clothing
to pick up.
Judgment takes predictions and uses them as information
that is useful to determine actions and hence, alongside predic-
tion, judgment is a critical input into many actions. Whether a
machine can undertake the action depends on whether the out-
come can be described in such a way that the machine can exer-
cise suitable judgment. This is not to say that our understanding
of human judgment cannot evolve and be automated: One of
the features of new modes of machine learning is that they can
examine the relationship between actions and outcomes and
use this feedback to further refine predictions.
In other words, prediction machines can learn, and this dy-
namic aspect drives improvements in how a task is performed.
For instance, machines may learn to predict better by observ-
ing how humans perform in tasks. This is what DeepMinds AI
AlphaGo did when learning the game of Go. It analyzed thou-
sands of human-to-human games and then played millions
more games, each time receiving feedback on action/outcomes
that allowed it to predict more accurately in order to inform on
strategies in the game.
In other situations, feedback can include data on human
judgment and actions. For instance, the startup X.ai launched
a service whereby it provides a virtual assistant to interact with
people you know in order to schedule appointments thereby
replacing the human assistant. To do this, the AI needs to under-
stand your preferences and also be able to communicate with
others and not seem overbearing. Thus, what the X.ai team have
been doing is handling the tasks themselves and having their
own AIs observe the interactions in order to learn from them.
In effect, the AI is trained to predict human responses and, in-
deed, what choices a human makes in judgment. The idea is
to allow the AI to mimic that judgment. In this way, over time,
feedback can transform some aspects of judgment into a pre-
diction problem.
Looking Ahead
Major advances in prediction may facilitate the automation of
entire tasks. In other words, while existing technology may allow
machines to take action, the full automation of a task requires the
ability for the machines to predict and rely on those predictions
to determine what to do. Thus, being able to move predictive
tasks to machines may facilitate automation. For example, for
many business-related language translation tasks, as prediction-
driven translation improves, the role for human judgment be-
comes limited, though judgment might still serve a role in critical
negotiations.
To see how prediction machines may lead to the automa-
tion of tasks that we do not normally associate with prediction,
consider fulfillment. This is the process of taking an order and
executing it by making it ready for delivery to its intended cus-
tomer. In electronic commerce, fulfillment includes a number
of steps such as locating items associated with an order in a large
warehouse-type facility, picking the items off shelves, scanning
them for inventory management, placing them in a tote, pack-
ing them in a box, labeling the box, and shipping the box for de-
livery. The fulfillment industry has grown rapidly over the past
two decades due to the rapid growth in online shopping.
Many early applications of machine learning to fulfillment
related to inventory management: Predicting which products
would sell out and which did not need to be reordered because
demand was low. These were well-established prediction tasks
rotmanmagazine.ca / 29
 Over time, feedback can transform some aspects
of judgment into a prediction problem.
that have been a key part of offline retail and warehouse man-
agement for decades. Machine-learning technologies made
these predictions better, and over the past two decades, much
of the rest of the fulfillment process has been automated.
For example, research determined that fulfillment centre
workers were spending over half of their time walking around
the warehouse to locate items that had been ordered, pick them
off the shelf and put them in a tote. As a result, several com-
panies developed an automated process for bringing shelves
to workers. Amazon acquired the leading company in this
market, Kiva, in 2012 for $775 million, and eventually stopped
servicing other Kiva customers. Other providers subsequently
emerged to fill the demand for the growing market of in-house
fulfillment centres and 3PLs (third-party logistics firms).
Despite significant automation, fulfillment centres still em-
ploy many humans. Perhaps surprisingly, the reason is because
of the physical challenge of grasping. Although grasping objects
is easy for humans infants develop the skill during the latter
half of their first year this task has so far eluded automation.
It turns out, the core challenge is not in creating dextrous fin-
gers, but in identifying the right angle to use in grasping a par-
ticular object. As a result, Amazon alone still employs 40,000
human pickers full time, and tens of thousands more part time
during the busy holiday season, handling approximately 120
picks per hour.
It is not that companies that do high-volume fulfillment
would not like to automate picking. In fact, for the past two
years, Amazon incentivized the best robotics teams in the world
to work on the long-studied problem of grasping by hosting the
Amazon Picking Challenge. Even though top teams from insti-
tutions such as MIT worked on this problem, as of this writing,
the problem has not yet been solved in a manner that is satisfac-
tory for industrial use. It may seem hard to believe that robots
are perfectly capable of assembling a car or flying a plane, but
are not able to pick items off a shelf and place them in a box.
However, perhaps most surprising is to learn that prediction lies
at the root of the physical task of grasping.
Robots can assemble an automobile because the compo-
30 / Rotman Management Spring 2017
nents are highly standardized and the process highly routin-
ized. However, there is an almost infinite variety of shapes,
sizes, weights, and firmness of items in an Amazon warehouse.
Therefore, it is impossible to program robots to pick and place
each and every type of item in whatever orientation they hap-
pen to be positioned in on the shelf. Instead, they must be able
to see the object (analyze the image) and predict what ap-
proach to grasping the object will work (arm approach, finger
positioning, grip pressure, etc.) so as to hold it and not drop or
crush it.
In other contexts, however, more abundant prediction
could actually lead to an increased value for human-led tasks,
where the machine provides predictions but the human exercis-
es judgment and undertakes the action component of the task.
The Managerial Challenge
As AI technology improves, prediction performed by machines
will increasingly dominate prediction performed by humans.
Managing for such a future requires understanding three inter-
related insights.
1. PREDICTION IS NOT THE SAME AS AUTOMATION. Prediction is an in-
put to automation, but successful automation requires a variety
of other tasks. The anatomy of a task involves data, prediction,
judgment and action in order to attain an outcome. Machine
learning is only one component of this (prediction). For exam-
ple, medical care tasks include imaging (data), diagnostics (pre-
diction), treatment choice (judgment), bedside manner (judge-
ment/action) and physical intervention (action), among others.
Prediction is the stage of automation in which the technology is
currently improving particularly rapidly, although advances in
sensor technology (data) and robotics (action) are also advanc-
ing quickly.
2. THE MOST VALUABLE WORKFORCE SKILLS INVOLVE JUDGMENT. For
many activities, prediction was the bottleneck to automation.
This meant a role for human workers in aiding a variety of
prediction tasks, including pick-and-place and driving. Going
forward, this role will diminish. Instead, employers will look for
workers who augment the value of prediction. In the language of
Economics, just as the demand for golf balls rises with lower pric-
es of golf clubs, the most valuable skills in the future will be those
that are complementary to prediction: Those related to judgment.
We can only speculate on the aspects of judgment that will be
most valuable, but ethical judgement, emotional intelligence, ar-
tistic ability and task definition will likely top the list.
This diverse group of skills suggests that the set of activi-
ties in which the human role may increase in value is potentially
wide-ranging: Nursing skills related to physical intervention and
emotional comfort may become even more valuable if predic-
tion leads to better diagnosis of disease; retail store greeters may
become increasingly effective if social interactions help differ-
entiate stores in the presence of reliable predictions on purchase
behaviour; and security guarding skills related to ethical judge-
ment and use of force may be of increased value as a comple-
ment to the better prediction of crime.
3. MANAGING WILL REQUIRE A NEW SET OF TALENTS AND EXPERTISE.
Identifying which applicants to hire and which workers to pro-
mote are prediction skills. As machines improve their perfor-
mance in prediction, such human prediction skills will become
less valuable compared to judgment skills such as mentoring,
emotional support and ethics.
Managing a workforce whose skills are complementary to
prediction may be quite different from managing a workforce
for which a core skill is prediction. For example, promotion can-
not be based on the (often well-measured) success of past pre-
dictions. Instead, alternative metrics must be developed.
Perhaps most important, managing a firm with AI capabili-
ties will involve managing the artificial intelligence itself. What
are the opportunities for prediction? What should be predicted?
How should the artificial intelligence agent learn to improve
those predictions over time? Managing in this context will re-
quire judgment in identifying and applying the most useful
predictions and weighing the relative costs of different types
of errors.
In closing
Three key managerial challenges lie ahead. First, shifting the
training of workers from prediction-related to judgment-related
skills. Second, assessing the rate and direction of the adoption
of AI technologies in order to properly time the shifting of work-
force training (not too early, not too late). And third, developing
management processes that build the most effective teams of
judgment-focused humans and prediction-focused artificial in-
telligence agents.
As the range of tasks that are recast as prediction problems
continues to grow, we believe the scope of new applications will
be extraordinary.
Ajay Agrawal is the Peter
Munk Professor of Entrepre-
neurship, Professor of Strategic
Management and founder
and academic director of the
Creative Destruction Lab at the Rotman School of Management. Joshua Gans
is the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship and
Professor of Strategic Management at the Rotman School, and author of
The Disruption Dilemma (MIT Press, 2016) and Information Wants to be Shared
(Harvard Business Review Publishing, 2012). Avi Goldfarb is the Ellison
Professor of Marketing at the Rotman School and Chief Data Scientist at the
Schools Creative Destruction Lab. A similar version of this article appeared
in the spring 2017 issue of MITs Sloan Management Review.
Rotman faculty research is ranked #3 globally by the Financial Times.
rotmanmagazine.ca / 31
Changing the World,
One Nudge at a Time
If you want someone to do something, make it easy. It sounds obvious
so why have leaders been so slow to embrace this proven principle?
by David Halpern
PEOPLE HAVE BEEN NUDGING EACH OTHER for as long as humankind
has existed. We are always busy persuading and encouraging
those around us to do one thing or another. Indeed, many biolo-
gists think that much of human development was powered by the
complex patterns of influence that characterized early human
social groups.
Yet when it comes to governments and businesses, many
have turned their backs on the messy skills of softer persuasion.
Instead, they have packed their toolkits with tools shaped by the
rational disciplines of Economics and Law.
In recent years, however, governments and businesses alike
have started rediscovering this wider set of influences on human
behaviour. It has been a fascinating rediscovery.
Dening the Nudge
A nudge is essentially a means of encouraging or guiding be-
haviour, but without mandating or instructing, and ideally, with-
out the need for heavy incentives or sanctions. In everyday life,
its a gentle hint; a suggestion; a conspicuous glance at a heap
of clothes that were hoping our kids might clear away. Nudges
stand in marked contrast to obligations, strict requirements or
the use of force. For Cass Sunstein and Richard Thaler, origi-
nators of the concept, a key element is that nudges avoid shut-
ting down choices, unlike laws or other formal requirements. As
we shall see, nudges are a subset of a wider, more empirical and
behaviourally-focused approach to policymaking.
Consider how a law actually works: A parliament or execu-
tive passes a resolution that says that henceforth, there will be
a new requirement for people or businesses to do something in
a particular way. The lawmaker normally attaches a sanction
or penalty to those who fail to comply, such as a fine or impris-
onment. But the link between the passing of the law and actual
behaviour is very distant.
Laws are also premised on an arguably naive model of hu-
man behaviour: They assume that somehow, people will have
heard about the new law and realized that it applies to them.
They then assume that people will weigh the costs of breaking
the new law with the risk of being caught, and conclude that they
should comply. They also assume that in the moment and con-
text of temptation, all of this will come to mind, and that these
rotmanmagazine.ca / 33
Sometimes, behaviour changes with
a surprisingly light touch.
considerations will outweigh other pressures and temptations.
Unsurprisingly, the passing of new laws is often a far from
perfect way of affecting behaviour. Citizens may be required to
fill in their tax returns on time, but every year, millions fail to do
so. Were not supposed to drop litter, but parks and public spaces
are often strewn with it. Even the very existence and scale of the
courts and judicial system can be argued to be testament to the
frequent failure of the law-based approach.
In contrast, sometimes behaviour changes with a surprising-
ly light touch. For example, over the last decade, many countries
have introduced bans on smoking in public places. There were
grave concerns that the new laws would be both unpopular and
unenforceable. However, in this case, they have proved highly
successful. The smoking ban, in the UK at least, has been subject
to almost no enforcement. In essence, smoking bans have been
self-policed, built around a new social norm and tacit public
support for smoke-free environments.
Subsidies and incentives have a similarly mixed success
rate. Sometimes, seemingly-small subsidies or taxes have had
rapid and dramatic impacts on behaviour. For example, the in-
troduction of a small difference in price between leaded and
unleaded fuels in the UK and elsewhere led to a rapid switch
to unleaded fuels. Similarly, requiring retailers to charge con-
sumers a tiny amount for a plastic bag has been shown to dra-
matically reduce their use. On the other hand, many much
larger subsidies and taxes, such as those intended to drive
savings or increase energy efficiency, have proven to have lim-
ited impact.
The fact is, nearly all government (and corporate) policies
have a behavioural component, and hence behavioural analyses
start to unpack what makes some policies/strategies work and
others flop. In so doing, they open the door to alternative and po-
tentially much more effective approaches. In recognition of this,
the UK government launched its very own nudge unit in 2010,
34 / Rotman Management Spring 2017
and I was tasked with heading it up. The Behavioural Insights
Team (BIT) was born.
The study of human behaviour reveals that many of our
abilities as human beings rest on mental shortcuts or heuristics.
It also leads you to respect these heuristics. In our early days at
BIT, we leaned heavily on a framework called MINDSPACE to
help guide our work (see sidebar). But after the first year or so of
battle-hardened application and many workshops and conver-
sations we developed a simplified framework for day-to-day
use: EAST.
Like MINDSPACE, EAST is a mnemonic: If you want to en-
courage a particular behaviour, you should think about making it
Easy, Attractive, Social and Timely. The EAST framework does
not cover every nuance of the behavioural literature, but it does
offer a good starting point.
My colleagues and I have found that frameworks like EAST
enable rapid engagement of a new problem a sort of mental
checklist that can be run through quickly to enable the identifica-
tion of some simple ideas for early testing. In this article I will
delve into the first principle of this framework.
Advice for the Ages: Make it Easy
John was in his late twenties. He had decent grades at school
and a job he enjoyed. He was already an assistant manager, and
rising fast. His employer, a large retailer, offered good benefits,
including a great pension. He remembered the details from
when he first joined, and from a seminar they did for staff the
previous year: For every pound he put in, his employer would put
in the same amount, and the government added more on top. It
was a no-brainer, and he knew it. The only problem: John hadnt
actually signed up.
Like many people, John knew that he should start saving
for his pension, and it was something he actually wanted to do.
Hed seen his grandparents struggle with money, and he knew

that a few pounds put away now would be worth a lot more in
the future. But it also involved paperwork, a bit of hassle, and it
didnt feel like something that had to be done today. Retirement
was years away, after all. Yes, he thought, Ill do it tomorrow, or
maybe next week.
In 2012, something happened: His employer wrote to him
to say that, as a result of a small change in the law, they would
now automatically enroll him in the company-sponsored pension
scheme, unless he indicated that he would rather not partake. If
he didnt want to enroll in the scheme for now, it was simple: He
just had to ask to leave the scheme within a month, and he would
get another prompt in a couple of years time.
The default had been flipped, from one in which John
would have to actively choose to join the pension scheme (opt in),
to one in which he would be automatically enrolled unless he said
otherwise (opt out). John read the letter, and went to a short talk
on the new arrangements. It was a bit of a relief: He didnt have to
do anything. His pension was sorted.
John was not alone. Within six months of this change (which
targeted all large UK firms), more than a million new savers start-
ed pensions. In short, more than 90 per cent of eligible workers
chose not to opt out. The proportion of the employees of large
firms saving for pensions rose from just over 60 per cent, where it
had hovered for decades, to over 80 per cent (the overall percent-
age is pulled down by those who were not immediately eligible
for a pension, such as those on extended leave). By early 2015,
this simple change in the default had led to more than five million
extra UK workers saving for their pensions.
This stunning result illustrates the power of a simple nudge
to change behaviour, and to turn around a problem that policy-
makers on both sides of the Atlantic had wrestled with for half
a century. Despite subsidies running into many billions more
than 20 billion per annum in the UK and $100 billion in the
U.S. millions of people apparently preferred not to save. It was
The MINDSPACE model
Messenger We are heavily influenced by who
communicates information
I ncentives Our responses to incentives are shaped
by predictable mental shortcuts, such
as strongly avoiding losses
Norms We are strongly influenced by what others do
Defaults We go with the flow of pre-set options
Salience Our attention is drawn to what is novel
and seems relevant to us
Priming Our acts are often influenced
by subconscious cues
A ffect Our emotional associations can powerfully
shape our actions
Commitments We seek to be consistent with our public
promises and reciprocate acts
E go We act in ways that make us feel better
about ourselves
enough to make many experts conclude that there was some-
thing deep in Anglo-Saxon culture against saving: We just pre-
ferred to live and spend for today.
The primary tool, employed on both sides of the Atlantic for
decades, had been the use of generous tax breaks and subsidies
to encourage people to save. And yet, as one leading economist
put it, many people continued to leave money on the table. Re-
cent analysis by Harvard Economist Raj Chetty has shown just
how cost-ineffective such tax subsidies are. His analysis, using
European data, shows that every $1 of taxpayers subsidy to en-
courage people to save more for their pensions led to a miserly
one cent of extra saving by workers. The main effect of these huge
subsidies was simply to encourage a small minority of savvy sav-
ers perhaps 15 per cent to move their investments into the
most tax-efficient schemes. In contrast, changing the default to
one in which savers were asked to opt out led to substantial in-
creases in saving, literally overnight and very little reduction
in saving elsewhere.
Changing the default also beats educational efforts, hands
down. A wide variety of studies by behavioural economists shows
that financial education though often called for by industry
and some politicians has very modest effects. These studies
rotmanmagazine.ca / 35
The human impulse to do something
grinds to a halt when it becomes a hassle.
show that efforts such as seminars on saving leave participants
feeling more knowledgeable and intending to save more; how-
ever, this fails to translate into actual increases in savings. In con-
trast, changing the defaults allowing people to opt out of future
saving, rather than opting in had much bigger impacts on me-
dium- to long-term savings behaviour.
Still, just because changing the default works, is it what peo-
ple really want? Policymakers on both sides of the Atlantic wor-
ried greatly that many people would object to the idea that they
had been automatically enrolled in a pension. Not so, explains
David Laibson, professor of Economics at Harvard. It is hugely
popular. U.S. survey data suggests that nine out of 10 workers
who have experienced the pension opt-out support the changes
in 401(k) defaults. And even among the small minority who do
opt out, more than seven out of 10 of them still think the opt-out
is preferable to an opt-in arrangement.
As well as being extremely effective, changing the default
so that savers are automatically enrolled illustrates how we can
often achieve better outcomes by making it easy for people to
do things that they would quite like to do if only it were more
straightforward.
The Power of Reducing Friction
As indicated, if you want someone to do something, a pretty
good start is to make it easy. In Economics, theres a phrase that
captures this simple concept: Friction costs. As in Physics, from
where the phrase is borrowed, it helps to explain why otherwise
perfect models might sometimes throw out predictions at odds
with messy real-world observations.
For those who studied Physics at school, the phrase calcu-
late, ignoring frictional effects will be familiar. Economists have
deployed similar simplifications to make the world more ame-
nable to elegant mathematical models. But in the real world of
people and bureaucracy, friction matters a great deal. Just as a
36 / Rotman Management Spring 2017
real weight pushed across a real table will soon grind to a halt
as a result of friction, a human impulse to do something soon
grinds to a halt when it becomes a hassle. Hence John, the young
worker mentioned earlier, really did mean to start saving, and
to get that money on the table: He just didnt get around to it,
because it involved effort and tedious paperwork and was less
attractive than all the other things he could be doing in the next
hour or day.
Frictional costs are not a peripheral issue. Rather, they of-
ten make all the difference between something happening or
not be it a stone rolling down a slope, or a policy succeeding
or failing.The fact is, humans have a deep-rooted tendency to
take the line of least resistance, be it cutting the corners across a
park, to deciding what to eat. Try putting out a selection of fruit
in your office, or even at home, and see whats left at the end of
the day. Chances are, itll be the oranges: They are just that little
bit more hassle to eat compared with an apple, or that master of
convenience, the banana.
The simple insight that hassle and friction have big impacts
on behaviour opens the door to countless policy interventions
as well as to use (and abuse) by companies.
Businesses work hard to make it as easy as possible for you to
sign on to a new deal: To get a mobile; to try out a new product for
10-day period for free; or to walk out of the showroom with a new
car. However, most will not make it as easy to return the product
or end the deal. Theyll go to great trouble to make sure that when
it comes to paying the instalments or renewing a subscription, its
an effort to opt out, but as easy as possible to renew.
If its a product you are happy with, theres no problem. But
if you arent sure about it and genuinely want to try it out, think-
ing youll cancel it in the offer period is generally a mistake: The
frictions are now working strongly against you. As the literature
shows us, even a small amount of friction will defeat most of us.
Hence the retailer, or manufacturer, can afford to offer dramatic
discounts on the ticket price provided theres a bit of effort in- mandatory cooling-off periods for financial products; having a
volved in claiming the money back. The fact is, most of us will required delay between a store offering cheap up-front credit
never get around to it, even though thats what helped to per- and the persons ability to use the card (even if just 30 minutes);
suade us to make the purchase in the first place. and requiring that certain products, such as cigarettes, are only
Businesses can also take out friction in ways that consum- sold over the counter. A little friction, it turns out, is not always a
ers can find very helpful. For example, pharmacies can make life bad thing.
much easier for patients on repeat prescriptions by automati-
cally sending, by post, a new batch of medication just before the In closing
old prescription runs out. This can save both patient and doctor The world is full of examples of frictions removed or added to
quite a lot of hassle in getting and collecting a new prescription, shape our behaviour. Policymakers and business leaders alike
saving tens of millions of dollars in the process. should never forget to ask the question, Could we make this eas-
Of course, there is little point in passing a law, introducing ier? Go ahead: Make it easy; take out the friction. Or, depending
a benefit, or running a public information campaign intended to on your goal, add some.
influence behaviour if no one knows about it or if the infor-
mation is so dense and complex that it is not clear what is being
asked of people. As such, the most fundamental application of
make it easy is to make sure that your information and messag-
ing are simple to understand.
When you last received a letter from the government, was
it clear what it was asking you to do? If you were asked to pay
a bill, was it obvious how to pay, or were there three different
addresses, several phone numbers and the how to pay details
buried somewhere on the back? Our work in BIT has taught us
to be almost obsessive about removing such frictions. Even the
tiniest extra hassle can make a significant difference.
Sometimes, however, the answer may be to add more fric-
tion at least when you are trying to encourage people not to do
something, or to pause for thought before doing something that
they might later regret. Thats because many of the decisions we
make in life make use of our automatic or System 1 parts of our
brain, as Daniel Kahneman has shown. In some situations, the Dr. David Halpern is a British psychologist and head of the UK
Governments Behavioural Insights Team. He is the author
role of the nudger may be simply to put a bump in the road to
of Inside the Nudge Unit: How Small Changes Can Make a Big
jolt the persons System 2, or active reflection, back on. Difference (Penguin Random House UK, 2015), from which this
Examples of such bumps in the road include introducing article was adapted with permission.

rotmanmagazine.ca / 37
CONSIDER THIS:
Option Awareness
and the Psychology
of What We Consider
If we can understand what leads people to consider a particular action,
we can design interventions that lead them to think of other possibilities.
By Anuj K. Shah and Jens Ludwig
THE STANDARD ECONOMIC VIEW SUGGESTS that people will commit
to an action if the expected benefits outweigh the costs. But this
model is incomplete in an important way: It overlooks how ac-
tions come to mind. Before you weigh the costs and benefits of
an action, what cognitive processes lead you to think of it in the
first place?
In this article we will show that actions are more likely to en-
ter into consideration when they are cognitively accessible, and
that accessibility depends on three psychological parameters:
automaticity, identity and privacy. We believe this framework can
inform new interventions to change a wide range of behaviours
by making certain actions more (or less) cognitively accessible.
Automaticity and Reection
In his 1992 Nobel lecture, Gary Becker described the personal
story of how he came up with the economic model of crime.
Becker was late to deliver an oral exam and was trying to park. He
considered parking illegally near campus to save time, weighing
the costs and probability of getting a ticket. In a sense, he asked,
Is it worth it to park illegally?.
Other questions could have come to mind instead. For exam-
ple, he might have asked, Since I am late, should I change the for-
mat of the oral exam? From this question, parking illegally does
not even come to mind as an answer.
A large body of research in Psychology suggests that our in-
terpretations of a situation often happen automatically and are
based on the situations we encounter most often. Importantly,
the assumptions we make about a situation constrain how we re-
spond to it, by affecting the alternatives we consider. In fact, many
times, only one response comes to mind based on how we see the
situation. As a result, many decisions might not be decisions at
all: For someone who cannot afford to get a ticket, parking ille-
gally may never come to mind as an option; and for someone who
assumes that academic bureaucracies are inflexible, parking ille-
gally might be the only accessible option.
We can see this psychology play out in an exercise that forms
the foundation of a youth anti-violence program called, Becoming
a Man (BAM), developed by the Chicago non-profit Youth Guid-
ance. In an exercise called The Fist, two participants are paired
up. One of them receives a rubber ball and is told to make a fist
rotmanmagazine.ca / 39
 Pausing to reflect on your assumptions about a situation
can make other courses of action more accessible.
around it. The other young man is told he has one minute to get
the ball from his partner. Inevitably, the youths use physical force
to try to take the ball.
Afterwards, the counselor asks why no one simply asked for
the ball. The youths say they are certain that if they asked for the
ball, their partner would have disrespected or ridiculed them. Then
the counselor turns to the first person in the pair and asks what
they would have done if asked for the ball; and the vast majority
indicate that they would simply have given it up.
Watching youths go through this exercise, it is easy to won-
der what character traits might make them choose to use physi-
cal force in such a trivial context. But a different explanation is
that there was no actual moment of choice. The youths automati-
cally responded, based on their perception of the situation: The
exercise seemed to call for physical force. As a result, violence
was not merely an attractive course of action; it was the only ac-
cessible one.
More generally, behaviours across a variety of domains may
sometimes happen because they are the only ones that came to
mind. There are clear implications for intervention: Reducing
automaticity might increase the chances that people consider
alternatives. To test this possibility, we carried out two large-scale
randomized trials of BAM in Chicago. In both studies, we found
reductions in total arrests during the program period by about
one-third and declines in violent crimes by nearly one half.
Importantly, automatic assumptions cannot be corrected
merely by thinking harder about a decision. Instead, people need
to recognize that they have made these assumptions in the first
place. To appreciate this point, consider a lab experiment con-
ducted by one of the authors (Anuj Shah). Participants first imag-
ined participating in The Fist exercise; then they were randomly
assigned to three conditions:
1. A think harder condition, where they imagined different
ways the exercise could play out or different people it could
involve;
2. A think back condition, where they identified their
40 / Rotman Management Spring 2017
assumptions about the situation and thought about
alternative assumptions; and
3. A control condition, where they were given no further
instructions on how to think about the situation.
All participants were then asked to brainstorm ways of
navigating the exercise. Participants who simply thought hard-
er about the situation were no more likely than controls to real-
ize that they could simply ask for the ball, but participants in
the think back condition were more likely to come up with this
solution.
This finding highlights a general principle with broad appli-
cations: Because people often ignore critical assumptions about
a situation, only a few ways of navigating the situation are acces-
sible to them. And as indicated, peoples assumptions are typi-
cally based on the situations they most commonly encounter,
because these assumptions enable action without much cogni-
tive effort. When people face novel situations that seem familiar,
but recognize that their usual assumptions might be misguided,
re-construing the situation thinking back to those assump-
tions can help to generate other actions to consider, each with
their own costs and benefits.
This principle looms large in areas such as Medicine, where
doctors see a great deal of regularity across patients. As a result,
physicians might match patients to a pre-existing mental tem-
plate, which may prevent them from asking more open-ended
questions or thinking beyond the template. For instance, when a
patient comes in with ankle pain from tripping, the doctor might
automatically focus on the narrow question of whether the ankle
is sprained or broken assuming this is the only diagnosis that
matters. In fact, it might be useful to think back and ask whether
the ankle is the only thing wrong with the patient, or whether the
fact that the patient tripped at all is itself a symptom of some-
thing else. As a particular diagnosis enters into a physicians
mind, it gains momentum, which makes other diagnoses inac-
cessible. Pausing to reflect on ones assumptions about the situa-
tion can make other courses of action more accessible.
Identity and Consistent Behaviour
How we construe a situation is not the only factor that deter-
mines whether particular actions come to mind. A large body
of research shows that our sense of identity also constrains which
actions are accessible to us, because people value acting consis-
tently with how they view themselves. For instance, someone
who thinks of himself as non-violent would be unlikely to car-
ry a weapon, even while engaging in activities where a weapon
might be enormously useful (such as drug dealing or robbery).
The action is not rejected merely because of its costs and ben-
efits; rather, it does not even enter into consideration, because it
is inconsistent with how the individual views himself.
This seems to suggest a straightforward intervention for
changing behaviour: Encourage people to take on a new identity.
But research from Social Psychology suggests that persuading
people to adopt a new identity can be difficult. Instead, it might
be more effective to tell people that they already have a certain
identity. For example, a classic experiment to reduce littering
randomly assigned subjects to either persuasion or labeling
conditions. In the persuasion condition, there were lectures, ad-
vertisements and messages like, Dont be a litterbug. In the la-
beling condition, students were told repeatedly (by the teacher
and principal) that they were already a litter-conscious class
that does not do things like litter. At follow-up, the share of stu-
dents who properly disposed of trash was 30 per cent for controls,
30 per cent for the persuasion group and well over 80 per cent
for the labeling group.
Similar effects have been observed for outcomes like scho-
lastic achievement, self-esteem and charitable giving. Interest-
ingly, social labels are already common in the criminal justice
system, but they are overwhelmingly negative: Juveniles are
labeled as troublemakers, inmates are labeled as problem-
atic and focused-deterrence strategies call in the highest-risk
gangs or people to tell them that they have earned the police
spotlight because they are prone to violence. Given the find-
ings, perhaps we should not be surprised that fully two-thirds of
all people released from prison are arrested again within three
years. Finding opportunities to use positive labels could help to
stem this trend.
More generally, beyond crime, labeling interventions
will likely be most effective when people already exhibit the
behaviour to some extent, because the labels will be more be-
lievable and the actions are already occasionally accessible.
For example, many financial literacy programs focus on teach-
ing and persuading people to save more. For people who are
already saving a little, positively labeling those individuals as
savers may increase the likelihood of saving more. But for
those with very low incomes and others who may be consum-
ing more than they earn, a different intervention may be need-
ed to stimulate savings.
Public vs. Private Behaviour
There are actions we would never even consider if we believed
there was an audience paying attention; and other actions be-
come more likely when there is a veil of privacy. For instance,
people might be more likely to commit a crime when they be-
lieve their actions have no audience. The usual approach to
making people feel like there is an audience for their crimes is
to increase the chances that there actually is an audience. The
U.S. spends billions of dollars each year to have police patrol
places where crime might happen by fielding security guards or
mounting security cameras. But there is an interesting wrinkle
in the psychology of privacy: People often experience what psy-
chologists call an illusion of transparency, whereby they believe
that others can read their minds.
The illusion of transparency basically removes the veil of
privacy. It might therefore be possible to leverage this illusion
to reduce the sense that some crimes have no audience. In fact,
it may be possible to increase this illusion without increasing
actual surveillance. To do so, we can draw upon the finding that
knowing a lot about others may lead us to believe they know
a lot about us, and having information about other people
might increase the illusion that our own thoughts and actions
are transparent to others. To test this hypothesis, researchers
rotmanmagazine.ca / 41
 Labeling a persons behaviour as already commendable can
be more effective than asking them to change their behaviour.
carried out an experiment in which participants were asked
to write four truths and one lie about themselves. Participants
were then randomly assigned to one of three conditions that
varied the amount of information they believed was about an-
other study participant: no information; seeing one truth about
this other person; or seeing four truths. They were then asked
how likely it was that the other person could detect the partici-
pants own lie.
Participants who were given information about the other
person reported a higher probability that the other person
would detect their lie (approximately 40 per cent versus 27 per
cent in the no information condition) that is, they experi-
enced a greater illusion of transparency. In some sense, this
assumption is adaptive, given most situations we face. It is usu-
ally true that people whom we know well also know us well.
The Path to Better Decisions
Stanford professor and best-selling author Chip Heath tells Carla ODell why so many decisions are awed
Carla ODell: Why dont we make better decisions?
Chip Heath: Psychologists have spent a number of
years studying all of the biases we have, and theyve
found that there are a number of basic ways we think
about the world that lead us to the wrong conclusions.
For example, we frame decisions narrowly. The typical
person only thinks of one alternative when making a decision.
How can we think more broadly and give ourselves multiple
options in the decision-making process?
The trick is to force yourself to come up with a second alternative,
which is generally not hard, once you discipline yourself. One of the
best tricks weve learned is what we call the vanishing options test.
Think to yourself, What if the option Im thinking about right now
suddenly disappeared? What else could I do?
When you dont force yourself to do this, your mental spotlight keeps
focusing on one option and whether or not you should do that one thing.
When we do the vanishing options test with people, we nd that about
80 per cent of the time, they come up with something much better than
they had initially thought of within three minuteseven if they had been
agonizing about the decision for weeks before they did the test.
42 / Rotman Management Spring 2017
But, in our experiment, this could not possibly be true. Instead,
people over-generalized this belief.
This insight also has implications for law enforcement,
which often focuses on solving and deterring crime by extract-
ing information from the public. The illusion of transparency
suggests that we may be able to deter crime more effectively by
providing information to the public. That might take the form
of local beat officers simply sharing a few benign details about
their lives at a community meeting or out on patrol.
More broadly, we suspect that increasing the illusion of
transparency will be most effective at changing behaviour
when specific individuals are responsible for enforcement,
but are not well known. For example, students who skip school
may not know the attendance clerks and truancy officers
tracking absences; people who are filing their taxes may not
Some of the hardest decisions we make are those that involve
loss and letting go. For example, discontinuing a product line,
or getting a divorce. What can we do to make these kinds of
decisions easier?
There is a very basic principle called loss aversion, which means that
people would rather avoid loss than acquire gains. Daniel Kahneman
and Amos Tversky found that losses are two-to-four times more painful
to our brains than equivalent gains are pleasurable. Very often, when
were going into a new situation at work, we have to give up something in
order to get something thats (hopefully) better. But empirically, the thing
thats coming has to be two to four times as good to be in the ballpark of
not regretting the loss. Loss aversion is a recipe for many problems in our
personal and professional lives.
Apart from loss aversion, what other cognitive bias undermines
our decision making the most?
The biggest bias I see and one of the harder ones to changeis
conrmation bias. When we go into a situation, were collecting data about
optionsthings we might do or consider. Conrmation bias is our ten-
dency to collect data in a way that is biased by the hypotheses we walk
in with. Say you love Thai food, and a new Thai restaurant opens in town.
You may browse reviews of the new restaurant and feel that youre
know who is responsible for reviewing their returns; and firms
filing annual earnings reports may not know who inspects
these results. Providing some information about those respon-
sible for monitoring could help to reduce the feeling of ano-
nymity among those being monitored.
In closing
The standard economic view assumes that people take an ac-
tion when the benefits exceed the costs, and that therefore, to
intervene on a behaviour, one must change the costs and ben-
efits. But before a person can even consider the costs and ben-
efits of an action, they have to think of that action.
We suggest that cognitive accessibility is a major driver
of which actions people consider, and hence of how they be-
have. Ultimately, if we can understand the psychological pa-
reading them even-handedly. But in actuality, you are about twice as
likely to read a two-star review as a four star review, because you really
want this place to be good.
Getting away from conrmation bias is very difficult. One trick is to
learn to ask yourself disconrming questionsthat is, to test the idea that
the opposite of your hypothesis is true. In the workplace, we can do this
with each other. For example, There are reasons for doing this merger, but
what are the reasons not to do it? Of course, the problem in organizations
is that, even though disconrming questions are useful for making good
decisions, asking them can make one look like less of a team player. CEOs
arent always pleased when somebody raises a counter-argument to an
idea theyre excited about.
Thats why its important to make asking disconrming questions
easier. You might start to ask your team these questions as part of your
project planning process, or even do a pre-mortem exercise and envision
everything that might go wrong. By including this as part of the process,
people dont have to take on the unenviable role of devils advocate.
Why have ideas from cognitive science and neuroscience begun
to get so much traction in business?
When Prof. Kahneman won the Nobel Prize in 2006, we [academics]
recognized that what we had been doing was as important as we thought
it was, for all these years. Kahneman started the trend of thinking about
rameters that lead people to consider an action, we can attempt
to design interventions that lead them to think of different
possibilities.
Anuj K. Shah is an Associate Professor of
Behavioural Science at the University of
Chicagos Booth School of Business. He is also
a member of the Scientific Advisory Board at
ideas42, a social science research and develop-
ment laboratory that uses scientific insights to design innovative policies and
products. Jens Ludwig is the McCormick Foundation Professor of Social
Service Administration, Law and Public Policy at the University of Chicagos
School of Social Service Administration and Director of the University
of Chicago Crime Lab. The complete paper on which this article is based,
Option Awareness: The Psychology of What We Consider was published
in the American Economic Review and can be downloaded online.
how to take these ideas from the research context and farm them out to
people at work in organizations.
When it comes to bringing ideas from cognitive science to the
business world, the potential gains are huge, and the costs are tiny. If you
asked a group of top global leaders about the decisions in their organiza-
tions, about half of them will say that they make as many mistakes as
they do correct decisions. That is a shocking statistic. Clearly, there is
an asymmetric payoff for getting top-level decisions in better shape.
Chip Heath is the Thrive Foundation for Youth Professor of Organizational
Behaviour at Stanford Universitys Graduate School of Business. He is the
co-author of Decisive: How to Make Better Choices in Life and Work (Random
House, 2013). Carla ODell is CEO of APQC, one of the leading proponents
of benchmarking and best practice business research. For more: apqc.org.
rotmanmagazine.ca / 43
 DUELING WITH
DESIRE:
How to Confront
Want/Should Conflict
The better we understand want/should conict, the more successful
we will be at designing effective interventions that shift behaviour.
by T. Bradford Bitterly, Robert Mislavsky, Hengchen Dai and Katherine L. Milkman

IN OUR DAILY LIVES we frequently face a tension between what we
want to do and what we believe we should do. After a long week
at work, we may want to share an expensive dinner and a few
drinks with friends when we know we should go home early
and get a good nights sleep; similarly, we might be tempted
to get caught up on the current season of Homeland when we
know we should focus on drafting that report we promised our
colleague. For decades, researchers have examined the battle
between highly desirable options that provide immediate grati-
fication (e.g., eating junk food, procrastinating, overspending)
and options that provide more long-term benefits (e.g., eating
healthy food, meeting deadlines and saving for retirement).
Harvard Professor Max Bazerman calls this common
struggle want/should conflict. In this article, we will summa-
rize the key findings on this pervasive conflict and discuss a se-
ries of interventions that policymakers, organizations, and indi-
viduals can use to promote more future-oriented choices.
A Struggle for the Ages
Individuals often evaluate decisions through two different lenses:
The want self focuses myopically on the here and now, and thus
strongly desires instant gratification; while the should self is more
far-sighted, guided primarily by long-term interests.
Indulging in the wants that we most desire can cause us to feel
wasteful, irresponsible and immoral, and as a result of a distaste
for such feelings, some individuals under-consume want options.
However, it is far more typical for people to feel that they have
made the opposite mistake (i.e., over-indulging in wants at the ex-
pense of shoulds) and to regret this irrational behaviour later on.
Over-indulging in want options typically has a much greater
cost than overindulging in should options. For example, failures
to control ones desires (e.g., choosing pizza over vegetables,
watching TV instead of exercising, smoking rather than quitting,
buying an unnecessary designer handbag rather than deposit-
ing the money in a savings account) can contribute over time to

rotmanmagazine.ca / 45
 The want self focuses myopically on the here and now,
and thus strongly desires instant gratification.
serious individual and societal problems, such as obesity, higher
cancer rates, and under-saving for retirement.
In many such cases, then, we can say that observed levels of
indulgence in want options are sub-optimal (and thus not ratio-
nal), as higher net utility would be obtained by selecting shoulds.
Because the mistake of over-indulging in wants is generally more
common and costly than the opposite error, when we discuss
want/should conflict throughout this article, we will focus our
discussion on how to increase the rate at which should options are
selected.
Following are eight factors that have been shown to affect
our choice of wants vs. shoulds.
1. CHOOSING FOR NOW OR LATER. A key finding is that people prefer
should options at a higher rate when making decisions for the
more distant future, but prefer want options more often the soon-
er a choice will take effect. For example, deciding to go to the
gym tomorrow is easier than deciding to go this very minute, and
committing to save more for retirement next year is easier than
committing to forego a portion of todays paycheque. This pat-
tern has been demonstrated in decision domains ranging from
those involving money to food and movie rentals.
Multiple studies investigating impulsiveness have con-
firmed that people show extremely high discount rates for de-
layed rewards. In one study, the average participant opted to
receive $50 immediately (a want option) rather than $100 in
six months (a should option) but preferred to receive $100 in 18
months rather than $50 in 12 months. These results contradict
the predictions of standard economic theory, which suggests that
an individuals preferences between two sure sums of money
should depend only on the time delay that separates their receipt
(six months in both cases).
These results are consistent with hyperbolic time discount-
ing. In one experiment, subjects randomly assigned to select a
film to watch that same day were more likely to select low-brow
films (want choices) than subjects randomly assigned to select a
film they would watch several days in the future. And in the do-
main of online grocery shopping, one of the authors [Katherine
Milkman] found that the percentage of extreme should grocer-
ies (e.g., fruits and vegetables) in a customers basket tends to
46 / Rotman Management Spring 2017
increase and the percentage of extreme want groceries (e.g., ice
cream and cookies) tends to decrease, the further in advance of
delivery a customer places her order.
2. COGNITIVE LOAD. Daniel Kahnemans two-system model of
thinking suggests that the relative strengths of System 1 reactions
(which are automatic, emotional and instinctual) and System 2
reactions (slower, more deliberative and logical thinking) influ-
ence the outcomes of want/should conflicts. Building on this no-
tion, want options are expected to be more likely to win out when
the cognitive resources available to make a decision are limited
(i.e. when System 2 is over-burdened), which allows System 1 to
dominate.
In one study designed to test this prediction, researchers pre-
sented participants with two snack options: A piece of chocolate
cake or a cup of fruit salad. They found that individuals who were
randomly assigned to memorize a seven digit number (and who
thus had reduced cognitive resources) were more likely to choose
cake over the fruit than those who were assigned to memorize a
two digit number. This finding highlights that the availability of
cognitive resources is critical to making far-sighted and delibera-
tive should decisions.
3. CONSTRUAL LEVEL. Construal Level Theory (CLT) suggests that
we prefer shoulds over wants more often when we are think-
ing more abstractly and thus focusing on the global features of
options, rather than when we are thinking concretely and fo-
cusing on the contextualized, surface-level and goal-irrelevant
features of options. For instance, abstract representations of ex-
ercising bring to mind its long-term benefits, while concrete rep-
resentations remind us of its in-the-moment pains and required
planning.
Research has shown that the tendency to make should choic-
es can be enhanced by inducing abstract, high-level representa-
tions of events for example, by focusing people on more distal
events in time and space, rather than more proximal events. In
one study, researchers primed participants to think abstractly by
asking them to describe why they maintain good physical health,
and primed others to think concretely by asking them to describe
how they maintain good physical health. They found that when
a more abstract, high-level mindset was activated, people ex-
hibited stronger preferences for immediate want outcomes over
delayed should rewards. Inducing people to adopt a higher-level
construal mindset is therefore one way to increase future ori-
ented decision making.
4. DEPLETION. As indicated, a growing body of research suggests
that exerting willpower comes at a cost, and that cost is a reduc-
tion in available self-control resources for use in future choices.
In other words, individuals have limited self-regulatory resources,
and exerting self-control to avoid wants in one situation can de-
crease ones subsequent ability to exert self-control.
In one study designed to test this theory, researchers showed
that participants who resisted eating chocolate chip cookies (an
obvious want for most people) quit working on unsolvable puzzles
earlier (where persistence is a should behaviour) than did indi-
viduals who resisted eating radishes an activity that for most
people, requires little self-control. This and other studies illustrate
the paradox that by exercising self-control now, we increase the
likelihood that we will give in to our desires to indulge later. Fortu-
nately, although the self-control muscle can be weakened through
repeated use, it can also be strengthened through proper exercise:
One study found evidence that practicing small acts of self-con-
trol greatly increased smokers chances of successfully quitting.
5. JOINT VS. SEPARATE EVALUATIONS. The outcomes of want vs.
should conflicts are also influenced by whether we evaluate op-
tions one-at-a-time or simultaneously. Although want options
tend to be preferred at a higher rate than should options in isola-
tion, we are more likely to think about the costs and benefits of
each option and make far-sighted choices when multiple options
are evaluated at the same time. For example, when viewed in iso-
lation, a charity that saves baby polar bears may seem more al-
luring and receive more donations than a charity that funds skin
cancer research. However, when these choices are compared
side-by-side, people tend to donate to the charity that helps peo-
ple, viewing its mission as more important, albeit less emotion-
ally resonant. This research highlights that presenting want and
should options simultaneously rather than sequentially is one
way to promote more should choices.
6. MOOD EFFECTS. Positive mood has been shown to facilitate fu-
ture-oriented decision making, and a number of explanations
have been proposed for this. One account is that experiencing
positive emotions signals to decision makers that their current
situation is non-threatening, which reduces discounting of the
future and thus makes shoulds relatively more attractive.
Another reason is that positive emotions can counteract
ego depletion, restoring the depleted willpower resources
necessary for selecting should options. In one study, research-
ers demonstrated that after randomly assigning participants
to watch clips of videos that induced either a happy or neutral
mood, those placed in a positive mood were more likely to se-
lect a should option (grapes) over a want option (M&Ms). How-
ever, they found that the tendency for positive moods to in-
crease should choices is attenuated by elevated arousal because
arousal is depleting.
Research has also explored the impact of negative emo-
tions on want/should conflict. Recent studies have demonstrat-
ed that these emotions can lead to self-control breakdowns.
For instance, sadness increases decision makers tendency to
focus on immediate gratification and to dramatically discount
future outcomes. Together, this research shows that people who
are relaxed and happy are more likely to make should choices,
whereas individuals who are emotionally aroused or in a nega-
tive mood are more likely to reach for instant gratification.
7. LICENSING EFFECTS. Interestingly, our choice between a want and
a should can also be affected by decisions we have made in the
past, as well as those we anticipate making in the future. Research
shows that people feel licensed to make (or justified in mak-
ing) want choices if they believe they have previously engaged in
should behaviours or if they anticipate having opportunities to en-
gage in should behaviours in the future.
For example, people who were asked to imagine they would
partake in a should behaviour (e.g., donating part of their tax re-
bate to charity, volunteering for community service), relative to a
control group who did not imagine any such future good behav-
iour, were more likely to select a desirable want product (e.g., a
pair of designer glasses) over a cognitively favourable should prod-
uct (e.g., a less expensive but more utilitarian pair of glasses).
rotmanmagazine.ca / 47
 People feel licensed to make want choices if they believe
they have previously engaged in should behaviours.
Furthermore, want products are more likely to be selected
when individuals make what they believe is the first of a series
of similar decisions rather than a single, isolated choice, presum-
ably because individuals making repeated decisions believe that
they will have the opportunity to choose shoulds in the future to
compensate for current indulgences. These findings highlight
that choosing between wants and shoulds is often not done in
isolation, but instead, hinges on an individuals past choices and
anticipated future decisions.
8. FRESH STARTS. Recent research suggests that there are natural-
ly-arising points in time when people are particularly motivated
to pursue their long-term interests and prefer shoulds. Temporal
landmarks, which include personally-relevant life events (e.g.,
anniversaries, birthdays) and reference points on shared cal-
endars (e.g., holidays, the start of a new week, month, year or
semester), demarcate the passage of time and help us organize
our activities and experiences. Field research has shown that
temporal landmarks magnify peoples virtuous intentions and
increase their engagement in should behaviours. Researchers
analyzed (a) daily Google search volume for the term diet, (b)
undergraduate students gym attendance records, and (c) a wide
range of goals (e.g., pertaining to education, health, finance, etc.)
that Internet users committed to pursuing on a goal-setting web-
site (stickK.com). These studies revealed that people engage in
should behaviours (i.e., dieting, exercising and goal pursuit) more
frequently following temporal landmarks, including the start of
the week, month, year and academic semester, as well as imme-
diately following a birthday, a national holiday, or a school break.
The authors refer to this phenomenon as the fresh start effect.
Should Prescriptions
Faced with the above challenges to our decision making, what
can be done? Following are three nudges that have been shown
to successfully increase the rate at which people choose shoulds
over wants.
PRESCRIPTION 1: PROMPTS
Prompting people to stipulate when, where and how they will
enact their goals is one of the oldest prescriptions for increas-
ing engagement in should behaviours dating back to research
conducted in the 1960s. Plan-making has been shown to improve
our likelihood of achieving goals in a diverse array of domains,
48 / Rotman Management Spring 2017
including exercise, dieting, smoking cessation, academic perfor-
mance, test preparation, recycling and voting.
Planning prompts are effective for a number of reasons, one
of which is that they reduce forgetfulness. When people take the
time to create and even write down the when, where and how of a
plan, they mentally associate their target actions with cues relat-
ing to the when and where of execution.
Planning also discourages procrastination by creating ex-
plicit commitments to oneself and sometimes to others. For ex-
ample, people feel internal pressure to follow-through on their
plans and seek to avoid breaking explicit commitments to them-
selves because behaving inconsistently with their past actions,
beliefs, and attitudes creates discomfort. Further, some plans
(e.g., to get a mammogram) may literally require making an ap-
pointment, which may be difficult to cancel or delay.
Recent large-scale studies have demonstrated the effec-
tiveness of plan-making as a means of increasing take-up of
two important should behaviours: receiving flu shots and colo-
noscopies. In a study by one of the authors (Prof. Milkman),
planning prompts were demonstrated to significantly increase
take-up of colonoscopies. In this study, those predicted to be the
most likely to forget to follow through (e.g., older adults, adults
with children, and those who did not comply with previous
reminders) benefitted most from the planning prompt.
PRESCRIPTION 2: COMMITTMENT DEVICES
Many people are sophisticated about preventing their self-con-
trol problems from getting in the way of their good (or should)
intentions. As a result, another way to increase engagement in
shoulds is by providing individuals with access to commitment
devices or a means of voluntarily (a) enforcing restrictions on
themselves until they have done what they know they should or
(b) imposing penalties for failing to do what they should. Com-
mitment devices have existed in many forms throughout the
years. For instance, the piggy bank is a commitment device that
encourages us to commit to saving by setting aside a certain por-
tion of earnings for future use.
More modern forms of commitment devices include Anta-
buse, a medication that makes alcoholics physically ill after con-
suming even a small amount of alcohol, and the aforementioned
stickK.com, a website that takes users money if they fail to
achieve their goals. Ultimately, commitment devices are mecha-
nisms that allow people to prevent themselves from giving in to
unwise wants, and the research shows that they can be used to only enjoy this desirable want while exercising (i.e. engaging in a
reduce procrastination, smoking, failures to achieve work goals, should behaviour).
and succumbing to repeated temptations in a laboratory setting.
In closing
PRESCRIPTION 3: TEMPTATION BUNDLING The better we understand want/should conflict, the more suc-
Temptation bundling seeks to increase should behaviours by bun- cessful we will become at designing effective interventions that
dling them with tempting wants a strategy that can simultane- promote should choices and help people avoid the temptation
ously reduce engagement in wants and increase engagement in to give in to harmful cravings and desires. As indicated herein,
shoulds. For example, a doctoral student may have the goal of even minor interventions can shift behaviours in beneficial
spending more time writing a manuscript (a should behaviour) directions.
while recognizing that he has been consuming too many Star-
bucks white chocolate mochas (a want behaviour). Using temp-
tation bundling, the student might commit to only consuming
white chocolate mochas while working on his manuscript, thus
increasing time spent writing and reducing white chocolate mo-
cha consumption. In addition to simultaneously tackling two
types of self-control problems, temptation bundling has the
potential to harness consumption complementarities: Working
while drinking mochas may make work more enjoyable and ef-
ficient, as well as reducing the guilt (and therefore overall enjoy-
ment) associated with chocolate mocha consumption.
Temptation bundling has proven an effective means of
increasing engagement in one important should behaviour:
exercise. Prof. Milkman et al. demonstrated the effectiveness of
temptation bundling in a field experiment where study partici-
pants were randomly assigned to one of three conditions:

(a) A full-treatment condition, in which access to tempting, low-

brow audio novels (wants) was restricted to the gym;
(b) An intermediate treatment condition, in which participants
were simply encouraged to self-restrict their enjoyment of tempt-
ing audio novels to the gym; or
(c) A control condition.

Their finding: Initial gym attendance among individuals in

the full treatment condition was 51 per cent higher than atten- T. Bradford Bitterly and Robert Mislavsky
are PhD candidates in Decision Sciences
dance in the control group, and participants in the intermediate
at the Wharton School at the University of
treatment condition showed a marginally significant 29 per cent Pennsylvania. Hengchen Dai is an Assistant
initial increase in gym attendance. At the conclusion of the study, Professor of Organizational Behaviour at the
61 per cent of participants were willing to pay to have their ac- Olin Business School, Washington University.
Katherine L. Milkman is an Associate Profes-
cess to an iPod containing tempting audio novels restricted to the
sor of Operations, Information and Decisions
gym. In other words, people would pay to have access to a pos- at the Wharton School.
session they could otherwise use freely restricted so they could

rotmanmagazine.ca / 49
Value Investing,
Human Behaviour
and Why You
Should Ignore
the Market
Rotman Professor Eric Kirzner interviews two of North Americas leading
value investors about the current investing landscape, the efficiency of markets,
and how some things like human behaviour never change.
Eric Kirzner: Many of us have been surprised by
how well the market has responded to Donald
Trumps presidency thus far. How do you account
for it?
Charles Brandes: What is so interesting to me is,
all of the expert opinions and polls turned out to be
wrong and we should keep that in mind, as far as
investing goes. Expert opinions are something you
have to be very careful about. As we have seen over history, in
many cases, they are worthless.
Whether people have been surprised by the results of
Trump so far or not, the fact is, nobody really knows what ef-
fects his presidency will have on the market. Having said that,
we do know a few things: Since 2008, value investing has not
performed as well as it usually does in comparison to growth-
stock investing, and there are a couple of reasons for that. First,
in periods of declining interest rates, the type of value stocks
people buy are from industry categories that dont do as well
as growth stocks. Also, when youre value investing, what you
are buying is present earnings and present cash flows; and when
youre investing in growth stocks, youre buying earnings poten-
tial in the future. So, if you discount that at a low interest rate,
you could pay more for growth stocks than you would for value
stocks when interest rates are low.
Now, it looks to me like interest rates are starting to re-
verse, and historically, in periods of rising interest rates, value
stocks do quite well. Thats because rising interest rates usu-
ally mean that the economy is growing, and when economies
grow, value stocks perform better. Historically, starting in the
early 1970s during a period of rising interest rates, our value
stocks did quite well; and the same was true during the period
of rising interest rates from 2002 to 2007. After that, as rates
declined, value stocks didnt do as well. Of course, there are
many other factors involved, but were starting to see a value
premium that could last for quite some time.
rotmanmagazine.ca / 51
 Investing is as much about being an emotional human being interacting
with the world as it is about underlying fundamentals.
Kim Shannon: From my perspective, I was certain
that if Trump won, the markets would plunge, be-
cause it would create high levels of uncertainty
and we all know that the market hates uncertainty.
So, its a really good thing that Im a value manager, because we
dont bet on things like that. We are bottom-up stock pickers.
While we couldnt have forecast what happened [when Trump
was elected], we certainly didnt make any changes to our port-
folio because of it.
In terms of the impact Trump will have on markets, its re-
ally hard to tell, because we dont know how much of his cam-
paign platform will be implemented. For me, the main question
is, What will he do with interest rates? They have been falling
since 1981-82, and weve been waiting for a big paradigm pric-
ing shift. Was July 2016 the bottom and are we starting the
march up? Im a big proponent of sideways market theory: If
that was the bottom in rates, then we are now in a neutral phase
for equities; but Im not at all certain that is true. Id like to be
able to make that judgment in a year or so.
The fact is, in terms of making money as a value manager,
the economy and politics really dont matter: Recent research
from Montreal-based Bank Credit Analyst (BCA), using 112
years of data, found that only 17 per cent of stock market behav-
iour is influenced by the economy.
EK: Lets move on to the theory of value investing.
Some people believe that if a stock is trading at
$30, that means it is worth $30. Is that true?
CB: Youre referring to Efficient Market Theory,
and as a practitioner over the last 47 years, I can
say that it is total and complete bunk. Over that pe-
riod of time, I have seen market prices of compa-
nies fluctuate a heck of lot more than the actual basic intrinsic
value of the company and the industry itself. Thats just a plain
old simple observation.
EK: The emerging eld of Behavioural Finance
shows that people make investment decisions
based on pervasive psychological biases. What
are some of the key biases you see?
52 / Rotman Management Spring 2017
CB: Many of these biases are built into us due to our
evolution, because early on, it was really important
for humans to think short term or we would not
have survived to see the next day. The problem is, as
far as investing goes, that is the wrong way to think.
Another bias I often see is a very strong herding instinct:
We like to be grouped together and aligned with everybody
else. But if you want to be an outstanding investor, you cant do
what everybody else is doing. I also see a lot of extrapolation:
Right now, everyone sees the U.S. market doing quite well, so
they extrapolate that it will continue to do well. That could be
a big mistake.
EK: How can we avoid some of these biases?
KS: One of the advantages of being a value man-
ager is that it automatically puts you in a contrar-
ian mindset. It causes you to go against the crowd,
and as Charles indicates, its much easier for people
to go along with what everyone else is doing. Academic studies
continually show that value investing works, so you would ex-
pect more investors to be involved in it but in actual fact, there
are very few disciplined value managers out there in part be-
cause of the herding instinct.
For example, look at the ownership of Valeant in Canada in
the last year and a half: If you were willing to really look at the
financial statements and dig below the surface, you could see a lot
of troubling elements in this firm and yet it got as high as 6.2 per
cent of the TSX. For a period of time, our clients were okay with
us saying, Valeant is clearly not a value stock, and we could move
on; but by last summer, we were getting lots of questions: Explain
to us, in gory detail, why you dont own Valeant because we
think its hurting our returns. It finally collapsed in the fall of 2015.
This type of client input is par for the course for us. Recently,
weve been getting grief over our renewed love for Empire Com-
pany (Sobeys) and last year, Charles, you were talking with
great enthusiasm about Russia when no one wanted to hear
about it. To succeed in this field, you really have to be comfort-
able being a contrarian.

EK: One of the key principles of value investing is
the notion of nding companies in many cases,
great oneswhose shares appear to be selling at
signicant discounts to their intrinsic value. Why
does this happen to a company?
KS: There are numerous reasons, but being over-
looked, under-followed and/or in some kind of
trouble is how I usually think of them. Often, a
management team will stumble in some way
which is what happened at Empire: They made an acquisition
that should have been terrific, taking them from being mostly
regional to national. It should have been an easy integration,
but it wasnt; then they misstepped and fired their CEO. This
created an opportunity to buy a good-quality firm without
much debt. If you believe that the company can figure out
how to get back in the saddle, that is an opportunity for sig-
nificant returns in the long-run.
CB: As Kim indicates, there are a lot of reasons
why a company might be under-valued. Dur-
ing the tech bubble of 1999-2000, everyone be-
lieved that, if you didnt own technology stocks,
you were out of it. I remember clients calling me and say-
ing, You are finished as an investment manager, because you
dont own any of this up-and-coming internet stuff. And, we
didntbecause they were outrageously expensive.
Then, suddenly there was so much money going into that
area that the basic fundamental companies were not attract-
ing investment. Even though they were actually doing well,
their stock prices werent going up, so there was an unbeliev-
able amount of value there. Thats one example of how you
can find under-valued companies.
Other reasons can be cyclical movements, or as Kim in-
dicates, short-term problems. If you do a deep analysis of a
company that is in trouble, sometimes you can see that the
problem is not going to last forever. For example, Volkswag-
on during its emissions crisis, and BP during the oil-spill de-
bacle. These were horrible, but temporary, situations for re-
ally good companiesand that can provide an opportunity to
buy them below their actual value.
EK: How do you get started on developing a
working list of companies that might t into the
value class?
KS: Today, information is so easy and cheap to ob-
tain. Back in the day, I used to have to pluck num-
bers off of financial statements and enter them into
a computer system; but with todays tools, we can
basically grind through all of the publicly-listed stocks in the mar-
ketplace. At my firm, we focus in on a formula that relies on clas-
sic value ratios like price of sales, price of cash flow and dividend
yield, and we come up with an intrinsic value; then, we rank the
entire universe according to cheapness.
Every sector of the market is open season for a value in-
vestor but not always at the same time, because at any point
in time, a stock can stumble. The easy part is finding something
that is cheap; then you have to do the deep analysis to find out
whether it is truly a value candidate. Does it have the appropri-
ate risk characteristics? A lot of times its a question of, Can this
stock truly revert back to its mean?
CB: We use the same criterion, as far as starting with
low-priced or unusually-priced shares. Then we
look at balance sheets, dividend yield all of that.
We have analysts divided into eight different indus-
try groups, headed up by 25 senior people. They are responsible
for understanding their industry group and which companies
within it might be potential investments for us. Of course, we
will always be attracted to the worst-performing market in the
world, and well take the time to examine whats going on there.
We dont find much anymore in the worlds best-performing
markets.
EK: A few years ago, Charles, you talked about
Microsoft as a prime example of great value. Do
you still believe this?
CB: A few years back, the Cloud was launched, and
suddenly, Microsoft was considered old-fashioned.
They didnt own the software market anymore, and
PCs were disappearing. As a result, one of the pre-
mier growth companies in the world got down to about 10 times
earnings which is the cheapest it had ever been. We looked at it
and said, Wait a minute. Maybe this overall impression that the
PC market is going away is incorrect; Microsofts size still gives
it a huge advantage, and its leaders will probably figure out how
to keep up with the Cloud and other developments. At the time,
Microsoft was $20 to $30 per share, so we bought it because we
believed it had a future. Today, its around $60 a share so we
would be looking elsewhere for deeper discounts.
rotmanmagazine.ca / 53
 Every sector of the market is open season for a value investor
but not always at the same time.
EK: Charles, back in 1987after the largest sin-
gle-day loss in market history, Black Mondayyou
were asked on national television, what you would
be doing differently as a result. Your now-famous
answer: Nothing. Please explain.
CB: Thats a typical mistake investors make: They
get really concerned about short-term stock mar-
ket price movement and think its going to continue
forever. It happens all the time. I get clients asking
me When the markets going down, what should I do? And, of
course, the first part of my answer is, Do nothing, because the
market does come back, and if you like what you have in your
portfolio, you should leave it alone. Never try to out-guess the
market. Of course, an even better answer to that question is, Buy
more if prices are down but over many years, weve found that
our clients have difficulty doing that.
KS: I absolutely agree with Charles: If you have a
robust portfolio, you should never move it around
on a day like that, but you can look around for oth-
er opportunities. For me, as a value manager, one
of the best times to do that was, sadly, in the aftermath of 9/11.
Canadian markets reopened on the Thursday or Friday, but the
U.S. didnt reopen until the following Monday. After the trag-
edy, every stock in the market was down by 20 or 30 per cent.
Enormous bargains were available all over the floorbut you
had to realize that your portfolio was also down 20 to 30 per
cent. It was easy at that moment in time for an active manger
to be shell-shocked and I certainly was.
Investing is as much about being an emotional human be-
ing interacting with the world as it is about underlying funda-
mentals. The beauty of having some extra time that week was
that I could come to work on Monday and say, Wait a minute:
Were all upset, but rationally, this is one of the best buying op-
portunities of my career. I have to act. Its very tough to step in
54 / Rotman Management Spring 2017
after big drops like that, but value managers have been trained
to do the opposite of what most people are doing.
CB: The stock market really has nothing to do with
true investing. Most of the time, you should be to-
tally ignoring the market and stock price move-
ments and volatility. Instead, you should be look-
ing at the companies you own, and how they are doing over a
long period of time. That has nothing to do with stock market
fluctuations.
EK: Charles, your rm has been investing in emerg-
ing markets since 1982. You were among the rst
to start pursuing that area. How do you go about
distinguishing opportunities in emerging markets?
CB: Terms like emerging market and developed
market arent what investors should focus on. In-
stead, they should be looking at individual markets
and individual companies within them. Where
they are based is less important. As Kim indicated earlier, this
is a bottom-up-type of thinking rather than a top-down ap-
proach that puts all emerging markets into the same bucket.
The fact is, each emerging market is different: Brazil is
very different from Russia, which is very different from South
Korea. What is not that different is how businesses operate
around the world. As always, the main thing we take into ac-
count is, how a company is priced today in the public market,
compared to its long-term intrinsic value.
In building our portfolio, we look all around the world,
including emerging markets and developed marketseven at
so-called frontier markets, trying to find the largest margin of
safety, no matter where the company happens to be located.
Emerging markets had been doing very poorly until about June
of 2016, but theyve done extremely well since then. Because
they were doing so poorly for so long, people got scared and
lots of money was coming out of them, and suddenly they were
very, very cheap.
We find certain markets are a lot better than others: We
still think Brazil and South Korea are very interesting; and
we find Russia and some of its major companies interesting.
You have to discriminate between companies, from a bottom-
up standpoint, rather than just looking at emerging markets
in general.
CB: Yes, because it is based upon economics and
wealth creation over a long period of time in a free
enterprise economy. Looking back to when Ben
Graham started on Wall Street in 1914, there has
been lots of change in terms of information availability, but not
much difference in the cyclicality of businesses and the way
wealth is produced over a long period of time. And there has been
little to no difference in human behaviour.

EK: How do you avoid the gamblers ruin riskof

being right about a country, but wrong about in-
dividual selections?

CB: Our whole job is to try to understand the fun-

damental risks involved with each company and
industry, the changes happening in management,
the balance of the company and its historic rates
of return on equity. We look at these factors to try to determine
whether, in actuality, the intrinsic value we come up with is
fairly close to the companys long-term value. Our whole job
is to make that determination. Of course, sometimes were
wrong; but thats why its so important to have a diversified
portfolio.
Some investors rely on indexes, like the Morgan Stan-
ley Capital International Emerging Markets Index (MSCI
EM)but they are very biased from the standpoint of market
capitalization: You are only able to buy the four or five biggest Charles Brandes is the founder and Chairman of Brandes Investment Part-
companies in a country like China, India or Russia which is ners, L.P., and a member of the firms Investment Oversight Committee.
extremely limiting with respect to the actual potential of com- He is the author of Brandes on Value: The Independent Investor (McGraw-Hill
Education, 2014). One of the most closely followed value investors working
panies in these markets.
today, he is a disciple of the Benjamin Graham school of value investing. Kim
Shannon (Rotman MBA 93) founded Sionna Investment Managers in 2002.
EK: Value investing has its roots in the 1930s, when She was previously Chief Investment Officer and Senior Vice President at
it was called Fundamental Analysis, and over the Merrill Lynch Investment Managers Canada Inc. She is a past president of the
CFA Society of Toronto. Eric Kirzner is the John H. Watson Chair in Value
years it has enjoyed a 2.5 to three per cent advan-
Investing and Professor of Finance at the Rotman School of Management.
tage over growth indexes. Do you believe that it is
as relevant today as it always has been? This interview took place at the Rotman School of Management on January 12, 2017.

rotmanmagazine.ca / 55
 How Behavioural
Biases Affect
Finance
Professionals
A better understanding of Psychology can assist Finance professionals
in achieving their clients long-term nancial objectives.
by H. Kent Baker, Greg Filbeck and Victor Ricciardi

THE LITERATURE HAS DOCUMENTED a wide variety of behavioural
biases in financial markets: Individuals are overconfident, they
exhibit loss aversion, they demonstrate familiarity bias, and
they are driven by mood and sentiment, to name a few. When
such biases affect the decision making of finance professionals,
they can quickly become their own worst enemies.
It is widely believed that less-sophisticated investors make
poorer choices than their professional counterparts. But the
fact is, financial professionals are human, too. In this article
we will look at which particular biases are most likely to affect
three categories of finance professionals: Financial planners
and advisors; financial analysts and portfolio managers; and in-
stitutional investors. A better understanding of these biases can
help finance professionals achieve their clients long-term fi-
nancial objectives.
Key Biases for Financial Planners and Advisors
Financial planners and advisors, along with their clients, reveal
a wide array of psychological biases that can result in flawed
judgments and decisions. But for this group, being aware of the
following biases is particularly important.
HEURISTICS. Financial planners often exclude specific informa-
tion or process information incorrectly when advising clients.
Thats because they apply heuristics or mental shortcuts when
processing large amounts of data or statistics which often re-
sults in errors.
For example, a financial planner may use a heuristic that
married individuals are less tolerant of risk than singles and
therefore, recommend conservative investment products to
married clients. Clearly, not every married investor should be

rotmanmagazine.ca / 57
placed into this risk stereotype. The research shows that many
such heuristic judgments result in errors, poor advice, and
lower investment performance.
ANCHORING. Anchoring is the tendency for an individual to hold
a belief and then apply it as a reference point when making
future judgments. Planners and advisors often base their deci-
sions on the first piece of information they receive such as a
stocks initial purchase price and they often have difficulty
modifying their assessment of new information. For example,
when they anchor on a losing investment as a bad experience,
they can become excessively risk- and loss-averse, resulting in
underweighting other stocks in a portfolio.
FAMILIARITY BIAS. Planners, advisors and their clients often show
The Right (and Wrong) Way to Think About Money
Leading behavioural economist and best-selling author Dan Ariely gives his two cents to the CFA Institutes Usman Hayat
Usman Hayat: What is the right way to think about money?
Dan Ariely: The right way is all about opportunity
cost. Every time you buy something a cup of
coffee, a car, a house you should be asking, What
am I giving up now, and in the future, for this act of
consumption? Of course, an infinite number of pos-
sible other consumption choices exist. Comparing, say, apples to
oranges is simple: Nobody has ever stood in front of a fruit bowl
saying, I have no idea which one I want, because the opportunity
cost is so clear: Do you feel like eating an apple or an orange?
But with money, youre likely to be thinking, Should I buy that new
bicycle now, or put the money into my retirement fund? That is a
very difficult decision, because calculating opportunity cost is the
key to answering it and doing so is not humanly possible. Even
if you tried to get a computer to simulate all of the various things
you could spend your money on, it would be extremely difficult to
figure out a true opportunity cost for each purchase you make.
Is short-term vs. long-term the crux of the issue?
That is one of the things that makes financial decisions so difficult,
because when you think about spending money now vs. saving for
later, youre looking at something concrete vs. something abstract.
You want that bicycle now; and retirement seems so far away. Even
if you could say to yourself, This bicycle represents one entire
months rent, its still about now vs. later. Likewise, with food, we amount is okay. As a result, lots of people end up buying a home
get tempted by what is around us at the moment, because of our
present-focused bias.
58 / Rotman Management Spring 2017
a preference to own familiar assets. For instance, they show
an inclination to invest in local securities with which they are
most familiar, thus over-weighting portfolios in domestic as-
sets. They also tend to perceive familiar assets as less risky
and earning a higher rate of return, which can result in under-
diversification in a portfolio and resulting lower performance.
TRUST AND CONTROL. An important characteristic of the client-
advisor relationship is developing a balance between trust and
control. Clients often place too much trust in planners and ad-
visors or overly allocate control about decisions to them. Con-
versely, when clients lack trust and are controlling, they are
unlikely to listen to financial advice. Financial planners must
work to establish a balanced relationship of trust and control
with every client.
You have said we think about money in multiple wrong
ways. Please describe a few others.
One of them is relativity. Imagine youre going to buy a car. The
cost is 30,000 Euros, and the salesperson says, Hey, would you
like leather seats for an extra 2,000 Euros? Compare that deci-
sion with the following: Youre buying a chair for your house, and
it costs 500 Euros. The salesperson says, For 2,000 Euros more,
you can get it in leather. In the first case, you would likely think
it seemed like a good deal; but in the second, youd think it was
a terrible idea even though you sit down much more at home
than you sit in your car. Because of diminishing marginal returns,
the moment you spend 30,000 Euros, 2,000 looks like a small
amount; but when youre paying 500 Euros, 2,000 more seems
almost immoral.
Another example is, we tend to not think about decisions
from scratch. Instead, we do what is called anchoring, which
means we consider our past decisions, assume that they were
reasonable, and repeat them. Yet another strange bias affects
housing. Obviously, buying a house or condo is a huge decision.
To get an idea of what they can afford, people often use an online
calculator. Then, they use the number generated by this calcula-
tor as the true amount they can afford. Just because youve used
an online tool, it doesnt mean you should borrow the maximum
amount! Yet we have this idea that, the calculator said this
that they can't truly afford and that, of course, affects other
areas, like saving for the future.
WORRY. Both financial planners and their clients commonly suf-
fer from worry, but it doesnt apply to all products equally. One
of the authors [Victor Ricciardi] found that a large majority
of investors associate the term worry with stocks rather than
bonds. A higher degree of worry for stocks increases perceived
risk, lowers the degree of risk tolerance among investors, and
decreases the likelihood of owning the investment.
Biases for Financial Analysts and Portfolio Managers
Financial analysts and portfolio managers are particularly sus-
ceptible to the behavioural biases described below. Left un-
checked, these biases can severely damage their reputation.
OVERCONFIDENCE. This bias manifests itself as an unwarranted
faith in ones own intuitive reasoning, judgment and cognitive
Is it possible to correct our behaviour and move from
irrationality to rationality?
The question is, What tools can we give people to help them think
better about money? If we still believe the human brain is designed
to recognize opportunity cost and that, if we leave people to
their own accord, they will do the right thing, that will not
happen; but if you admit that people are going to make some
predictable mistakes, you can look at how chequing and savings
accounts are structured and come up with mechanisms
to help people.
What would be an example of such a tool?
One example might be an electronic wallet that nudges you to
think about some of the things you want to purchase in the near
future. Imagine if just before you walk into Starbucks it
says to you, If you keep spending money on lattes, you will not
be able to afford that trip to Paris. That would be one way to get
people thinking about opportunity costs.
Or, imagine that your chequing account didnt just include
one total pile of money, but was divided into different monthly ex-
penditures. When our salaries come in at the end of each month,
we feel like we have a lot of money; but the fact is, rent is due
tomorrow and that student loan payment is due the next day; so,
you dont really have all that money. Imagine that your account
showed you how much money you actually have available to
spend on discretionary things each month? Tools like that would
be very helpful to people.
abilities and includes both prediction overconfidence and certainty
overconfidence. Prediction overconfidence occurs when profes-
sionals assign too narrow a confidence interval around their in-
vestment forecasts; while certainty overconfidence occurs when
professionals assign too high a probability to their prediction
and have too much confidence in the accuracy of their judgments.
These biases have been shown to lead to overly-concentrated
portfolios, as these individuals may assume that their perceived
superior skills warrant including fewer assets for consideration.
HERDING BEHAVIOUR. Herding refers to disregarding ones own
opinion or analysis in order to follow the crowd which can lead
to financial bubbles and crashes. As prices increase from inves-
tors capitalizing on momentum, these individuuals may observe
their peers investing in these assets and thus be incentivised to
How can behavioural insights help finance professionals
make better decisions on behalf of clients?
Professional investors are human, too, so they are susceptible
to some of the same biases as everyone else. In 2008, we saw
lots of institutional investors panicking and behaving in terrible
ways it was not limited to individual investors. So, understand-
ing the role of emotions and decisions is centrally important for
companies, as well as for individuals.
Think about something like dieting. You know full well that if
you have your favourite cookies at home, you will eat too many.
So, you might decide, No more cookies at home! You might be
willing to limit your freedom to eat cookies by doing that. Imagine
if we took a similar approach with investments, and created a rule
that investors are not allowed to sell things immediately. Instead,
they have to go through a multi-step process that takes one full
month so that they cant act on their emotions. We could apply
that to any arena where emotions come into play and get the best
of people, and find ways to stop it. The fact is, we will never reach
perfect rationality, but we can do much better.
Dan Ariely is the James B. Duke Professor of Psychology and Behavioural
Economics at Duke University, the founder of The Centre for Advanced
Hindsight and the co-founder of BEworks. He is the author of several
best-selling books, most recently, Payoff: The Hidden Logic That Shapes our
Motivations (Simon & Schuster/ TED, 2016). This interview was conducted
by the CFA Institutes Usman Hayat.
rotmanmagazine.ca / 59
 Men are consistently more overconfident than women in
their predictions, particularly when they relate to finance.
follow suit. If they fail to follow the herd, they risk trailing behind
their peers; however, if they follow the herd, they may get caught
on the wrong side of an artificially-attractive opportunity.
LOSS AVERSION AND THE DISPOSITION EFFECT. According to Dan-
iel Kahneman and the late Amos Tversky, investors treat the
gains and losses in their portfolio very differently. Loss aversion,
which comes from Prospect Theory, suggests that managers
significantly overweight losses compared to an equivalent gain.
This behaviour results in the disposition effect, whereby profes-
sionals recommend selling securities to lock in gains too quickly,
and recommend retaining securities too long in order to recoup
losses. These finance professionals may exhibit both behaviours
in monitoring a single security in a portfolio.
GENDER DIFFERENCES. Although women represent only nine per
cent of portfolio fund managers, mutual funds managed by fe-
male portfolio managers perform in line with those managed by
men. Interestingly, funds with mixed gender teams of both male
and female portfolio managers exhibit superior performance. Al-
though both genders can display overconfidence in their abilities,
research shows that men are consistently more overconfident than
women in their predictions, particularly when related to finance.
CONFIRMATION BIAS. This bias causes analysts to overweight infor-
mation that confirms their prior beliefs and to underweight infor-
mation that runs counter to their prior beliefs. The result: Recom-
mendations may be based on previous choices.
OVER-OPTIMISM. Empirical research finds that individuals can be
excessively optimistic in both their earnings forecasts and stock
recommendations. One study found that management actually
prefers optimistic forecasts, because they increase market valu-
ations and therefore management compensation. In support of
60 / Rotman Management Spring 2017
this belief, researchers found that sell recommendations com-
prise only six per cent of their sample of recommendations,
whereas buy- and-hold recommendations comprise the remain-
ing 94 per cent.
Biases for Institutional Investors
Institutional investors are professional investors working for in-
surance companies, banks, pension funds, endowment funds,
mutual funds and hedge funds. Evidence indicates that these
sophisticated investors are less subject to some of the more com-
mon behavioural biases discussed thus far; however, they can
still be affected by the following biases.
HERDING BEHAVIOUR. Like analysts and portfolio managers, in-
stitutional investors can display a propensity to herd or follow
each others trades. If herding is irrational or driven by behav-
ioural motivations such as fads, greed, fear or reputational
concerns, it can de-stabilize asset prices and move them away
from their fundamental values. Conversely, herding behav-
iour can be rational and information-based. If so, it can lead to
more efficient markets and/or to higher risk-adjusted returns
to investors.
Two reasons largely explain why institutional investors en-
gage in herding behaviour. First, they infer information from
each others trades. Second, they analyze similar information
and draw the same conclusions about the fair value of specific
securities. Hence, herding by these individuals tends to be un-
intentional and information-driven. In one study, researchers
concluded that herding by institutional investors, in general, ap-
pears to be price stabilizing rather than price destabilizing.
UNDER-DIVERSIFICATION DUE TO OVERCONFIDENCE AND FAMILIARITY
BIAS. Although Portfolio Theory indicates that investors should
hold diversified portfolios, institutional investors do not always
If herding is irrational or driven by behavioural motivations
such as greed, it can de-stabilize asset prices.

do so. Instead, they often exhibit home bias, which is the ten- In closing
dency to invest mainly in domestic equities, despite the pur- Behavioural biases can dramatically affect the behaviour of all
ported benefits of diversifying into foreign equities. Various types of finance professionals. But the evidence reveals that
behavioural attributes might explain the irrationality of over- as investor sophistication increases from individual investor
weighting in domestic markets, including overconfidence, opti- through to institutional investor, the biases displayed do in fact
mism and familiarity. Overconfident investors overestimate the decrease and some even disappear. Regardless of their current
accuracy of their private information, judgment and intuition; role, Finance professionals across the board can benefit from
those with optimism bias believe that they are less at risk of ex- familiarizing themselves with all of the potential biases de-
periencing a negative event compared to others; and those with scribed herein.
familiarity bias trade in the securities with which they are famil-
iar. All three biases can lead to underestimating the amount of
risk in the investment and thus not taking the requisite steps to
reduce risk, such as diversifying.
However, under-diversification can also be a rational strat-
egy driven by information advantage. If this is the case, under-
diversification should not lead to deteriorating performance.
One recent study found that under-diversified positions earn
higher risk-adjusted returns than globally-diversified portfo-
lios; and another study found that institutional investors, espe-
cially in the realm of mutual funds, actually outperform when
holding locally-concentrated portfolios. Thus, under-diversifi-
cation generally tends to be a rational, not a biased choice for
institutional investors.
H. Kent Baker is the University Professor
of Finance at American Universitys Kogod
MOMENTUM TRADING. This refers to an investment strategy that School of Business in Washington, DC. The
tries to benefit from the continuance of existing market trends. Journal of Finance Literature has recognized
Although all types of institutions engage in momentum trading, him as among the top one per cent of prolific
authors in finance over the past 50 years. Greg Filbeck holds
evidence shows that they do not do so because of greed, fear,
the Samuel P. Black III Professor of Finance and Risk Manage-
overconfidence, or representativeness bias, but for fundamental ment at Penn State Erie and serves as the Interim Director for
reasons. A 2017 study concluded that using a momentum strat- its Black School of Business. Victor Ricciardi is an Assistant
egy is actually value-generating, because institutional investors Professor of Financial Management at Goucher College in
Baltimore. This article draws on themes from their book, Financial Behaviour
appear to buy past winners. Moreover, they are less subject in
Players, Services, Products, and Markets (Oxford University Press, 2017). It was
general to behavioural biases and generally contribute to making first published in The European Financial Review (europeanfinancialreview.
markets more efficient. com) and is reprinted with permission.

rotmanmagazine.ca / 61
 FEEDBACK:
The Broken Loop
in Higher Education
and How to Fix It
Learning science and teaching practice agree on the power
of feedback to enable and enhance learning. So why is
feedback so spotty and ill-timed in higher education?
by Mihnea Moldoveanu and Maja Djikic

WHEN WE WANT TO LEARN a new skill in life, we try out a new be-
haviour. Some behaviours fulfill their intended purpose, while
others do not. Feedback signals from the environment that tell
us whether or not the behaviour we produced had the intended
effect is essential to changing, adapting or modifying human
behaviour. This is what learning is all about.
Whether or not a skill can be reproduced by an algorithm,
learning any skill requires feedback and is essential to the mea-
surement of learning. In the skills environment of the Fourth
Industrial Revolution wherein information is free and com-
plex, interpersonal skills whose development requires textured,
precise, timely personalized feedback have become the highest
value contributions to human capital. The result: Feedback has
become the critical missing link in higher education.
Learning Science and Practice: A Picture Emerges
The science of learning and teaching offers abundant evidence
of the critical link between feedback and learning. In recent
years, it has come to focus on identifying the right kinds of feed-
back for different people and learning environments: Whether
you are learning a foreign language or a computer language;
learning to supress impulses; or learning to communicate co-
herently, empathically and responsively each requires spe-
cific types and sequences of feedback.
Timeliness, precision, intelligibility, actionability, rep-
etition all represent features of learning-enhancing and en-
abling feedback across different domains of knowledge, skill
and expertise. The discipline of machine learning has made
rapid advances in the last 10 years precisely because of its use

rotmanmagazine.ca / 63
 Machine learning has made rapid advances in the last 10 years due to
algorithms that learn from their own performance, via feedback.
of fast mechanisms that allow algorithms to learn from their
own performance via feedback that tracks their successes and
failures in replicating or predicting the data sets they are trained
to compress and replicate (or understand).
Despite the momentous advances in understanding the
role that feedback plays in learning, professional and higher ed-
ucation are lagging dangerously behind what is now both possi-
ble and desirable. The lecture-homework-quiz-exam routines
that pervade higher education whereby feedback is provided
en masse lag student performance by a long time and are not
adaptive or personalized to the learner or to her task. As such,
current teaching practice and the learning environment it
produces lives in self-sufficient isolation from the findings
of learning science, deep learning science and engineering and
the neuroscience of learning regarding the impact of feedback
on skill and competence development.
Todays feedback practices resemble those in effect 50 and
even 100 years ago an inertia driven partly by the econom-
ics of higher learning and partly by the cultural imperviousness
of pedagogical practice to learning science and technology. But
the opportunity costs of this knowing-doing gap are very high
and rising quickly: This gap represents both a significant drag
on the learning curve of students and an important opportunity
for disrupting the $2 trillion (2016 dollars) higher education in-
dustry. It is one that some organizations, as we will see, have
already laid the groundwork for.
Missing and Counterproductive Feedback Patterns
To understand how the current feedback landscape of higher
education fails learners by falling short of state-of-the-art
learning science, lets return for a moment to the century-old
lecture-homework-quiz-exam routine that is the central model
for learning today.
Lectures present concepts, models, methods, heuristics,
along with their derivations thereof and applications. Home-
work problems, quizzes and exams often test for the norma-
tive or correct application of a skill or method to an unfamiliar
problem. Feedback on the exercise of the skill by the learner
is, for the most part, given by teaching assistants on problem
sets, quizzes and exams turned in by learners in batches, and
64 / Rotman Management Spring 2017
days or weeks following the completion of the work. This is the
exact opposite of what learning science tells us about feedback
that maximizes skill development. Specifically, feedback in our
current model is.
TOO LATE: Graders typically take days or weeks to deliver
feedback to learners, in sharp contrast to the results of stud-
ies that indicate the importance of immediate feedback in
the development of skill.
TOO RARE: Feedback is infrequent relative to both the weight
it should receive vis vis other learning activities (such as
listening and taking notes) given its importance to learn-
ing, and especially to the learning of complex skills. An ar-
tificial neural network can shatter or, learn to classify
a large data set containing lots of non-linear relationships
only if it receives profuse feedback about its performance
as it learns. Why would a real neural network be any
different?
TOO IMPERSONAL OR GENERAL: The feedback the learner re-
ceives is not adaptive to her specific patterns of thought or
behaviour. Because of the economics of feedback in higher
education, there is little time or scope to adapt the feedback
to the learners specific goals and stock of existing skills,
which significantly decreases the actionability of the feed-
back for the learner.
TOO IMPRECISE: Learners usually receive 0 or 1- type feed-
back (i.e. correct/not correct) relating to the degree to which
they answer a question or solve a problem as a whole but
not on the specific pitfalls of the thinking or reasoning un-
derlying an incorrect or partially-correct answer. This makes
the feedback signal difficult to interpret as an action-guiding
and behaviour-correcting input.
TOO NOISY: Much of the feedback learners receive is heavily
dependent on the rapidly-changing and idiosyncratic bias-
es, moods, dispositions and physiological states of the grad-
ers. Different graders can disagree sharply on the quality of
 The highest-value tasks performed by humans have become
predominantly social, relational and interactive.
a particular piece of work, and a single graders feedback can
be more or less favourable, precise and cogent at different
times of the day, before or after meals, and before or after
sleep.
MIS-CONSTRUED AND MIS-CONSTRUCTED: Most of the feedback
in higher education is given and interpreted as having
been given for purposes of evaluation, filtering and selec-
tion, as opposed to being oriented to learning and behav-
ioural change. It is evaluative and selection-oriented some-
thing that educational research has steadfastly shown to
undermine the effectiveness of feedback as an enabler and
facilitator of learning, which developmental feedback en-
courages and facilitates.
The Right Feedback at the Right Time
We currently have the means at our disposal to fix this broken
feedback loop: Converging models and evidence from cognitive
science, deep learning theory and practice, and the neuroscience
of learning (together making up feedback science) document
the qualities of feedback that is maximally conducive to learning
for most skill sets. We can and should turn this knowledge
into a set of principles for the design of feedback protocols that
fix the broken loop.
Not all feedback is equally useful or good; and some is ac-
tually counterproductive, uninformative and useless. What kind
of feedback is most useful to learning? Some of the answers are
intuitive, others less so. Learning-enabling feedback is:
TIMELY:It follows promptly in the footsteps of the learners
behaviour. Feedback given in a week is far inferior to feed-
back the next hour or the next day. In fact, neuroscientists
have found that for cognitive taskslike learning the gram-
mar of a moderately complex languageinstantaneous
feedback trumps feedback that is given even a few seconds
later;
SPECIFIC: Feedback that enables learning is not general or
fuzzy. It does not evince the cluelessness of currently com-
mon grading practices, in which the grader struggles for
something meaningful to say to justify a letter or number
grade arrived at on account of causes that have nothing to
do with the reasons given for the grade. It is specific to the
following:
To behaviour or output to the details of the learners
written answer or verbal and non-verbal behaviour, and
to the components of the output that can be usefully
modified.
To the context in which the written answer or verbal
or non-verbal behaviour is embedded. Good feedback
points out, for instance, ways in which the learner mis-
construed the situation or the question.
To timing to the order or sequence in which the learn-
ers answer or verbal or non-verbal behaviour occurs.
Good feedback singles out the specific points in the
learners pattern of reasoning or behaviour that make
the greatest contribution to the quality of the work. If a
learner cannot differentiate continuous functions, for
instance, and taking derivatives is an integral part of the
chain of reasoning that leads to the right answer on an
equilibrium calculation problem, then feedback that pro-
motes learning should single out the learners skill gap in
differential calculus.
To the learner herself to patterns of reasoning, calcu-
lation or behaviour that are specific to the learners own
way of thinking or being. Good feedback is not generic
it is highly tuned into the learners patterns of thinking
and behaving.
To the consequences of behaviour or output and their
interpretations. Good feedback on interpersonal, social
or relational tasks points out the consequences of the
learners behaviour on others feelings, behaviour and
likely thoughts, allowing the learner to make textured in-
ferences about the causal chain that links her behaviour
to their social consequences.
rotmanmagazine.ca / 65
 The Adaptive Feedback Agent (AFA)
The basic building block of higher learning in most STEM and
professional schools is a technical problem requiring the
learner to produce a problem solving method (or, algorithm)
a sequence of operations that takes the evaluator from the prob-
lem statement to the solution in small and self-evident steps.
An adaptive feedback agent (AFA) takes each step in the
problem solving process (from turning a word problem into
numbers and symbols and performing operations on these to
get to the solution) and gives instantaneous feedback to the
learner at each step, using intuitive prompts (forgot to invert the
matrix, this is a European call option, use formula.) that also
contain prompts to targeted tutorials (differentiating polynomi-
als, inverting matrices). A script rolling in the background films
the entire sequence of operations and tutorials, so that this
learning session remains available in MP3 form, for the learner
to look back on.
ACTIONABLE: Good feedback provides prompts for behav-
ioural or conceptual changes that are intelligible, clear and
executable by the learner. It does not merely provide an ap-
praisal of how successful an answer or behaviour was, but
also a set of suggestions or injunctions for changing thought
or behaviour patterns which are likely to lead to a better
result;.
CREDIBLE: Good feedback is persuasive to the learner in
virtue of being:
Legitimate. It is connected to the learning objectives of
the course or module or learning experience and to the
learning objectives of the learner;
Justied. It is buttressed by valid reasons, drawn from
disciplinary research and/or research on optimal learn-
ing;
Objective or impartial. Good feedback can be validated
by others of comparable expertise to the feedback giver,
and is not thus prone to personal biases that render it par-
tial or unfairly slanted.
DEVELOPMENTAL: Its intent is to help the learner improve her
performance on a task, or enhance her skill or competence
in a domain rather than merely to provide an ordinal or
cardinal ranking of learners effort and talent levels for the
purpose of providing discriminant value to recruiters or oth-
er programs of training.
66 / Rotman Management Spring 2017
ITERATIVE: Good feedback is not a one-shot deal. It proceeds
in iterative fashion. Just as neural networks and automata
learn from multiple rounds of feedback that build on each
other, learners require sequences of feedback sessions that
help them refine their skill or capability.
RESPONSIVE: Good feedback is responsive to the learners
objections or interpretations of the feedback. It is neither
opaque nor definitive, even if and when it is legitimate and
impartial.
Two Routes to One Big Opportunity
As indicated herein, the current system of professional and high-
er education is very far from embodying the insights of feedback
science. Given the foundational importance of feedback to learn-
ing and the gap between current and optimal feedback practices,
we are faced with a significant opportunity to make a $2 trillion-
industry massively more effective by changing its feedback prac-
tices.
What if the learning outcomes that the current lecture-
homework-quiz-exam course achieves in 25 hours of lectures
and 50 hours of homework and testing can be replicated in a
feedback-intensive environment with just four-to-six hours of
learner-teacher time? The opportunity is significant both educa-
tionally and financially. Several organizations with Facebook-
sized revenue streams could live well from even a 10 to 20 per
cent reduction in the costs of education driven by changes in
feedback practices.
There are two routes to the realization of this opportunity,
and both are likely to emerge and develop within the next five
years. Each has the potential to radically change the way teaching
and learning are done. The first makes use of the semantic, dia-
logical and conversational capabilities of AI agents and enhanced
formal and natural language-processing technologies, while the
second relies on a new generation of teachers and educators
making feedback the centerpiece of their curricular designs and
teaching plans. Lets take a closer look at each.
1. FEEDBACK BECOMES ALGORITHMIC. Walking in the footsteps of
IBMs Watson and Bluemix, and making use of deep learning
ecologies of algorithms and platforms like Googles TensorFlow
and Microsofts Cognitive Services, adaptive feedback agents
(AFAs) will take the learners stream of thought attempt to solve

a problem and give targeted, immediate, specific, objective, ac-
curate feedback on each step of that learners process of reason-
ing or calculation, along with suggestions for remedial exercises
or drills that develop each sub-skill or competency required for
the successful execution of a task.
Powered by a database of questions, problems, answers and
solutions from some 58 million learners taking some 13,000 mas-
sively open (MOOC) and small private online courses (SPOC) of-
fered by 700 universities around the clock, AFAs will be trained
to address patterns of errors, idiosyncrasies and reasoning styles
that learners exhibit. New results from feedback science can be
embedded into feedback practice via updates to algorithmic plat-
forms without the need to train up armies of teaching assistants
and graders. Feedback can thus be liberated from the fluctua-
tions of quality, mood, resources and acumen of human graders,
for those skills that are sufficiently explicit and cognitive in na-
ture to be tracked by algorithmic agents.
2. THE FEEDBACK-CENTRIC LEARNING FACILITATOR EMERGES. The
Fourth Industrial Revolution is not only one in which many
tasks previously performed by humans can be performed by
algorithmic agents hooked up to server farms, but also one in
which the nature of the highest-value tasks performed by hu-
mans have changed, becoming predominantly social, relational
and interactive.
Eighty per cent of the work managers now do in organiza-
tions is performed in groups and teams, and hence, the skills
most prized by organizations are communicative and relational
in nature. They comprise as many and even more affective skills
(empathic accuracy, expressiveness) and executive skills (like
problem structuring and quick task switching) as they do cogni-
tive skills.
With affective computing still in a turbulent though prom-
ising infancy, there is a need to rapidly develop the language
and base of expertise for giving feedback on interpersonal, rela-
tional and communicative genres of work such as board pre-
sentations, sales pitches, negotiations, deliberations, processes
of collaborative inquiry and debate that will enable and foster
real learning of skills that are (still) quintessentially human and
very hot in the labour market.
Communication skill is now used as a catch-all label, which
makes the development of all of the skills that go into commu-
nicating very far from the elaborate evaluation rubrics that have
Revolutionizing the Development of Social,
Relational and Emotional Skills
Once turned into practice, the science of human feedback will
transform the way we think about the skills we value most, but
feel most pessimistic about being able to learn or teach: The
social, emotional and relational skills that modern businesses
prize most.
You say charisma, collaborativeness and relationality can-
not be taught? You may be right; but if by that you mean these
things cannot be learned, you are wrong. The unteachable can
be leaned through feedback that is precise, adaptive, targeted,
iterative, actionable and developmental.
The coach trained in human feedback science focuses on
the basic unit of social work of the learner say, footage of a
real presentation, meeting or work session in which the learner
interacts with others. To be precise and specific, each com-
municative act (in increments of 10 to15 seconds) of the learner
is mapped into all of the ways in which it conveys information:
message (use of imagery, coherence, responsiveness); voice
(tone, pitch and the emotions they convey, as well as their fit with
the learners message); body movements (amplitude, emotional-
ity and fit with message); facial actions and micro-expressions
(expressiveness, congruence, positivity, negativity) and the
effect of each micro-behaviour of the learner on her group is fed
back, along with actionable suggestions for small, incremental
and adaptive changes.
been developed over a century of practice in teaching and grad-
ing Calculus, Microeconomics, structured language program-
ming or thermal system design quizzes. But progress on creating
the practices that will promote the rapid acquisition and transfer
of these in-demand skills requires that we think carefully about
the semantic and syntactic (e.g. coherence and completeness)
and dialogical and interactive (e.g. responsiveness, informative-
ness) aspects of the learners behaviour in a social context
and that our feedback practices reflect a much higher level of pre-
cision.
Mihnea Moldoveanu is the Desautels Profes-
sor of Integrative Thinking, Professor of Busi-
ness Economics, Vice-Dean of Learning, Inno-
vation and Executive Programs, Director of
the Mind Brain Behaviour Hive and Academic
Director of the Self Development LaboratoryTM and the Leadership Develop-
ment Laboratory at the Rotman School of Management, as well as Visiting
Professor at Harvard Business School. Maja Djikic is Associate Professor and
the Executive Director of the Self Development Laboratory at the Rotman
School of Management. Over the past six years, they have designed, developed
and implemented feedback science-based learning in the Self-Development
Laboratory the Rotman Schools personal development engine for its pro-
fessional students.
Rotman faculty research is ranked #3 globally by the Financial Times.
rotmanmagazine.ca / 67
 How to Increase
Ethical Behaviour
in Organizations
Encouraging people to develop a vigilant mindset can go a long
way towards reducing unethical behaviour in organizations.
by Ting Zhang, Pinar Fletcher, Francesca Gino and Max Bazerman
FOLLOWING THE COLLAPSE of the worlds largest Ponzi scheme in
2008, clients of Bernard Madoff Investment Securities lost an
estimated $65 billion in unrealized gains. In hindsight, investors
detected major alarm bells that signaled Madoff s returns were
too good to be true: They were impossibly steady and high, at 11
per cent per year, never experiencing a down year, and were con-
sistently higher than those of the S&P 500 index, with surpris-
ingly little volatility.
Madoff employed a small, three-person auditing firm that
had only one active principal accountant; the other principal
was an 80-year-old retired accountant living in Florida. He was
extremely secretive about his investment strategy and selec-
tive about who could invest in his funds. Despite these telltale
signs of fraudulent behaviour, Madoff s Ponzi scheme was not
uncovered for more than a decade a fact that surprised even
Madoff himself. Although a few investors suspected something
was up, many including those with extensive knowledge of
finance were either completely blindsided or failed to act on
their suspicions.
Behind this scandal were two groups of individuals who contrib-
uted to the growth of the Ponzi scheme:
1. The perpetrators, who knowingly committed unethical acts,
including those at Madoff Investment Securities who cre-
ated fraudulent records of non-existent transactions; and
2. The investors, advisers and regulators who had the expertise
and fiduciary responsibility to detect fraudulent behaviour
but failed to do so.
This article will focus on the latter group, in an effort to under-
stand the factors that can help people notice unethical behaviour
and act on their suspicions.
Ethics at Work: Key Findings to Date
Large-scale scandals including Madoff, Enron and Worldcom
typically have a few bad apples at the core, but are enabled by
a larger group of individuals who fail to notice and act even
when there are strong hints of wrongdoing. This has motivated
rotmanmagazine.ca / 69
scholars to shift their focus from examining acts committed
with the intention to do harm to investigations of how individuals
who intend to do good are ultimately tempted to act unethically.
This latter subset of unethical acts can be categorized as ei-
ther intentional (when individuals are cognizant of their ethical
violations) or unintentional (when they are unaware that their
actions cross ethical boundaries). In the domain of intentional
unethical behaviour, the study of behavioural ethics the
systematic and predictable ways in which individuals fail to act
ethically demonstrates that although there are individual dif-
ferences in peoples moral identity and ethical values, morality
within an individual is also malleable. Mordechai Nisans mor-
al balance model shows that people have a moral bank account,
wherein good deeds raise the balance and bad deeds lower it.
Perceptions of a surplus in ones account might lead a person to
cheat, whereas perceptions of a low balance might lead one to
Are All of Our Good Intentions Just Cheap Talk? By Nina Maar
Like most of you, I consider myself an honourable member of
society: Trustworthy, honest and moral. Yet I dont always act ac-
cordingly and judging by the magnitude of insurance fraud, tax
deception and the illegal downloading of music, films and games,
most of you are like me.
One could say that we are hypocritical. However, to stan-
dard economists, most of what people say is just cheap talk: Its
meaningless. Only what people do is meaningful: Actions speak
louder than words. This is what economists call, revealed prefer-
ences, and to an economist, it means that all those who say they
care about morality but then go ahead and engage in various
transgressions dont really care.
To a behavioural scientist like me, the world looks a bit more
complex. We believe that for some of those who say they care
about morality, its not just cheap talk: They really mean it. In fact,
we believe that this is true for many people. In short, these people
are good, but they face situational circumstances that might
appear unimportant that they might not even be aware of
that keep them from being their true authentic selves. As a con-
sequence, if we make small, smart changes to these situational
circumstances, we may be able to help people behave more
authentically and act more morally.
To me, this a much better world to live in. Just think about
your own life. Im sure you can all think of plenty of situations in
which you were tempted to transgress from your moral code
because you could benefit from it. Say, when filling out your tax
form, or an insurance claim. And I bet, in those situations, you
suddenly became very good at rationalizing why it would be okay
to transgress, so that if you did give in, you didnt feel too bad. We
are very good at rationalizing so that we can have our cake and
eat it, too and it turns out that some situational circumstances
make rationalizations easier to come by than others.
70 / Rotman Management Spring 2017
act more ethically.
Elsewhere, psychologist James Rests model of unethical
behaviour suggests that once an issue has been identified as hav-
ing moral dimensions, individuals engage in a moral judgment
(i.e., they decide whether something is ethical or unethical),
which triggers moral intention (they plan to act either ethically
or unethically) and moral behaviour (they act, either ethically
or unethically). Behavioural ethics research has also shown that
peoples judgments, intentions and behaviour depend on the
situational and social forces in the environment. For example, in-
dividuals are more prone to cheat when they feel cognitively de-
pleted and can easily justify their behaviour; and because people
often look to others to determine acceptable norms, people are
also more likely to cheat when they see others cheating.
Alongside the research on intentional acts of cheating is
another body of research that studies how individuals engage in
My co-authors and I recently teamed up with a car insur-
ance company in the U.S. This company regularly sends out audit
forms, asking policy holders to indicate the odometer mileage
for their cars. Insurance premiums are then adjusted to corre-
spond with how much a car is driven. The logic is, the more miles
driven, the more likely an accident, and the higher the insurance
premium.
As a result, when policy holders receive the audit form, many
are tempted to under-report their mileage. Almost immediately,
their rationalizations start working: I already pay such a high
insurance rate! Im not the problem, Im a good driver. Suddenly,
they are under-reporting their mileage, and not feeling bad about
it at all. And by the time they reach the end of the form where
they are asked to confirm with their signature that they have filled
it out truthfully they have managed to convince themselves
that everything is indeed legit.
By comparison, in a court of law, people are asked, up front,
to swear that they will tell the truth, the whole truth, and nothing
but the truth. Only then do they testify. In short, we ask people to
commit to being truthful before, not after they face temptations
to misreport. This is a very interesting twist, because such a pre-
commitment to the truth is likely to increase peoples attention
to their own moral standards to keep them top of mind, and
therefore, harder to ignore in the face of temptations. If this is the
case, we posited, perhaps we could use this insight to redesign
those insurance audit forms.
Thats exactly what we did: We randomly assigned a policy
holder to either receive the standard audit form (with a signature
field at the end), or a form that was identical except for one thing:
the signature field was moved to the top. The result: Policy hold-
ers who signed the audit form at the top magically seemed to be
driving more; on average, 2,500 miles more per car. To put this in
unintentional acts of cheating. These behaviours fall under the
broader category of bounded awareness a state in which we sys-
tematically fail to notice relevant information that falls outside of
our attention at the time of making a decision.
Individuals can also exhibit bounded ethicality, making uneth-
ical decisions that are outside of their own awareness and incon-
sistent with their consciously-held values. Both bounded awareness
and bounded ethicality operate at an unconscious level: Individu-
als are not aware of how the biases that arise from their limited
capacity to notice key information influence their judgments.
Examples of bounded ethicality include implicit prejudice
and conflicts of interest. Even individuals who espouse equality
and diversity might discriminate based on gender or race with-
out their awareness. Such implicit biases stem from stereotypical
associations that even individuals who consciously strive to be
unbiased have difficulty overcoming. Furthermore, conflicts of
perspective, if each of the 13,000 policy holders in our experiment
had received the revised form, this would have resulted in an ad-
ditional $2 million in insurance premiums for the company. And this
is just from a small subset of policy holders, from one company.
In Ontario alone, auto insurance fraud accounts for up to
$1.6 billion yearly three times the provinces budget to fight its
chronically-high youth unemployment rate. Just imagine what our
small, costless change to the audit form could do here.
Our findings show that the reason people fudge their numbers
is not that theyre cold blooded and calculating. If people only
cared about the likelihood of being caught and the magnitude of
the punishment, moving the signature field to the top should make
no difference. Instead, many people do care about being virtuous,
and moving the signature field to the top makes it possible for them
to ignore the devil on their shoulder, encouraging them to fudge the
numbers.
Its important to point out though that theres nothing special
about morality: We can find mismatches between what people say
they care about, and how they act in many other areas. Even in life
and death type of situations. Take, for example, organ donation.
Every day more than 20 people die in the U.S. because of a lack of
available organs. In Canada, its two people every three days.
If everyone registered as an organ donor today, this crisis
would be a thing of the past. So I ask you, why are half of all
the people in the U.S. and three quarters of the people in Canada
not registered? If you believe that actions speak louder than
words, you would say, People just dont care. Even Canadians!
On the other hand, if you ask people Do you support organ
donation?, everything looks much rosier: About 90 per cent of
people say they do. So, which one is it? If we believe that this
mismatch between what people say they care about, and how they
act, is mostly due to situational circumstances, then we should be
interest can operate outside of an individuals awareness. Audi-
tors, for instance, may exhibit bounded ethicality when they fail
to recognize how the promise of becoming a future employer for
the audited firm precludes them from making impartial audits.
Because these biases operate at an implicit level, interven-
tions that would be aimed at addressing intentional acts of cheat-
ing do not necessarily apply. Therefore, scholars are developing
interventions aimed at mitigating them. For example, recent re-
search has demonstrated that employers evaluating candidates
separately exhibited a gender bias: They were more prone to hir-
ing men for math-related tasks and women for verbal-oriented
tasks, even when gender did not predict performance on these
tasks. In contrast, behavioural economist Iris Bohnet et al.
found that evaluating male and female candidates jointly rather
than separately eliminated reliance on gender stereotypes in hir-
ing decisions.
willing to nudge them towards more authentic behaviour.
The good news is, most people are good. And if we become
more sensitive to situational circumstances, we may be able to
nudge them towards more authentic behaviour. This approach
holds great potential in many areas, beyond insurance fraud and
organ donation. Credit card delinquency, obesity, and energy
conservation come to mind immediately. If we can systematically
and responsibly harness these insights, what a wonderful world
this could be.
Nina Maar is an Associate Professor of Marketing and
Co-Director of Behavioural Economics in Action at Rotman
(BEAR) at the Rotman School of Management. She is on
leave until November of this year to serve as the Behav-
ioural Scientist of the Global INsights Initiative (GINI) at
The World Bank in Washington DC. In 2014 she was named one of the 40
Most Outstanding B-School Profs Under 40 in the World by the business
education website Poets&Quants. This article is adapted from her presenta-
tion at TEDx Toronto.
Rotman faculty research is ranked #3 globally by the Financial Times.
rotmanmagazine.ca / 71
 People have a moral bank account wherein good deeds
raise the balance and bad deeds lower it.
Whereas past research has aimed to reduce bounded ethical-
ity that manifests as implicit biases, we recently set out to inves-
tigate factors that may help individuals notice when options that
appear attractive are in fact too good to be true.
Research on inattentional blindness suggests that preparing
peoples attention for a certain type of information or data sig-
nificantly increases their chance of noticing that information.
For example, when signs warning drivers about the presence
of cyclists on the road are present, drivers become more likely
to notice cyclists, which improves the safety of everyone on the
road. We wondered, would preparing individuals with a similar
mindset of vigilance prior to making a decision lead them to at-
tend to more information that challenges the viability of seem-
ingly-attractive options?
To help us understand how creating a vigilant mindset af-
fects the ability to notice elements of unethical behaviour and
act on critical information, participants in our study played the
role of a financial advisor in an investment game. Advisors
were asked to select one fund to recommend to a hypothetical
client from a pool of four funds. Unbeknownst to participants,
the fund with the most attractive risk-return profile Fortitude
Investments was based on Madoff s feeder fund.
In addition to charts and graphs, individuals could also read
the fine print that contained important information about each
fund. For the disguised Madoff feeder fund, the additional facts
informed advisors that the fund was exclusive to investors with
strong relations to the fund, opaque on disclosing its investment
strategy, and maintained unconventional auditing practices.
Participants who ignored this information and selected Forti-
tude Investments lost all of their clients money at the end of the
hypothetical four-year investment period.
So, what percentage of individuals selected Madoff s feed-
er fund despite having access to critical information about the
fraudulent nature of the fund?
The answer depended on whether the advisor selected the
fund that appeared most suspicious to them before or after they
made their decision for the client. Those who made an investment
decision for their client before contemplating their suspicions
selected Madoff s feeder fund 68 per cent of the time; whereas
those who made their decision after determining which fund was
the most suspicious selected the fund 51 per cent of the time.
72 / Rotman Management Spring 2017
In other words, instilling a vigilant mindset by merely ask-
ing participants to identify the fund that seemed most suspicious
to them prior to making a decision reduced the propensity of
selecting Madoff s fund by 17 percentage points. The timing of
instilling vigilance is critical to helping individuals notice fraudu-
lent behaviour and act on their suspicions: Once individuals have
already made a decision, they will be less likely to consider dis-
confirming evidence and notice critical information.
Implications for Management
Failure to notice unethical behaviour is a significant problem
in modern organizations and in society, more broadly. Given
the prevalence of both bounded awareness and bounded ethicality
across organizational contexts, our findings highlight the value
of proactively raising vigilance in helping individuals consider
reasons not to take a particular course of action.
Although increasing vigilance prior to making a decision
decreased individuals propensity to select Madoff s fund, as
indicated, more than half of the individuals still recommended
it. Clearly, vigilance is not enough. Following are some other
proven tools that can complement a vigilant mindset.
1. ASK LOTS OF QUESTIONS
Although this might seem obvious, many people fail to recognize
that they can obtain more information than what is in front of
them. Imagine that you are concerned that a supplier you are con-
sidering for your company is using child labour. Directly asking,
Do you use child labour? is unlikely to be effective, but asking
multiple related questions can help you determine whether the
supplier is violating laws. Questions like, Can you break down the
cost of materials and labour for me? How long does it take each
worker to produce the product? Can you provide demographics of
your workers?, and Can you tell me how you manufacture these
products? may indicate whether suspicion is warranted. You may
realize, for instance, that it is impossible for the number of work-
ers provided in their figures to produce all of products manufac-
tured, suggesting under-reporting of the number of employees.
2. TRIANGULATE ON THE FOCAL ISSUE WITH MULTIPLE SOURCES
Sometimes, investigating one source is not enough. Triangula-
tion is a powerful technique that consists of verification from
 Most people dont notice when someone answers a slightly
different question from the one that was asked.

two or more sources. The idea is that one can be more confident
with a result if different methods lead to the same result.
When asking multiple sources the same question, are the
answers congruent with one another, or do they conflict? For ex-
ample, consider the scenario that you are concerned a supplier is
using child labour. If multiple sources reveal conflicting numbers
about the number of employees working at the company, you
have reason to be more suspicious. Inconsistency is often a sign
that suspicion is warranted.
In closing
By embracing a vigilant mindset as a default state, managers in
any industry can develop a keen ability to notice unethical be-
haviour. In our view, this is a critical step towards reducing both
bounded ethicality and bounded awareness in modern organiza-
tions.

3. ATTEND TO ARTFUL DODGES

When people are asked questions that could reveal the unethi-
cal nature of a situation, they often give non-answers in order to
deflect attention away from the issue of concern. Such dodges
are signs that suspicions are warranted. For example, an indi-
vidual who does not want others to know about the use of child
labour may direct discussion to the quality of products or mate-
rials when asked about the low cost of labour. Research shows
that individuals tend to not notice when others are answering a
slightly different question from the one that was asked. One way
to detect artful dodges is to remember the original question and
to think critically about whether the answer provided truly ad-
dresses the focal question.

4. LEAVE MORE TIME TO DECIDE

After gathering all relevant information, leaving time to decide
can prevent you from overlooking critical information. In a fa-
mous experiment, theological seminary students were asked
to give a lecture. Some of the priests were told that they needed
to hurry in order to arrive at the building on time, whereas oth-
ers were told they had plenty of time. On their way over to the
lecture, all of the priests passed by a man slumped over, who ap-
peared to be in need of medical attention. The priests who were
not in a rush were more likely to help the man; while those in a
rush were more likely to pass by without even noticing him. Time
constraints proved to be an even bigger deterrent of helping be-
haviour than the content of the talk: Some of these seminary stu-
dents were on their way to give a talk on being a Good Samaritan.
As this study indicates, when people are in a rush, they a) do not
have enough time to do any additional investigative work, and b)
fail to notice even when obvious information is in front of them.
Ting Zhang is an Adjunct Assistant Professor
of Management at Columbia Business School.
Pinar Fletcher is a behavioural scientist who
received her doctorate from Harvard Business
School. Francesca Gino is the Tandon Fam-
ily Professor of Business Administration at
Harvard Business School. Max Bazerman is
the Jesse Isidor Straus Professor of Business
Administration at Harvard Business School
and Co-Director of the Center for Public Lead-
ership at the Harvard Kennedy School. This article is based on their paper,
Reducing Bounded Ethicality: How to Help Individuals Notice and Avoid
Unethical Behaviour, which was published in the journal Organizational
Dynamics and can be downloaded online.

rotmanmagazine.ca / 73
HOW TO TURN
CUSTOMER INSIGHT
INTO GROWTH
Most leaders recognize the importance of understanding their customers.
Why, then, do so many continue to overlook change signals?
by C. Barton, L. Koslow, R.Dhar, S. Chadwick, M.Reeves and F. Lang
DESPITE THEIR BEST INTENTIONS TO FOCUS on customer needs, many
companies spend most of their time looking inward. If you are
not convinced of this, try this experiment: In your next internal
meeting, divide a piece of paper in two. On the left side, record
each mention of an internal topic, such as financial or operational
performance, plans, metrics, employees or culture; on the right
side, record each discussion of an external topic, such as compe-
tition, technology, innovation, social media or customer needs
and wants. If your introverted score is higher than your extro-
verted score keep reading.
Consumer-facing companies in developed economies have
experienced little to no growth since the global recession of
2008. As a result, the smartest of the bunch are now increasingly
looking outward, trying to spur growth by turning to new sources
of customer information structured batches of Big Data such
as online behaviour and unstructured data such as social media
and call centre conversations.
In addition, these companies are experimenting with predic-
tive methods for anticipating customer behaviour and evolving
an internal customer insight (CI) function that can provide rel-
evant recommendations and ongoing execution support.
Unfortunately, our research finds that most companies
struggle to make CI more than just a traditional market research
operation. In this article we will look at the challenges and ben-
efits of integrating CI into your core processes.
Rewiring Your Customer Insight Function
Rapidly-changing technology is having disruptive effects on con-
sumer behaviour. Shopping is now integrated into consumers
daily activities, before and after traditional retail hours, and the
shopping habits of Millennials, for example, are quite different
from those of older generations. Mobile apps are generating large
volumes of new data from sources such as online behaviour pat-
terns, social media, user reviews, geolocation data and mobile
payments. Consumer demand for information, newness and
interactions with brands is increasing, as is the ability of brands
and retailers to anticipate the needs of individual customers. As
a result, sectors that once were predictable and stable and that
rotmanmagazine.ca / 75
 Senior executives agree that customer insight (CI)
is critical to accelerating growth.
once could have survived with a more internal focus have be-
come more volatile and uncertain. In this environment, compa-
nies must rewrite indeed, rewire their CI capabilities.
In a 2016 Boston Consulting Group survey, 45 CEOs,
presidents, business unit leaders and chief operating officers in
a variety of sectors said they consider customer and growth ob-
jectives to be the top priorities for their companies, followed by
operational excellence, shareholder value creation and cus- most senior marketer in the company, as well as greater access to
tomer experience. More than 75 per cent of the senior executives
overall and 100 per cent from companies with more than US$5
billion in annual revenue said CI was critical to accelerating
growth. When asked what capabilities their companies needed to
develop, respondents cited CI and business development as the
top two; advanced analytics was also an important focus, repre-
sented in three of the top ten categories.
Surprisingly, many organizations have a long way to go. In
fact, they have barely evolved in the years since BCGs 2009
benchmarking study [The Consumers Voice Can Your
Company Hear It?, available online]. In late 2015, BCGs Cen-
tre for Customer Insight, in partnership with Cambiar and the
Yale School of Management, updated that original study to in-
clude 640 respondents from 90 cross-sector enterprises. More
than 60 per cent of the participating companies reported an-
nual revenue of at least $5 billion, and about 70 per cent operate
globally.
The patterns of maturation that we identified in 2009.
were still relevant. We found that CI groups move through four
developmental stages.
STAGE 1: TRADITIONAL MARKET RESEARCH PROVIDER. At this stage, CI
is mostly tactical and research oriented, focused on uncovering
trends of sales of existing products and services, largely in exist-
ing channels and geographic locations. The CI group works on
a project basis to produce data in response to line managers re-
quests. It is limited in budget, head count, and scope of influence
within the organization, and it receives limited senior executive
support. The CI functions communications concentrate on stud-
ies or project results that target a narrow audience, such as the
managers who commissioned the research.
76 / Rotman Management Spring 2017
STAGE 2: BUSINESS CONTRIBUTOR. For a CI function at this stage,
research tends to have a real-time focus on short-term innova-
tions such as packaging, form and flavour extensions, pricing,
and promotions. The group concentrates on translating custom-
er insights into business recommendations. Studies build on one
another to start to form bodies of work and broad perspectives.
A function at this stage typically has active support from the
senior and business-unit (BU) leaders; however, business leaders
generally set priorities. Significant parts of the CI budget may ex-
ist outside the functions control, and the groups representation
on the executive team and its exposure to the Board are limited.
STAGE 3: STRATEGIC INSIGHT PARTNER. At this stage, senior execu-
tives believe customer insights should guide most commercial
business decisions, and the CI function is a strategic partner and
trusted advisor to the line. In addition to specialized research
skills, CI team members demonstrate critical thinking, a willing-
ness to challenge ideas, economic and strategic understanding,
and judgment. An executive team memberwho is not the chief
marketerchampions strategic research, and the CI team works
with line management to translate customer knowledge into key
business decisions. Together, the CI team and line managers
form the beginning of a learning organization that becomes in-
creasingly capable of anticipating customers needs.
STAGE 4: SOURCE OF COMPETITIVE ADVANTAGE. This stage remains
elusive for almost all companies. At this level, the CI function is
focused on new-to-the-world innovation, foresight and predic-
tive inquiry. CI is used in business decisions and core processes
beyond market decisions, including research priorities, new
product development, strategic planning, M&A and portfolio
strategy, employee engagement and company branding.
At this level, the CI team exerts the greatest control over its
budget. As one CI vice president remarked, Were aiming for
100 per cent budget control. We want to have visibility of the
total spend and the ability to trade off against higher value and
higher-impact uses. A function at this stage provides feedback
on relevant trends, offering an independent perspective on high-
 The Top 10 Capability Development Areas

Respondents (%) Customer Insight Ranks at the Top of Senior Executives Priorities
60

44
40
12
33
7 27
27 27
11 24
7 4 22
9 4 20
20 11 4 18
9 18
4 2 7 4
11 2 4 4
4 4 2 2
11 13 11 2
11 13 4
4 4 2
9 2 9
4 4 2 4 2 2 4 4
0
Customer Business Talent Pricing Brand Big data and Strategic Performance Talent Customer
insight development development analytics development customer planning management sourcing relationship
analytics management

1st priority 2nd priority 3rd priority 4th priority 5th priority

SOURCE: 2016 BCG survey of 45 cross-sector CEOs and other top executives.
NOTE: Only the top 10 capabilities are shown. The percentages in each column may not add up to the total shown because of rounding.

FIGURE ONE

priority topics and customer populations and specializing in in-
novative methodologies. Functional leaders play executive roles,
such as head of strategy, analytics, or marketing, and they often
report directly to the CEO.
One senior marketer said that for a team to reach stage four,
the CI function must be truly embedded with business decision
makers, seen as a thought leader rather than only a project ex-
ecutor or data provider, and capable of providing world-class
strategy and guidance that is actionable.
How to Reach Stages 3 and 4
In our initial study, only 10 per cent of companies had CI func-
tions at the third and fourth stages. Despite participants talk of
vision, transformation, restructuring, and long journeys
and rising expectationsthe pace of change has been glacial: Our
latest study found that only 20 per cent of companies are now at
stages 3 and 4.
Even when companies adopt new functions and capabilities
that incorporate Stage 3 elements such as advanced analytics,
digital or social media monitoring these groups seem to be
analogous to traditional market research groups: They lack execu-
tive support, report low in the company hierarchy, have limited in-
teraction with the line, are constrained by small budgets and little
budgetary control, are unmeasured in terms of return on invest-
ment, and offer narrow career paths to team members.
Companies with CI functions that do manage to reach Stage
3 or 4 often do well on externally-verifiable outcomes, such as cus-
tomer loyalty and growth rates. Generally, companies with such
functions are more likely to recognize CIs effectiveness in busi-
ness decisions and to measure the return on these investments.
Specifically, executives we surveyed in companies with
Stage 3 functions were significantly more likely (by 15 percent-
age points) than executives in companies with less-mature CI
functions to think that these groups materially contribute to fi-
nancial performance, that they put their companies and BUs on
faster growth trajectories (by nine percentage points), and that
they enhance their companies competitive advantage (by 20
percentage points).
All senior executives we surveyed whose CI functions had
achieved Stage 4 agreed that CI puts companies and BUs on
faster growth trajectories, while 50 per cent said CI was very
critical to growth. Furthermore, 50 per cent of Stage 3 and

rotmanmagazine.ca / 77
 67 per cent of Stage 4 companies try to measure the ROI of CI in-
vestments, and they report significantly higher satisfaction83
to 88 per centwith CIs ROI.
In companies with Stage 3 or 4 functions, CI practitioners
and business line partners are much more closely aligned on
the impact, value and importance of CI. As companies progress
through the stages, practitioners and business line managers
become increasingly satisfied with their relationship. By Stage
4, the satisfaction rate is 89 per cent. About 90 per cent of the
executives in our study agreed that by Stage 3, line leaders pull
CI into business decisions more than CI pushes its way in. As
the line invites CI in, business partners satisfaction with CIs
contributions to business decisions increases, jumping to 90 per
cent overall in Stage 4.
Given these results, we would advise executive teams to
explicitly re-evaluate the ROI for CI functions that are mostly
backward looking, descriptive, tactical or confined to marketing.
How to Get Started
Executive teams can take three steps to begin the process of
reaching higher levels of CI maturity:
1. CONDUCT A DIAGNOSTIC. Interview stakeholders, quantitative-
ly benchmark against peers, and observe the life of an in-
sight through the parts of the organization and the processes
in which it is identified, amplified, gains influence, and has
impact or is dampened and dies out.
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2. ATTEND ONE OR TWO FACILITATED CREATIVE WORKSHOPS WITH
THE EXECUTIVE TEAM. Apply practical creativity techniques to
achieve shared self-awareness; identify magic points, in
which the CI function delivers on executives aspirations,
and tragic points, in which CI falls short of its potential.
3. CRAFT AN ACTION PLAN. Develop a strategy for changing
executives individual and collective action.
Companies serious about attaining the highest stages of CI ma-
turity should set a target of no more than 24 months. Longer
initiatives do not signal a sufficient commitment to change and
may get bogged down, leading to distraction and change fatigue.
Firms whose CEOs and executives are not committed to
a fundamentally different CI operating model should not un-
dertake the hard work of CI transformation. In companies with
CEOs who do support the transition, however, senior executives
should be updated with regular reports from a steering or strat-
egy committee. They should create an activist project manage-
ment structure that ensures functional transformation through
transparency, a single source of the truth, a focus on results in-
stead of the completion of activities, accountability, accelerated
decision making, and interventions when change initiatives are
off track.
Based on our experience, companies should prioritize three
types of cross-functional initiatives and identify executive spon-
sors and day-to-day leaders for each.
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 The Stages of CI Maturity
2009: 90% of companies
2016: 80% of companies
Business
Traditional market 2 partner
1 contributor
research provider
Tactical focus More strategic focus
Service provider Business collaboration
Marketing scope Commercial scope
Insufficient or Budget input but
inconsistent budget no control
SOURCES: The
The Consumers Voice - Can Your Company Hear It? BCG report, November 2009; BCG, Yale CCI, and Camblar, 2015 Customer Insights Benchmarking Study
FIGURE TWO
Funding the Journey. Initiatives in this category fund the
transformation and the external support it requires by closing
performance gaps. Examples include consolidating market
research suppliers; reviewing supplier pricing and terms; cut-
ting or reallocating tactical, backward-looking, descriptive,
low-ROI project spending; and attacking duplicative expenses
and teams.
Winning in the Medium Term. These initiatives, which require
more lead time, are the building blocks of the functional strat-
egy. Examples include building knowledge management sys-
tems; measuring the return on CI spending; developing learn-
ing agendas for executive teams and boards; experimenting
with data sources and methodologies; and enabling CI to use
strategic planning and budget tools.
Organizing for Growth. Initiatives of this type enable the
function to execute and sustain the transformation. Examples
include expanding roles for the most talented employees; re-
working job specifications, forming executive recruiting part-
nerships, and targeting new talent pools; developing career
paths; developing rotation programs for future leaders; estab-
lishing functional training and development programs and ty-
ing functional compensation to performance.
Developing a truly external orientation is a struggle for many
companies. Taking a hard look at the maturity of the CI func-
tion may be a good place to start. But a CI function thats treated
simply as a provider of traditional market research cant become
2009: 10% of companies
2016: 20% of companies
Source of
Strategic insight 4 competitive
3 advantage
Mostly strategic focus, Focused on foresight
prescriptive predictive
Trusted advisor Partner with C-suite
Cross-functional scope Enterprise perspective
Some budget control Significant budget
and control
a strategic player on its own. The effort to tap this overlooked
source of competitive advantage must begin at the highest levels
of the organization, with executives setting the tone for the pro-
cess. By measuring, interpreting, and applying knowledge from
customer experiences and using this information to fuel deci-
sions companies can elevate both their CI function and their
position in the marketplace.
Fighting Organizational Introversion
How do companies end up so isolated, even from their own cus-
tomers? We have found that large, established companies tend
to rely too much on existing business models and neglect to ex-
plore new possibilities. As a result, they generate future growth
options at a much lower rate than smaller, younger companies.
We found that large, established companies are about 20 per-
centage points less exploratory than their younger peers, and
as a consequence they underperform those peers by nearly six
points in sales growth and more than two points in long-term to-
tal shareholder returns.
Fortunately, this trend is not inescapable. A minority of
large, established firms manages to balance exploration and ex-
ploitation. So, how can you avoid or reverse the tendency towards
introversion? We offer the following four tips for renewing your
external orientation.
TIP 1: CAPTURE EXTERNAL CHANGE SIGNALS. Getting the right in-
formation in the door is the crucial first step: Invest in captur-
ing granular, real-time, and implicit data on customer trends
rotmanmagazine.ca / 79
 Large, established companies are about 20 percentage
points less exploratory than their younger peers.

and preferences. Explore new methods, such as biometric,
observational, and neural analysis. Look beyond the obvious:
Access new and under-exploited data sources such as social me-
dia and usage data from smart products. In other words, create
not only a signal capture capability but a signal advantage by do-
ing it better or earlier than others.
TIP 2: EXTRACT NOVEL INSIGHTS. Learn to extract patterns from
change signals. Again, look beyond the obvious to create advan-
tage by leveraging new techniques such as natural language pro-
cessing to mine unstructured data and machine learning to sepa-
rate signal from noise. Create easily usable data visualization to
facilitate the detection of patterns and the formation of insights
that are not obvious. Again, strive to do so not just sufficiently,
but better than the competition can.
metrics, nearly 80 per cent of which are related to customer
experience. Customer-centricity is further supported by well-in-
tegrated information systems, which are able to capture, explore
and share insights throughout the firm.
In closing
Overcoming introversion is no easy feat, but it is imperative for
your organizations long-term survival. The approach discussed
herein can provide a starting point to increase your external ori-
entation which will enable you to capture the right information
and use it more effectively.

TIP 3: USE INSIGHTS TO DRIVE KEY VALUE-ADDING PROCESSES SUCH AS

INNOVATION AND RESOURCE ALLOCATION. Customer data and insights
should be organized so that they are easily accessible to all parts
of the company and can be integrated into decision making be-
yond the sales and marketing function. For example, customer
insights can be included as a formal decision factor for strategic
planning, portfolio strategy and resource allocation, and they can
be integrated into stage-gate requirements for innovation.

TIP 4: COMMIT TO AN EXTERNAL ORIENTATION WITH STRUCTURE, SYS-

TEMS, CULTURE AND LEADERSHIP. Companies need to increase their
surface area by exposing internal functions to external realities.
Highly adaptive companies like Alibaba understand this intui-
tively and set up flexible organizations to allow for the constant
matching of internal and external. As Jack Ma, the companys
founder and chairman, has said: In the information era, change
is the best equilibrium.
We can also look at Amazon as a best-practice example of
an external orientation. Customers are the top priority every-
where in the organization, starting with the CEO. As Jeff Bezos
has said: We see our customers as invited guests to a party, and
we are the hosts. Its our job, every day, to make every important
aspect of the customer experience a little bit better. This cus-
tomer-centric culture is reinforced through formal performance
Christine Barton is a Senior Partner
and Managing Director in The Boston
Consulting Groups Dallas office. Lara
Koslow is Global Leader of BCGs Centre
for Customer Insight and part of the firms
global Marketing, Sales & Pricing leadership
team. Ravi Dhar is the George Rogers Clark
Professor of Management and Marketing
and Director of the Centre for Customer
Insights at the Yale School of Management.
Simon Chadwick is the Founder and Manag-
ing Partner of Cambiar. Martin Reeves is
a Senior Partner and Managing Director in
BCGs New York office and Director of
BCGs Henderson Institute. Frederik Lang
is a Consultant in BCGs Copenhagen office. For more BCG content,
visit bcgperspectives.com.

80 / Rotman Management Spring 2017

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17-0042
Dan and Julie Sarah Matt

Derek Andrew Linda

Amy Ida John

Kira Brett Greg

 Ryan

The Persona Project

and the Future of
Democratic Capitalism
A deep understanding of peoples values, their daily
pain points and their unmet needs is key to shaping
the future of democratic capitalism.
by Jennifer Riel and Stefanie Schram

GREG IS A 28-YEAR OLD HR MANAGER living in Phoenix, Arizona. Hes
got a Masters degree in Labour Relations, a salary in excess of
$100,000 a year and a lot of ambition. In fact, hes got a list of
22 goals personal and professional that he regularly updates
and modifies as he ticks things off; getting a girlfriend is at the
top of the personal list right now. In many ways, hes a prototypi-
cal knowledge worker an urban professional who draws upon
diverse bodies of knowledge to solve complex problems. In his
work, he has a lot of scope for independent decision-making and
the freedom to do his work largely on his own terms.
He is also a devout Christian, a staunch Republican and
fierce patriot. Asked to share a moment in which he was particu-
larly proud to be an American, Greg doesnt hesitate: I think of
George W. Bush throwing out the first pitch after 9/11. It was in
the World Series at Yankee Stadium, and he went out there and
threw a strike. I watched that YouTube video over and over. I get
goose bumps thinking about it. Its hard not to cry at a moment
like that.
There is pride then, but anger too. Asked about former Presi-
dent Obama, he says, I completely disagreed with his fiscal and
social policies. To me, he was trying to make this country the op-
posite of what it was. That type of leadership makes me not proud
to live in this country. I take that back. Im always proud to live in
this country. [I was] not proud to have him as our leader. People
on welfare are given up to two years without any requirement of
looking for a job, without any drug testing. That really makes me
mad. It builds a culture of entitlement.
As indicated, Greg is a complex and sometimes contradic-
tory guy. But grappling with that complexity and understanding
him, we believe, is essential to understanding the challenges fac-
ing democratic capitalism today and to generating prescrip-
tions to help remedy those problems.
Democratic capitalism isnt a perfect system; but it is the
best one weve got right now. Even before Brexit and Trump, the
system was under threat from a variety of sources, including ris-
ing income inequality, sniping political partisanship and deeply

rotmanmagazine.ca / 83
 People with routine-intensive jobs, who earn below-average wages,
make up the majority of the U.S. workforce.
self-interested corporate behaviour. As we began to delve into
this area of study at the Martin Prosperity Institute we used
public data, quantitative analysis and economic theory to help us
understand the nature of our problem. But, we soon saw that the
traditional approach to this analysis would only get us so far.
MPI Director [and former Rotman School Dean] Roger
Martin, in particular, pushed hard on this point. If we used all
the same tools and approaches that have been tried before, he
argued, we would be all too likely to come to the same abstract
and unactionable policy prescriptions that have failed to gener-
ate meaningful change up until now. Roger wanted us to shift our
perspective, from thinking about theoretical, idealized people to
designing for real, actual people.
The first step, then, was to find out more about the core
customers of democratic capitalism the citizens of its largest
and, up until now, most powerful exemplar: The United States.
We were primarily interested in the self-defined middle class,
for whom the real median income has remained unchanged
since 1990, because they are the heart of Americas electorate.
They are also in the midst of a profound shift, when it comes to
their work.
We already knew that disruptive change was underway,
as argued in a 2015 working paper by the MPIs Roger Martin,
Richard Florida, Melissa Pogue and Charlotta Mellandar
[which was excerpted in our Fall 2016 issue: Creativity, Clus-
ters and Why Your Barista Has Mixed Feelings About You]. The
paper looked at the structure of the U.S. economy using a combi-
nation of two well-established lenses: Michael Porters indus-
try clusters work and Prof. Floridas Creative Class occupational
perspective.
To summarize, per Porter, industries can be understood as
dividing into two large groups: traded clusters and local industries.
Traded clusters, as the name suggests, consist of industries that
sell beyond local markets. These industries tend to cluster to-
gether in select regions and countries, providing those jurisdic-
tions with higher wages, increased innovation, higher productiv-
ity and a stronger economy. Examples of traded clusters include
oil and gas production and biotechnology. Local industries, by
contrast, are broadly distributed across jurisdictions and serve
only their local markets, and these industries for example, re-
tail and social services have lower wages and productivity.
84 / Rotman Management Spring 2017
Prof. Florida also divides the economy into two parts, but
he focuses on two categories of occupations: creativity-intensive
jobs (which have a high-degree of independent judgement and
decision-making) and routine-intensive jobs (which do not). Cre-
ative Class jobs tend to be higher paid and also cluster in specific
cities and regions.
In their working paper, Martin, Florida et al. demonstrated
that the most well-paid jobs are creative occupations in traded
industries. No surprise. Just think of product developer in Palo
Alto or a research scientist in Boston. This group which makes
up just 14 per cent of the economy earns almost 80 per cent
higher wages than the national average. Creative workers in local
industries do okay, too: Accounting for almost 25 per cent of jobs,
these workers earn 36 per cent more than the average worker.
The news is less good for those with routine-intensive jobs, who
earn below-average wages, despite making up the majority of the
U.S. workforce.
Moreover, the authors noted a troubling shift: While cre-
ative-intensive jobs had grown as a percentage of the overall
economy in the years between 2000 and 2012 (from just over 36.3
to 38 per cent), they were not growing nearly fast enough to make
up a majority of jobs any time soon. Worse, there was a shift in
routine-intensive work, from traded industries (which included
traditional well-paid manufacturing jobs) to local industriesthe
mainly service-sector jobs that pay about 35 per cent less than the
average (see Figure One).
We knew we needed to understand these workers more
deeply, as something other than a number in a spreadsheet. So,
we used tools from Design Thinking, paired with the Martin-
Florida framework to help structure the task. In the fall of 2015,
we set out to conduct lengthy, ethnographic interviews with two
dozen or so Americans working in jobs that were well-represent-
ed in each of the four quadrants. For instance, food preparation
and serving related occupations make up a sizable portion of
routine-intensive local industry jobs, as do protective service oc-
cupations. So, we interviewed a casino server in St. Louis and a
firefighter in Miami. Routine jobs in traded industries are often
in transport and production, so we spoke to a truck driver for a
multinational logistics company and a production supervisor
at a large manufacturing firm. On the creativity-intensive job
side, local industry workers we spoke with included a nurse and
 Changing Wages for Jobs in the Modern Economy

100%

78.5%
74.0%
Average wage comparison by occupational

Creative-in-traded
80
and industry clusters, United States

Creative-in-local

60 Routine-in-traded

36.1%
31.3%
Routine-in-local
40

20
13.3% 23.0% vs. National weighted average wage 13.9% 24.8% vs. National weighted average wage
0
20.1% 16.5%
-20
-13.9%

-17.9%
43.5%
44.8%
-31.7%

-40

-36.8%
-60%

0 20 40 60 80 100% 0 20 40 60 80 100%
Year 2000 Year 2012

Employment composition by occupational and industry clusters, United States

SOURCE: ROGER MARTIN, RICHARD FLORIDA, MELISSA POGUE & CHARLOTTA MELLANDER
NOTE: FOR U.S. EMPLOYED WAGE EARNERS

FIGURE ONE

a teacher, while traded- industry representatives were manage-
ment workers at multinational firms.
In each group, we attempted to match typical characteristics
(age, gender, race) against the most common demographics of
that industry and occupation group. Our youngest interviewee
was 23; our oldest, just over 50. Their salaries ranged from under
$30,000 per year to over $120,000. They were progressive and
conservative, white, black, Hispanic, Christian, Muslim, gay and
straight; and all of them told us they were part of the middle class.
The State of the American Dream
Over the course of wide-ranging interviews, we asked these indi-
viduals about their families, their work, the impact of the econo-
my and government on their lives, their hopes and fears, and the
state of the American Dream. What did we hear?
Pride, first of all. Like Greg, these Americans are proud to
live in what they still consider to be the greatest country in the
world. One interviewee a young hairdresser from Milwaukee
started out her interview with clear instructions for us: Before
we start, she said, you must promise that you will not miscon-
strue anything I say to be negative about America.
We also heard cautious optimism about the future, and a
sense of satisfaction with life. When we asked about the Ameri-
can Dream, we heard over and over again that it was still pos-
sible, if a little harder to achieve than it used to be. Brett, a pro-
duction supervisor from Washington, had been laid off in 2009
and eventually moved cross-country in search of a job. Yet, he
remained hopeful. The American Dream is the pursuit of hap-
piness, he said. Its the pursuit of being your own person and
basically anything you want to do. I do still believe in it. It takes
a little bit more work than it used to. But I think Im living the
American Dream. Perhaps hes a little more cautious than he
used to be when it comes to spending money, but all in all, Im
pretty happy.
Even those struggling to get by tended to blame themselves,
rather than the system overall. Like Sarah, a Kindergarten teach-
er in South Carolina: I live paycheque to paycheque, she says,
with a sigh. I just dont get it. I have a Masters degree. I thought
I did everything right. How did I get here?
When we asked people about their experiences with the

rotmanmagazine.ca / 85
 Almost half of eligible voters chose not to cast a ballot
in theNovember 2016 Presidential election.
economy, many struggled to connect their own lives to the
broader economy. Amy, a yoga instructor, said, I dont think my
contributions to the community have a strong economic effect.
As for the global economy I can probably tell you more about
whats happening spiritually in places like China and India than
I can tell you about the U.S. economy, because my life is super
focused in that direction. Although I know it affects everything,
I also know that Im just this really, really small piece of the puz-
zle. I dont like to get too caught up in it and stress out about it
because, again, it doesnt affect my day-to-day.
Overall, when it came to the economy, we heard little about
international trade, GDP or globalization. Instead, we heard
about peoples families, about keeping food on the table and
making ends meet. Andrew, a Massachusetts production super-
visor and unionist summed it up: To me, its about owning a
house, being able to come home and feed your family a decent
dinner. Im not saying youre having prime rib every night; but,
your kids dont want for a whole lot. Youre able to clothe them
without looking for financial help or support from anyone else.
Again and again, folks like firefighter Matt told us: I dont
think I play a role in the economy; I just pay my bills. One outlier
in this respect was Dan, a truck driver from Illinois, who had a
very clear idea of how the economy shows up in his life. I see
the economy in my truck every week. When things are good, I
see 75 to 100 TVs in my truck. Id rather see people buying things,
keeping me busy, and keeping the economy going. But he, too,
minimized his own role: We live basic, simple lives. We have fun
and go on vacations, but we try to be real careful. Our son and
daughter are both in college and were so proud of them, because
neither of us went. Thats one of the things we want for our kids,
to be more educated its whats going to help them be success-
ful in life. We just dont want to be one of them statistics, you
know, as far as just being the ones that always need help.
Another clear theme from our interviews was a sense of dis-
connection from the political apparatus. As we asked about the
role of government in their lives and their feelings about politics,
most folks were sheepish to admit that, frankly, they just didnt
engage. Im not really into politics, said Julie, a hairdresser
from outside Chicago with two grown kids. I should be more in-
terested, I know. I dont feel very knowledgeable about politics.
Im kind of embarrassed to say that I dont get more involved, be-
86 / Rotman Management Spring 2017
cause I think people should be involved.
Again and again, we heard that while people felt some ob-
ligation to get involved, it wasnt enough to make them actually
do it. Ryan, a learning and development professional from Utah,
explains: I have to admit that Im not a fan of politics debates
seem to go on between individuals and nothing gets done. There
are important things that happen, but most of the time its about
politicking and the changes are of no benefit to the average citi-
zen. Brett, dislocated by the financial crisis but now back on his
feet, agrees: I think weve lost trust in politicians. It doesnt re-
ally matter who you vote for, its just going to be the same.
And Miami firefighter Matt, a Haitian migr with a young
family? He said: I dont think voting makes much of a difference,
either. I voted for Obama the first time because hes black; who
wouldnt want a black president?! But I dont like anybody this
time around, so Im not going to vote. Itll be a waste of my time.
I think local politicians are the worst. Theyre corrupt as hell.
I think all politicians, mayors, governors theyre all thieves. I
think theres just a bunch of empty promises. As he explained
this view, Matt seemed not so much angry as resigned.
We were particularly struck by the way in which these citi-
zens struggled to make any connection between what happens
in Washington and their own lives. Although choices in Washing-
ton demonstrably impact healthcare, education, public safety,
civil rights, infrastructure and so much more, most of the people
we spoke to could not name a single way in which government
policy affected their daily lives; and those who could framed gov-
ernment services almost solely in terms of entitlement programs
like social security.
Derek, a young and ambitious corporate communications
director said: Government doesnt really touch me directly.
Obviously, Im not on Social Security because Im not 65-plus.
There are certain people who are more affected by government,
whether theyre poor or theyre veterans or they come from a
different country and need help getting set up. So, government
touches their lives directly. I suppose it affects me in the sense
that my taxes can go up or down a little bit. But if you are more
self-sufficient in society, government wont really touch your life
until you hit a certain age. Honestly, I dont think our democra-
cy works. Im a big believer that if people dont understand the
issues, they wont participate.
 Given that almost half of eligible voters chose not to cast a
ballot in the November 2016 Presidential election, this sense of
disaffection seems to be having real, tangible results. Take Kira.
A graduate of UT Austin, shes working as a server at a casino and
floating through her 20s. As she explains, My interest in politics is
very limited. She continues that her disinterest is more because
I feel like theres so much to the game that Im just not aware of.
I dont want to know the ups and downs. I dont need to get that
anxious about it. The only political campaign that Ive ever ac-
tually felt interested in was Planned Parenthood. It really irked
me [that Congress was seeking to de-fund the organization] and I
started donating to them. I set up an automatic debit from my ac-
count for $10 a month and I didnt really think about it after that.
I changed my Facebook profile to show [my support]; I dont re-
ally know what else to do.
From our interviews, we selected 13 real people to be our
MPI Personas. Typically, in Design Thinking, a persona is meant
to be a representative description of a key customer. Often, per-
sonas are created by combining qualitative and quantitative data
from a variety of people to create a single, representative con-
sumer. In our case, each persona is a real person anonymized
for privacy but based entirely on a single individual, in all their
complex, contradictory glory.
Creating personas is not a new concept. Typically, the goal is
to get a clearer picture of your customers the life they live ev-
ery day, their points of pain or hassle, their values, attitudes and
ultimately, their unmet needs. This tool can help organizations
view their customers and stakeholders as real people, rather than
faceless segments described in vague demographic terms such
as age, disposable income or sales targets.
In closing
For MPI, the translation of real stories into personas has helped
us think more deeply about stakeholders, their needs and how
they might be better met. Now that the personas have been cre-
ated, we anticipate two important uses for them, one internal
and one external.
First, we want to ground our internal discussions in real
human beings, with real experiences, stories, emotions, moti-
vations and behaviours. By embracing the complexity of these
people, we believe we will be in a better position to create policy
solutions that meaningfully add value to peoples lives. As we
proceed with our work, we will return to these personas and ask:
What are the implications for Matt? How will Kira be affected?
Second, we want to use these personas as a way of structur-
ing external conversations in a new way. As we meet with key
stakeholders and thought leaders, we are using the personas
as a starting point for those discussions, grounding the conver-
sation in the challenges and opportunities facing real people
across the U.S.
At the first of these discussions, friends from the design
community dwelt on the implications of disengagement and
the potential reasons for it, positing that a desire for greater
simplicity and a sense of control over things I can understand
might be at the heart of it. Well be exploring these themes in the
months ahead.
More such discussions are scheduled, and our hope is to
continue to learn more and more about these real people and to
find new solutions to meet their needs. We will report back as so-
lutions for the future of democratic capitalism take shape.
Jennifer Riel (Rotman MBA 06) is an Adjunct
Professor at the Rotman School of Manage-
ment. She is also Managing Director of
Strategy and Innovation at the Schools Martin
Prosperity Institute (MPI). Stefanie Schram
(Rotman MBA 10) is Director of Intervention Design at MPI. To learn more
about this project: http://personaproject.martinprosperity.org/
rotmanmagazine.ca / 87
ANYTHING CAN HAPPEN
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Idea Exchange
90 ERIC ALMQUIST A twist on Maslows Hierarchy of Needs

94 LISA KRAMER on how seasonal moods impact investing

97 ANGELA DUCKWORTH on how grit leads to success

101 BING HAN on our fear of the unknown

105 NICHOLAS EPLEY on improving your ability to connect

109 ELKE WEBER on encouraging sustainable behaviour

113 VARUN GAURI on how the World Bank is using behavioural insights

117 JAMES BETTMAN shares a careers worth of consumer behaviour findings

121 AVNI SHAH on reducing demand for unhealthy food

125 ANTONIO NIETO-RODRIGUEZ on why so many projects fail

128 ANDREW ATKINS on behavioural insights for leaders

132 DAN MARKOVITZ on nudges for business

135 UTPAL DHOLAKIA on why nudging is only part of the solution

 QUESTIONS FOR Eric Almquist, Partner, Bain & Company

Q
&A The head of Bains
Advanced Analytics
practice describes
30 elements of value.
Figuring out what consumers truly value these days is
no easy feat. Describe how you discovered 30 elements
of value.
My colleagues and I have been studying consumers for many
years. After literally hundreds of studies, about three years
ago we consolidated our findings and were able to identify
24 elements of value but we suspected there were more.
So, in 2015, we did some new qualitative research talking
directly to consumers about the products they were buying.
As people spoke about why they made a particular
purchase, we kept asking questions, trying to get at the
fundamentals. If someone told us their bank was conve-
Interview by Karen Christensen nient, we didnt accept that answer: We would probe fur-
ther by asking, What does convenience mean to you? The
consumer would then delve deeper, and say things like,
Well, its nearby, so it saves me a lot of time and effort. We
did this repeatedly, across all the different statements con-
sumers made, to get at the most granular elements of value.
We ultimately did some quantitative research as well but
it all began with these deep customer insights.

90 / Rotman Management Spring 2017

 People will give you their money, time and attention
in exchange for various types of value.
Your 30 building blocks fall into four categories: func-
tional, emotional, life-changing and social impact. How did
you arrive at these categories?
We realized that we couldnt just provide people with a long
list of 30 things to consider; we had to help them mentally
organize the elements. At first, we looked at the Periodic Ta-
ble for inspiration. Then we looked at Abraham Maslows
Hierarchy of Needs. This well-known pyramid of human
needs starts out with basic physiological and safety needs.
Once these are met, it moves on to psychological needs like
belonging, love and feelings of accomplishment. And at the
top of the pyramid are self-fulfillment needs, like achieving
ones full potential.
We noticed that these different levels of needs could
be broken down into several categories: functional needs,
emotional needs and transformative needs. And ultimately,
at the top of the pyramid, it was clear that some sources of
value had to do with different forms of altruism or charity.
When we thought about our 30 elements in the context
of Maslow, organizing them into four categories made a lot
of sense. By the way, were not saying that our hierarchy is
complete. Its really meant to be used as a heuristic concept
or guideline; there is room for improvement, and we may
discover other elements over time; but in our work with cli-
ents, we are finding the model to be quite effective, because
it provides a new way to think about value.
You have said that businesses today have to continually
look at their products and come up with new combina-
tions of value. Please explain.
Theres a lot of talk these days about Big Data and the use of
advanced analytics to uncover value and I do believe data
plays a role in that. But at the heart of every successful prod-
uct or service is the concept of value that one is exchanging
with the consumer. People will give you their money, time
and attention in exchange for various types of value.
I would strongly encourage companies to spend at least
as much time thinking about what kind of value they can add
as they do thinking about what kind of analytics they can
use. My belief is that there is much more economic value to
be found by uncovering new forms of value. For example,
smartphones are really just bundles of elements of value:
you have your friends in your device; you have tools that
help you organize your life, like calendars; you have access
to your money; you have entertainment, whether its video
or audio. One of the reasons smartphones have been so suc-
cessful is that they deliver on multiple elements of value
including functional, emotional and life-changing elements
in a way that is unprecedented in business history. In our
work, weve been able to quantify that: With the iPhone and
iPad, for instance, Apple delivers on 11 of the 30 elements
of value. Its pretty astonishing how they have achieved that.
As indicated, your model traces its roots to psychologist
Abraham Maslows Hierarchy of Needs. Describe how
you extended Maslows insights.
Whenever Im giving a talk, I ask the audience if they are
familiar with Maslows Hierarchy, and just about everyone
who works in marketing or strategy raises their hands. It is a
very familiar concept; people even say things like, We need
to play higher up on the Hierarchy of Needs. But then I ask
a second question: Have you used Maslows Hierarchy in a
concrete way to help you think about your business? Very
few hands go up.
In other words, Maslow developed an intriguing the-
ory, but it has remained too academic, and people think it
pertains to basic human motivation as opposed to being
directly relevant to business. Our extension of the theory
is mostly about making it more practical and applying it to
business. Our approach has really resonated with people,
because we have made a fundamental psychological theory
more appealing to business practitioners.
rotmanmagazine.ca / 91
 Smartphones deliver on multiple elements of value
in a way that is unprecedented in business history.

You have said that the relevance of the 30 elements var-

The 30 Elements of Value ies according to industry and demographics. How so?
We did a number of analyses to determine which of the el-
Social Impact
ements was driving an organizations Net Promoter Score
(NPS) the widely-embraced measure of customer loyalty
Self-transcendence
that Bains Fred Reichheld developed 10 years ago. Today,
NPS is used by thousands of companies as a simple and ef-
Life Changing
fective tracking mechanism for loyalty and advocacy.
In virtually all of the industries where we conducted
Provides Self- analyses, quality was the number-one driver of NPS. We
hope actualization believe that likely stems from the Total Quality Movement
that started almost 40 years ago. There has been so much
improvement in product and service quality in recent de-
Motivation Heirloom Affiliation & cades that if you are not delivering a certain level of per-
belonging
ceived quality, you probably cant make it up with other ele-
Emotional ments of value. Quality has become almost table stakes, if
you will.
Then, in various industries, things start to diverge. For
Reduces Rewards Nostalgia Design/ Badge example, in credit cards, the next element that drives value
anxiety me aesthetics value
after quality is rewards me. A lot of credit cards provide re-
wards, and that is now appearing as a driver of loyalty. Avoids
hassles and provides access follow after that. If you compare
Wellness Therapeutic Fun/ Attractiveness Provides that with an industry like grocery, after quality, variety is
value entertainment access
very important, along with sensory appeal, reduces costs and
rewards me. So, the drivers do vary by industry.
Functional Weve looked at demographics in the wireless market
in the U.S., studying the entire mobile experience. It turns
out that for Baby Boomers, one of the most important ele-
Saves Simplifies Makes Reduces Organizes Integrates Connects ments of value is the connection provided by the wireless
time money risk
i network. But if you look at Millennials, they are much more
interested in some of the emotional elements of value,
such as belonging and entertainment. We are seeing pretty
Reduces Avoids Reduces Quality Variety Sensory Informs
effort hassles cost appeal dramatic differences by generation and by industry and
Im sure its even further segmented. As we get larger sam-
ple sizes, well be able to look at this in more detail.
FIGURE ONE

How are companies using the 30 elements in practice?

As indicated, smartphone providers are doing really well
not just Apple. There is something about those devices and
the value they offer. Another company that is delivering
great value is USAA. We found that their insurance business
delivers on 13 of the elements of value. They are known to be
a leader in customer satisfaction, but what is interesting is

92 / Rotman Management Spring 2017

that their service is so good that its beginning to ring some
of the emotional bells further up the hierarchy, where its not Maslows Hierachy of Needs
just about good functional service anymore. Consumers are
feeling an emotional bond with that company. Self-fulfillment
needs
Self-
Describe how tools like structured listening, ideation
actualization:
sessions and prototyping can be used to embrace the achieving ones
elements of value. full potential, including
Structured listening is a very active form of listening that creative activities
Esteem needs: Psychological
involves trying to get below the surface statements that prestige and feeling needs
people tend to make. Once you do that kind of listening, of accomplishment
you use the findings as stimuli for ideation sessions. The Belongingness and love needs:
goal of those sessions is to try to identify where you can add intimate relationships, friends
Basic
value, or improve upon the value being offered. Companies Safety needs: needs
can focus on improving on the elements of value they cur- security, safety
rently offer or they can look at adding new elements to Physiological needs:
their repertoire. food, water, warmth, rest
We typically do several rounds of ideation sessions,
using the pyramid with the 30 elements as a stimulus. We
FIGURE TWO
ask people, essentially, to think about where they are pro-
viding value today, and which elements might be possible
for them to provide going forward.
For example, we recently worked with a bank and
helped them identify rewards as an element of value that
could be important for them. We went on to further explore
velop a set of elements of value that will show, for example,
that concept with their customers, testing ideas of what the
that what procurement professionals value can be quite
rewards could be, and the levels of reward and status, and
different from, say, a business unit head or a project leader.
so forth. Then we developed a prototype that appeared on a
There has been a resounding outcry for business-to-
smartphone and showed the different elements of the re-
business elements of value. We started with consumers
ward program, etc. We tested that quantitatively with con-
because they represent roughly 70 per cent of GDP; but
sumers, to optimize the features. Then, it went into market
business-to-business is also very important. We believe our
testing and it is just being launched, as we speak. Thats a
model for B2B will be nuanced by different types of decision
typical process for us.
makers, although many of the elements will be the same.
Ill be happy to share our results with your readers when the
Going forward, will you look at how the elements of value
work is complete.
contribute to the bottom line?
Yes. Weve already correlated our findings with both NPS
and growth, so we know that companies who are delivering
on multiple elements of value tend to grow much more dra-
matically than those who are not. Next, we will be working
Eric Almquist is a partner in Bain & Companys Boston office and
on business-to-business elements of value. When compa-
leader of Bains global Customer Insights and Analytics capability.
nies are selling to other businesses, there may be multiple Prior to joining Bain, he spent 24 years with Mercer Management
decision-makers in those businesses, so were going to de- Consulting (now Oliver Wyman).

rotmanmagazine.ca / 93
 FACULTY FOCUS Lisa Kramer, Professor of Finance, University of Toronto Mississauga
How Your Mood Affects
Your Investments
Interview by Karen Christensen
In your research, you have found that investor risk appe-
tites vary by season. How so?
As daylight becomes less abundant in
the fall and winter months, our moods
respond accordingly. Many people can
identify with the notion of winter blues;
but at a more clinical level, psychologists
have identified a condition called Season-
al Affective Disorder (SAD), which causes severe depression
in a significant part of the population.
Early in my career, I was intrigued by the possible im-
plications of this disorder on financial decision making.
Findings from Psychology had long shown that when peo-
ple are in a negative mood, they become more risk averse,
and combined with my finance perspective, this all seemed
to be part of the same big picture. My colleagues and I were
able to show that, as daylight diminishes, people shun riski-
er assets like stocks; and when it becomes more plentiful, in
the spring, they jump back into these holdings. In short, our
moods and preferences vary seasonally, and this spills over
into our financial decision making.
94 / Rotman Management Spring 2017
How prevalent is this effect?
Roughly 10 per cent of the global population suffers from se-
vere SAD, but this varies by latitude. People who live in tropi-
cal zones are less likely to be affected than those who live, for
instance, in parts of Scandinavia some of which get only
six hours of sunlight per day in late December.
My former Rotman colleague Mark Weber and I con-
ducted a survey of faculty and staff at a large North Ameri-
can university, and we found similar results. What surprised
us was that the other 90 per cent or so of our sample also ex-
perienced significant variation in mood across the seasons
but less severely. It turns out that most of us become more
despondent in the darker seasons of the year; but a fraction
of us become so depressed that we need medical help.
In one recent study, you looked at how mutual fund hold-
ings are affected by these seasonal factors. Tell us what
you found.
We considered how much money investors put into and
take out of their mutual funds in various months, and again,
we found strong evidence that seasonality is a key factor.
 As daylight diminishes, people shun risky assets and
in the spring, they jump back into riskier holdings.
In the fall, when people are becoming somewhat more
depressed and risk averse, we found a much lower appetite
for risky categories like stock-based mutual funds, and a
much greater appetite for safe categories, like government
bond funds. Then, six months later as spring blooms and
risk appetite returns these flows switch in the opposite
direction.
Our findings are statistically significant: We examined
trillions of dollars worth of U.S. mutual funds for this study
and identified seasonal flow differences due to mood in the
tens of billions of dollars. We also considered mutual fund
flows for Canada, and found similar results albeit on a
smaller scale, on par with the smaller size of our economy.
What is the broader economic impact of your work?
First, it provides further evidence that our mood influenc-
es the way we make decisions. As a result, at a policy level,
when regulators are deciding if or how to intervene in fi-
nancial markets say, during a financial crisis it would
be sensible for them to take into account the time of year.
If it is autumn, and markets are crashing (and perhaps not
surprisingly, markets do tend to crash more frequently in
the fall), we know that people might react more drastically
than if that same event happens in the spring. It is possible
to design interventions and regulatory responses, depend-
ing on seasons. Thats the key implication of my work.
Lots of other related behavioural findings are coming
out, with broad societal impact. One study I read recently
looked at mood as it is influenced by the amount of sleep
people get, and how that pans out in election results. In a
particular time zone, for instance, researchers found that
the people who lived further east got less sleep that those
who lived further west, and that this led to systematic dif-
ferences in the way they voted on election day. As that pa-
per suggests, candidates might want to widely distribute
coffee on the morning of an election!
Another related finding is that when the weather
is bad on election day, people make more risk-averse
choices at the ballot box. So if its pouring rain, they are
less likely to vote for candidates that are perceived as
risky. This is broadly consistent with what weve found
in financial markets.
Tell us about your ndings in Australia and other coun-
tries.
I mentioned earlier that flows into and out of risky mutual
fund categories vary by season in places like Canada and
the U.S.; but this effect basically flips in the southern hemi-
sphere, because when its fall up here, its spring in, say,
Australia. Basically, wherever it happens to be fall, thats
when people generally become more risk averse.
This finding was corroborating evidence for our notion
that the seasons are at work behind this effect. Additionally,
when we study stock market returns around the world, we
basically find that people avoid certain stocks in the darker
months, and this effect is stronger the more northern the
country you consider. So, if you compare the U.S. with Cana-
da, and then with Britain, and then Sweden, the seasonality
in stock returns only gets stronger. And when we looked at
countries like Australia, New Zealand and South Africa, this
seasonality was exactly out of sync by six months. Our evi-
dence is consistent across a broad range of countries.
How can the average investor incorporate these ndings
in order to optimize her portfolio?
The impulse might be to take what Ive just described and
try to translate it into some sort of market-timing strategy:
but that is the exact opposite of what I recommend. The trick
is not to try to time the markets because in any given year,
the effects were talking about can be completely swamped
by larger economic factors that are fundamental in deter-
mining the dynamics of returns.
My advice would be to avoid market timing altogeth-
er, because the research shows that people who attempt to
time markets perform worse, on average, than those who
just buy and hold. It is a much better idea to stick with lon-
ger-term investing principles to have a well thought-out
formula for a long-range investing plan, for example, and
to avoid buying or selling on impulse when things happen
suddenly in markets.
Furthermore, if things are topsy turvy in your life, that is
the wrong time to be making any kind of important financial
decision. If you dont feel confident about managing your
emotions in the context of investing, one course of action
can be to consider hiring an intermediary. There are a couple
rotmanmagazine.ca / 95
 Culture and beliefs are largely inherited, so when people move to a
different region, they bring with them ingrained biases and beliefs.

of options on that front. One is to elicit the assistance of a growth prospects for an entire region.
fee-based financial advisor, to provide advice that is tailored As we become even more globalized, we need to be
to your specific situation, and isnt influenced by commis- aware that every individual is a biological being with count-
sions that more traditional advisors rely on. less behavioural biases. We also have to be aware of this as
Another option is the idea of a robo advisor a class were interacting with people who might have very different
of financial advisor that provides financial advice or portfo- biases from us. In general, when we are designing the way
lio management online with minimal human intervention, we interact with each other including decision making in
based in part on algorithms. This relatively new class of in- our financial institutions we need to be increasingly aware
termediary offers an array of portfolios that are customized of the influence of culture and the environment.
to investors characteristics, such as age, risk preference,
and so on. Fees for robo advisors are lower than mutual
funds fees, especially in Canada, and the degree of custom-
ization they offer is higher than an investor would get with
an exchange-traded fund or a mutual fund.
For people who want to take a more hands-on approach,
another option can be to hold an assortment of exchange-
traded funds rather than mutual funds. But then, you have
to really be disciplined about trying to overcome those emo-
tional urges when markets are choppy, or if your personal
circumstances are anxiety-provoking.

What are the key takeaways for people working in an

increasingly global investment landscape?
Our beliefs are largely a by-product of the environment in
which we grow up, and in an increasingly global landscape
investment and otherwise we are interacting more and
more with people who were brought up under very differ-
ent conditions. Culture and beliefs are largely inherited, so
when people move to a different geographic region, they of- Lisa Kramer is a Professor of Finance in the Department of Manage-
ten bring with them ingrained regional and cultural biases ment, University of Toronto Mississauga and a Research Fellow of
Behavioural Economics in Action at Rotman (BEAR). Her recent paper,
and beliefs.
Seasonal Asset Allocation: Evidence from Mutual Fund Flows, with
In parts of Italy, for example, the level of trust in insti- M. Kamstra, M. Levi, and R. Wermers, was published in the Journal of
tutionsincluding financial institutions is very low, and Financial and Quantitative Analysis and can be downloaded online.
in these regions, stock market participation is also very low. Her 2012 paper, This is Your Portfolio on Winter, can also be down-
loaded online.
If, for cultural reasons, certain people arent participating
in stock markets, that can have consequential spillover ef- Rotman faculty research is ranked #3 in the world by the Financial
fects, including retirement preparedness and the economic Times.

96 / Rotman Management Spring 2017

POINT OF VIEW Angela Duckworth, Professor of Psychology, University of Pennsylvania
The Recipe for Success:
Self-Control + Grit
WHY ARE SOME PEOPLE more successful
than others? One obvious answer is tal-
ent; another is opportunity. But even peo-
ple who have comparable levels of talent
and opportunity often enjoy strikingly dif-
ferent levels of success.
Applying the scientific method to this age-old question
has yielded important new insights regarding the determi-
nants of both everyday success and extraordinary achieve-
ment. What is lacking and of central interest to me as a
researcher is an integrative framework for understanding
the requirements for these two kinds of success.
The idea that the determinants of everyday success
differ from the determinants of extraordinary achievement
goes back to the earliest days of psychology. Sir Francis Gal-
ton (1822-1911) contrasted self-denial in the face of hourly
temptations with what he considered, other than talent, to
be the essential features of high achievers namely, zeal
[and] the capacity for hard labour. What Galton termed
self-denial is now referred to as self-control, which includes
both inhibiting strong, but ultimately undesirable impulses
and activating weak, but ultimately desirable impulses.
Galtons conception of zeal and the capacity for hard
work corresponds to what I refer to as grit a newer con-
struct defined as passion for and perseverance toward
especially long-term goals. Today, self-control and grit
are sometimes used interchangeably. However, despite
overlap in key underlying psychological processes, they are
not identical.
Like Galton, both Sigmund Freud and William James
speculated that the capacity to regulate attention, emotion
and behaviour was essential to everyday success. Studies
have confirmed that higher levels of self-control earlier in
life predict later academic achievement and attainment,
pro-social behaviour, employment, earnings, savings, and
physical health. In fact, self-control predicts many conse-
quential outcomes at least as well as either general intelli-
gence or socioeconomic status.
The psychological processes that underlie self-control,
once referred to as willpower, are now coming into focus.
It is now understood that self-control is required when there
is a conflict between two possible action tendencies (i.e., im-
pulses) one corresponding to a momentarily alluring goal
and the other corresponding to a more valued goal whose
benefits are deferred in time, more abstract, or otherwise
more psychologically distant. Regardless of the particular
type of impulse that is engaged (e.g., gobbling up one sweet
and chewy marshmallow immediately vs. waiting for two;
rotmanmagazine.ca / 97
 Self-control predicts consequential life outcomes at least
as well as either general intelligence or socioeconomic status.
watching television vs. going to the gym), it seems that com-
mon prefrontal brain areas are involved in successful top-
down regulation.
In addition to directly modulating bottom-up impuls-
es, both children and adults are capable of deploying an
array of cognitive and behavioural strategies seconds, min-
utes, or even hours in advance of confronting temptations.
In general, the capacity to exercise self-control appears to
improve from infancy through adulthood, in parallel with
the maturation of prefrontal brain areas and metacognitive
abilities (thinking about thinking).
A newer literature has begun to explore the conse-
quences of pursuing a passionate interest with determina-
tion and effort over the course of years. Studies show that
grit predicts the completion of challenging goals despite
obstacles and setbacks. For instance, in my own research I
have found that grittier high school juniors in Chicago public
schools are more likely to graduate on time one year later;
grittier cadets are more likely than their less gritty peers to
make it through the first arduous summer at West Point; grit-
tier novice teachers are more likely to stay in teaching, and
among the teachers who do stay, those who are grittier are
more effective.
Elsewhere, researchers found that in the National
Spelling Bee, grittier competitors accumulate more hours
of deliberate practice over the course of years, which in turn
fully mediates the effect of grit on final ranking. Related
research has identified harmonious passion (i.e., the in-
ternalization of a passionate activity into ones identity) as
98 / Rotman Management Spring 2017
a predictor of deliberate practice and, in turn, performance.
Many other studies of expert performers in diverse
domains have found that thousands of hours of extremely
effortful deliberate practice are prerequisite for achieving
world-class levels of skill. If, as Woody Allen has suggest-
ed, showing up is crucial to success in any endeavour, and
if highly effortful, focused practice is a necessary means
to improving in skill, then it may be that grit predicts high
achievement by inclining individuals to both show up and
work very hard, continuously, towards a highly valued goal
for years.
A Hierarchical Goal Framework
It is perhaps no wonder that self-control and grit are often
used interchangeably. These two determinants of success
are highly correlated, and both predict success outcomes
over and above intelligence. However, some paragons of
self-control lead undistinguished lives devoid of a focused
life-long passion, and some gritty and exceptionally suc-
cessful people are famously undisciplined in life domains
other than their chosen passion.
How are self-control and grit similar, and how are they
different? My colleagues and I propose that both their simi-
larities and their differences can be understood within a
Hierarchical Goal Framework (see Figure One). Following
prominent motivational accounts, we assume that goals are
typically organized hierarchically, with lower-order goals
serving higher-order goals. Lower-order goals are more
numerous, context specific, short-term, and substitutable,

whereas higher-order goals are typically fewer in number,
more abstract, more enduring, and more important to the
individual. At any level in the goal hierarchy, goals are more
likely to be activated if they are appraised as being both fea-
sible and desirable.
Individuals can have not only multiple goals but also
multiple goal hierarchies, and this multiplicity of motives
can lead to conflicts. Within this framework, self-control
refers to the successful resolution of a conflict between
two action impulses one that corresponds to a goal that
is more valued in the moment, and another that corre-
sponds to a goal that is of greater enduring value.
For example, Monday morning may find a professor
torn between editing a section of her graduate students
manuscript or, alternatively, checking Us Weekly for the
latest Hollywood gossip. The former action is more valu-
able in the long run, advancing the goals of supporting her
students development and of publishing empirical stud-
ies. In contrast, the rival action is momentarily more allur-
ing guaranteed to be effortless and amusing but alas,
in the long run, less valuable insofar as it merely advances
the goal of having fun. So, whether by modulating her ac-
tion tendencies in the heat of the moment or, preferably, by
deploying cognitive and behavioural self-control strategies
earlier in time, the professor hopes to exercise self-control
and choose the manuscript over the tabloid.
In our framework, grit entails having a dominant super-
ordinate goal and tenaciously working toward it in the face
of obstacles and setbacks. This superordinate goal sits at the
A Hierarchical Goal Framework
Goal
Goal Goal Goal
Goal Goal Goal Goal Goal Goal
Action Action Action Action Action Action Action
Goals are typically organized hierachically, with fewer high-
level goals and more numerous low-level goals. The latter
are associated with action tendencies, broadly construed to
include attention, emotion and behaviour.
FIGURE ONE
top of a well-organized goal hierarchy in which lower-order
goals are tightly aligned with the superordinate goal, and
these lower-order goals in turn give rise to effective actions
that advance the individual toward the superordinate goal.
When faced with setbacks, gritty individuals find a way
forward by sprouting new lower-order goals (or actions).
For instance, if a grant proposal or manuscript is rejected,
tears may be shed, but soon enough, another funder or
journal outlet is identified and pursued. In other words, in a
gritty individuals domain of passionate interest, goals or ac-
tions deemed unfeasible are met with the response of an ac-
tive search for or even invention of viable alternatives.
Viewed in this light, it is evident that self-control and
grit both involve the defense of valued goals in the face of
adversity. Where they principally differ is in the types of
goals that are being defended, the nature of the enemy,
and the timescale that is involved. Self-control is required
to adjudicate between lower-level goals entailing necessar-
ily conflicting actions. One cannot eat ones cake and have it
later, too. In contrast, grit entails maintaining allegiance to a
highest-level goal over long stretches of time and in the face
of disappointments and setbacks.
Self-control and grit have attracted increased interest
in recent years, in no small part because they seem more
amenable to intervention than other determinants of suc-
cess such as cognitive ability and socioeconomic status. We
are optimistic that a better understanding of the psychologi-
cal processes underlying self-control and grit could, in fact,
lead to high-impact, cost-effective interventions.
rotmanmagazine.ca / 99
 How Gritty Are You? The 8-Point Grit Scale

Following are a number of statements that may or may not apply to you. For the most accurate score, when responding, think
of how you compare to most people not just the people you know well, but most people in the world. There are no right or
wrong answers: just answer honestly.

1. New ideas and projects 4. I am a hard worker. 7. I finish whatever SCORING:

sometimes distract me
from previous ones.
Very much like me
Mostly like me
Somewhat like me
Not much like me
Not like me at all
2. Setbacks dont
discourage me.
Very much like me
Mostly like me
Somewhat like me
Not much like me
Not like me at all
3. I have been obsessed
with a certain idea or
project for a short time
but later lost interest.
Very much like me
Mostly like me
Somewhat like me
Not much like me
Not like me at all
Very much like me
Mostly like me
Somewhat like me
Not much like me
Not like me at all
5. I often set a goal but
later choose to pursue
a different one.
Very much like me
Mostly like me
Somewhat like me
Not much like me
Not like me at all
6. I have difficulty
maintaining my focus
on projects that take
more than a few months
to complete.
Very much like me
Mostly like me
Somewhat like me
Not much like me
Not like me at all
I begin. For questions 2, 4, 7
Very much like me and 8 assign
Mostly like me the following points:
Somewhat like me 5 = Very much like me
Not much like me 4 = Mostly like me
Not like me at all 3 = Somewhat like me
2 = Not much like me
8. I am diligent. 1 = Not like me at all
Very much like me
Mostly like me For questions 1, 3, 5 and
Somewhat like me 6 assign the following
Not much like me points:
Not like me at all 1 = Very much like me
2 = Mostly like me
3 = Somewhat like me
4 = Not much like me
5 = Not like me at all
Add up all the points and
divide by 8. The maximum
score on this scale is 5
(extremely gritty), and the
lowest score on this scale
is 1 (not at all gritty).

With respect to interventions, the proposed frame-
work implies that self-control is a skill or capacity, which,
like other skills and capacities, might be improved with
training and practice.
Grit, in contrast, is as much about motivation as volition.
Studies beginning in childhood and extending across the life
course are needed to examine how individuals develop su-
perordinate goals of such compelling personal significance
that that they inspire lifelong allegiance despite innumera-
ble alternative pursuits and inevitable mistakes, failures, and
other obstacles. Very generally, we assume that commitment
to a superordinate goal is a function of that goals feasibility
and desirability, and thus that the diverse psychological ante-
cedents to such valuations (e.g., growth mindset, optimism,
attribution style, locus of control, counterfactual style, core
self-evaluation, intrinsic motivation, interest, approaches to
happiness) are logical targets for intervention and inquiry.
In closing
Research on self-control has illuminated the importance
and inherent difficulty of aligning actions with valued
goals when momentarily more rewarding actions become
available. Separate research on grit has suggested that in-
dividuals differ in their pursuit of superordinate goals of
enduring significance. Our hierarchical-goal perspective on
self-control and grit advances the understanding of the re-
lated but distinct psychological mechanisms that underlie
these two key determinants of success.
Angela Duckworth is the Christopher Browne Distinguished Professor
of Psychology at the University of Pennsylvania and the author of Grit:
The Power of Passion and Perserverance (Collins, 2016). She is also the
founder and scientific director of the Character Lab, whose mission is
to advance the science and practice of character development. This arti-
cle summarizes her paper, Self-Control and Grit: Related but Separable
Determinants of Success, co-authored with Stanfords James Gross
and published in Current Directions in Psychological Science.

100 / Rotman Management Spring 2017

FACULTY FOCUS Bing Han, Professor of Finance, Rotman School of Management
Fear of the Unknown:
Familiarity, Risk and
Economic Decisions
MOST OF US RECOGNIZE THAT, generally
speaking, people fear change and the
unknown. We prefer familiar goods and
people, status quo choices, and gambles
that seem unambiguous. What some peo-
ple might not realize is that these effects
are not only manifested in the realm of consumer goods, but
also in capital markets.
My co-authors and I recently set out to develop a model
based upon two underlying psychological forces:
1. The tendency for individuals to use a focal choice as a
benchmark for comparison in evaluating other possible
choices. We refer to this focal choice option as the status
quo; and
2. The tendency to skeptically evaluate choice alternatives
that deviate from the status quo.
An individual who is subject to the status quo bias prefers
either the current state or some choice alternative that has
been made salient as the default option that will apply if no
alternative is selected explicitly. For example, in a set of ex-
periments on portfolio choices following a hypothetical in-
heritance, researchers found that an option becomes signifi-
cantly more popular when it is designated as the status quo,
while others are designated as alternatives.
When neither choice alternative is made salient as a
passive default choice, sometimes, the focal choice becomes
the one that is easiest to process. The greater comfort that
individuals have with easily-processed choice alternatives
probably lies in the fact that we prefer choices about which
we can feel competent.
Another principle that has emerged from the research is
that when there is a single clear-cut focal choice alternative,
people evaluate choice alternatives that deviate from the
rotmanmagazine.ca / 101
 Investors have a greater perceived familiarity with local
and domestic securities and, in turn, invest more in them.
Status Quo Deviation Aversion (SQDA) is pervasive in capital markets.
focal choice with skepticism. For example, people tend to
dislike risks that derive from active choices more than risks
that result from remaining passive. Psychologists have re-
ferred to this as the omission bias, and it explains why indi-
viduals are reluctant to take seemingly risky actions such as
getting vaccinated, often preferring to bear the much bigger
risks associated with remaining passive.
More broadly, psychologists have documented a
strong and robust mere exposure effect: individuals tend to
like stimuli that are more familiar. Advertisers try to take
advantage of this by repeatedly exposing consumers to the
name of a brand, hoping that consumers will use it as a de-
fault choice when they face many similar products.
In general, things that we are familiar with, choice al-
ternatives that fall within our domain of competence, and
default choice alternatives that involve continuing to do
what we were doing previously, will tend to be viewed as
less risky than new initiatives into unknown territory. As a
result, it makes sense as a general heuristic to favour famil-
iar or status quo choice alternatives. Such a heuristic can go
astray, however, when in fact we possess other clear sources
102 / Rotman Management Spring 2017
SHUTTERSTOCK
of information about the distributions of payoffs of different
alternatives.
There is a great deal of evidence suggesting that these
two psychological forcesthe tendency to evaluate choices
relative to a focal-choice benchmark, and the tendency to be
unduly skeptical about non-focal choice alternatives oper-
ate robustly in capital market decisions.
In corporate finance, a managers reluctance to termi-
nate an investment, involves holding insistently to a pre-
viously-selected or endowed choice alternative. Previous
studies document that firms commonly use hurdle rates that
exceed the cost of capital, thereby discouraging new proj-
ects. A related phenomenon is the sunk-cost effect, whereby
an initial investment in a project creates reluctance to ter-
minate it.
In the realm of stock investments, individuals have also
been shown to prefer familiar choices. For example, U.S.
investment managers invest disproportionately in locally-
headquartered firms. Researchers have found that custom-
ers of a given U.S. Regional Bell Operating Company
(RBOC) tend to hold more of its shares and invest more
 We introduced the concept of Status Quo Deviation Aversion
(SQDA), which gives a privileged position to the status quo strategy.
money in it than in other RBOCs; that both institutional
and individual investors in Finland tend to hold the shares
of firms that have nearby headquarters and communicate in
investors native tongue; and that Swedish investors tend to
concentrate holdings in stocks to which the investor is geo-
graphically close.
Research also shows that investors have a greater per-
ceived familiarity with local and domestic securities and,
in turn, invest more in such securities. In pension fund in-
vestments, many people invest a significant fraction of their
discretionary contributions in their own company stock. For
example, researchers found that the percentage of assets in
company stock in defined-contribution plans is around 29
per cent; and another study of sample S&P 500 firms found
that about one third of the assets in retirement plans are in-
vested in company stock, and of the discretionary contribu-
tions, about a quarter are invested in company stock.
Furthermore, in international financial markets, in-
vestors tend to hold domestic assets instead of diversifying
across countries, a puzzle known as home bias. Although
various explanationssuch as transaction costs, differential
taxes, political risk, exchange rate risk, asymmetric infor-
mation, purchasing power parity, and non-tradable assets
have been offered, none has been shown to explain the
magnitude of observed home bias.
In my research with H. Henry Cao, David Hirshleifer
and Harold Zhang, we introduced the concept of Status
Quo Deviation Aversion (SQDA), which gives a privileged
position to the status quo strategy. We found that a strategy
is preferred to the status quo strategy only if it provides high-
er expected utility under all probability models that capture
the investment uncertainty. When there are other choices
that dominate the status quo option, the investor evaluates
each strategy under the scenario that is most adverse to that
strategy. Thus, if the status quo action is dominated by an
alternative strategy x, then strategy x is evaluated according
to the minimum gains in expected utility, and the alternative
strategy with the highest minimum gains in expected utility
is selected.
In our model, fear of the unfamiliar derives from aver-
sion to model uncertainty about the mean payoffs of unfa-
miliar choice alternatives. We then examined the implica-
tions of familiarity bias for individuals decision making,
demonstrating that this bias can induce the endowment ef-
fect (whereby people ascribe more value to things merely
because they own them) and under-diversification in risky
asset holdings. Put simply, investors who exhibit familiarity
bias focus on the worst-case scenarios associated with con-
templated deviations from status quo choices.
Our interpretation of familiarity bias can explain the
use by managers of excessively-high hurdle rates in cer-
tain investment choices, and also in the reluctance to
terminate existing investments. Unlike the rational in-
vestors optimal risky portfolio, which is determined by
the expected returns of stocks and their co-variances, the
familiarity-biased investors equity portfolio also depends
on his endowment and the degree of uncertainty about ex-
pected stock returns. Even when the familiarity-biased in-
vestor trades away from his endowment in the direction of
the stock having superior risk-return trade-off, he is more
conservative than the rational investor, as he underweighs
the more attractive stock.
Our finding that limited diversification can occur due to
fear of unfamiliar choice options suggests that mutual funds
(and especially index funds) can provide a social benefit for
a reason different from standard explanations. In our mod-
el, investors stop adding stocks to their portfolios because
a large diversification gain is needed to offset the aversion
to buying an unfamiliar stock. A mutual fund can address
this issue in two ways. First, the individual needs to add just
rotmanmagazine.ca / 103
 a single new asset to his portfolio (the mutual fund); and
second, by focusing on marketing to investors, mutual funds
can make their product more familiar to them. In other
words, whereas corporations specialize in making profits,
mutual funds can specialize in being invested in.
Our approach suggests that there is a socially-valuable
IT ALL STARTED HERE
complementarity between being good at marketing that as-
suages investor fears about stocks, and providing a diversi-
fied portfolio of securities in which individuals can invest.

In closing
Celebrating 15 years
The evidence indicates that individuals favour geographi- of strengthening
cally- and linguistically-proximate and more familiar in- the female talent
vestments; that they are biased in favour of staying at cur-
pipeline.
rent consumption/investment positions or strategies and
in favour of choice alternatives made salient as default op- The Judy Project has
tions; and that they are averse even to small gambles when helped women ascend
presented as increments relative to an endowed certainty into executive leadership
position. More generally, individuals are more reluctant to
take actions that impose risk than to bear risk associated
and C-suite positions:
with remaining passive; tend to like stimuli they have al-
ready been exposed to; and tend to like people they are lo-
350 women
cated close to. from the senior ranks of
As indicated herein, emotions of fear and suspicion are corporate Canada,
often directed towards the unfamiliar, and this phenomenon
explains several biases in individual psychology as well as in impacting 125
economic and financial decisions. organizations
around the world.

Since then we have

launched professional
development programs to
advance women
from the classroom
to the boardroom.

www.rotman.utoronto.ca/women

Bing Han is a Professor of Finance at the Rotman School of Manage-

ment. This article summarizes his paper, Fear of the Unknown:
Familiarity and Economic Decisions, co-authored with H. Henry
Cao, David Hirshleifer and Harold Zhang. The complete paper,
published by the Review of Finance, can be downloaded online.

Rotman faculty research is ranked #3 globally by the Financial Times.

104 / Rotman Management Spring 2017

QUESTIONS FOR Nicholas Epley, Professor of Behavioural Science, University of Chicago

Q
&A A leading behavioural
scientist describes
the ability that helps
us achieve lifes most
You believe that the ability to read other people is the
human brains greatest asset. Please explain.
This ability which I also call our social sense or sixth sense
enables us to achieve lifes most important goal: connect-
ing with other human beings. It allows us to cooperate with
those we should trust and avoid those we shouldnt. At its
best, it enables understanding between friends, empathy
between strangers, forgiveness among enemies and coop-
eration between people, co-workers even countries.
Psychologists have been studying this ability for some
time now, and we have found that people use three intuitive
important goal: connecting with tools to make inferences about what is going on in another
others. persons mind. The first one is no surprise: Given that we are
egocentric, we use our own thinking as a guide to what oth-
Interview by Karen Christensen ers are thinking. So, if I think onion ice cream sounds ter-
rible, it is reasonable for me to assume that you will agree.
Secondly, we make regular use of stereotypes about
other people and the groups and categories we feel they
belong to. So, if I find out that youre a member of a liberal

rotmanmagazine.ca / 105
 Egocentrism leads us to believe that others see
the world more like we do than is actually the case.
SHUTTERSTOCK
If you think a candidate is awful, but someone else says
they are terric, you believe they are mistaken.
party, I will make certain inferences about your policy
preferences and maybe even some of your life choices
based on that knowledge. The third approach is to focus on
other peoples behaviour: By watching what you do and how
you act, I obtain a source of information about what is going
on in your mind. So, if I see you eating onion ice cream every
day, I will assume that you love it.
We dont think about these tools much, but they are ex-
traordinarily helpful in guiding us in our daily lives. Without
realizing it, we use them in just about every social interac-
tion we ever have. The problem is, they also have a dark
side: Egocentrism can lead us to believe others see the world
more like we do than is actually the case; using stereotypes
leads us to assume that others are more different from us
than they actually are; and focusing on behaviour as a di-
rect guide to peoples thoughts overlooks the power of situ-
ational influences which play a significant role in guiding
human behaviour.
Most people like to believe that they are independent
thinkers with kind hearts; what is the harder truth?
In general, people have good intentions, but we are also
heavily influenced by situational influences and forces that
106 / Rotman Management Spring 2017
we are not necessarily aware of and that often leads us
to behave in ways that are inconsistent with our vision of
ourselves.
Imagine that youre thinking about whether to cheat in
some situation. Most people use their good intentions as a
guide to how they should behave; but when they are actu-
ally in the situation, their behaviour is influenced by forces
that they underestimate. In particular, we underappreciate
the power that other people have over us. Humans are very
social beings, so when we are around other people, we are
influenced by their attitudes and behaviour.
If a person thinks she sees the world as it actually is,
what happens when she meets someone who sees the
world quite differently?
Stanford Psychologist Lee Ross has argued that we are all
naive realists in that we naively presume that we see the
world as it is. The inability to introspect on why were think-
ing or feeling as we are, means that our thoughts and feel-
ings seem like accurate reflections of the world. I like you
because you are a likeable person; thats not something
about me, thats something about you. I look at a table and
its brown; I can see it right there in front of me its brown:
These dont seem like constructions in my brain they
seem like facts about the world.
What this means is, when somebody else looks at the
very same thing and sees something else for instance,
if two people look at the same political candidate and you
think she is fantastic but the other person thinks that can-
didate is awful you will think that anyone who disagrees
with you is mistaken in some way. I see the world as it is, so
they are the ones who are biased or mistaken in their think-
ing. This leads us to denigrate the minds of others, and to
think of other people as being less intelligent and reasonable
than we are.
 Our condence in our judgment is typically far
greater than the accuracy of our judgment.
At the far end of this spectrum, you have found that we can
actually dehumanize people. Tell us how that happens.
Dehumanization is a scary term, but psychologically speak-
ing, its a simple concept: When you dehumanize someone,
you attribute less fundamental human capacities to them. So,
I might assume that somebody is not quite as intelligent or ra-
tional as I am, or that they cant feel in quite the same sophis-
ticated ways that I can. We see this showing up in political
discourse all the time: People think the other side is irrational
or unreasonable, and this is a dehumanizing perception.
The best way to overcome this is to actually seek out oth-
er peoples perspectives. That is, listen to somebody from the
other side explaining their thoughts and feelings; have them
reveal their thoughts to you directly, through conversation
and interaction.
On that note, youve been quoted as saying that texting is
not the best way to connect with people. What is a better
choice?
The human voice contains a lot of additional information
that is lacking in text: Intonation, pace and pitch all of
which can convey your thinking process while youre speak-
ing. As a result, texting can be dehumanizing.
In our research, people seemed less capable of think-
ing and less human when people read what they had to say,
rather than listening to their voice. I should note that this
happens in cases where people are interacting with folks they
dont know very well; if you already have a strong impression
of someone, presumably, the medium will not have as big an
effect on your impression. But if you dont know anything
about the other person, you want to be connecting in an in-
formation-rich environment where you can get good access
to that persons mind and the best context for that is one
that involves a persons voice.
If the goal is to understand somebody, talking can work
just as well as sitting down with them face to face. If, how-
ever, you are interested in other things like persuading
someone to do something or befriending them those are
different outcomes. In such cases, being face to face will cer-
tainly help.
You have said that being self-aware demands a recogni-
tion that our judgment is wrong more often than we think.
Please discuss the importance of this.
Our confidence in our judgment is typically far greater than
the accuracy of our judgment which is why the key require-
ment for improving in almost every domain of life is the
recognition that you might have something to learn. Rec-
ognizing that we make mistakes is a critical requirement for
adopting strategies that allow us to understand other people.
The humility that comes with this is a key requirement for
continuous improvement. Overconfidence can be a major
impediment to learning.
It is widely believed that we use only about 10 per cent of
our brain. Do you agree?
That is a widely-quoted myth, but rest assured, there are very
few spare neurons in your brain. We use our whole brain in
every waking and sleeping moment of our life. Having
said that, only certain parts of our mental experience are ac-
cessible to us consciously, and most of that has to do with the
end-products of our thinking and feelingthings like expe-
riences of pain or pleasure, feelings of control and strongly
held beliefs. What remains invisible to us are the processes
by which these mental products come to us.
How can we get started on improving our understanding
of others?
You can start by attempting to take the perspective of anoth-
er person and imagining how you would see the world if you
rotmanmagazine.ca / 107
 were in their circumstances. How would I feel if I were living
in poverty? Would I understand this presentation if I were
one of our clients?
The weakness of this approach is that its effectiveness
relies on our ability to imagine another persons perspective
accurately. If your belief about the other sides perspective
is mistaken, carefully considering that perspective will only
magnify the mistakes consequences. This is particularly
likely in conflict, where members of opposing sides tend to
have inaccurate views about each other. Across many stud-
ies, my colleagues and I have found no clear evidence that
perspective taking helps.
We have found that a much better approach is perspec-
tive getting, which means putting the other person in a po-
sition where they can tell you what they think, openly and
honestly. Companies understand their customers better
when they get their perspective directly through conver-
sation, surveys or face-to-face interaction not when ex-
ecutives make guesses from the boardroom. And spouses
understand each other when they are willing to share their
thoughts openly and verify that theyve heard correctly
not when they walk past each other in silence, thinking they
already understand their spouse perfectly.
In the end, other peoples minds will never be an open
book. But in a world of seven billion people where both
your happiness and your economic success depend on your
relationships with others it is hard to imagine a more use-
ful ability to work on than understanding people.
Nicholas Epley is the John Templeton Keller Professor of Behavioural
Science at the University of Chicagos Booth School of Business.
He is the author of Mindwise: How We Understand What Others Think,
Believe, Feel and Want (Borzoi/Alfred A. Knopf, 2014).

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108 / Rotman Management Spring 2017

QUESTIONS FOR Elke Weber, Professor of Psychology and Public Affairs, Princeton University

Q
&A
Evolutionarily speaking, the focus for Homo sapiens is on
the here and now. Describe how the focus of Homo Eco-
nomicus differs.
As the name implies, Homo Economicus is an invention of
economists. The assumption is that, as information proces-
sors and decision-makers, human beings are rational: We
base our decisions on evidence; we evaluate risk and time
in appropriate ways; and we combine all inputs in rational
ways. The problem with that frameworkwhich is certainly
something to aspire to is that human beings simply dont
work that way, at least most of the time.
Because of the way we evolved, we had to make deci-
A professor who has sions in a timely fashion in order to survive to see tomorrow;
and the result is a focus on the here and now. The problem
made it her lifes work is, early in our evolution, we were avoiding threats like
to understand how we predators on a daily basis; but today, the threats we face are
things like climate change. These are very different kinds of
make decisions shares threats, and an approach that served us well in the past does
some of her key findings. not serve us quite so well now.

Interview by Karen Christensen
In a world where we make choices every day, why is it so
important which option we consider rst?
In my time at Columbia, I worked for many years with my
colleague Eric Johnson on Query Theory, a framework that
explains how people actually make decisions across differ-
ent contexts. One key thing we found is, because humans

rotmanmagazine.ca / 109
 Climate change is an example of a behavioural
perfect storm.
SHUTTERSTOCK
Fixing climate change will take decades. The problem
is, humans dont like to pay costs up front.
are finite information processors, we think about things one
at a time.
So, when somebody says, Would you rather buy a new
car or save for your retirement?, you will evaluate those op-
tions one at a time. First, you will ask yourself, What argu-
ments are there for buying the car? and then, What is the
argument for saving for my retirement? This approach
would be fine, if it didnt matter in which order you asked
yourself these questions, but we found that the option you
consider first has a huge advantage.
When you start to think about, What is good about the
first option (buying the car), it temporarily inhibits argu-
ments against buying the car or more generally, arguments
for other options. Then, when you turn to considering the
second option (saving for retirement), those initial argu-
ments are temporarily inhibited, so they have a harder time
coming to the surface. Thats why, all other things being
equal, the first option you look at has such a huge advantage.
Of course, marketers have known this for a long time
which is why they are always so keen to direct our attention
to the option they want us to buy.
110 / Rotman Management Spring 2017
In terms of how people make decisions with respect to
environmental concerns the core of your current re-
searchare you a fan of mandated changes to the status
quo, or choice architecture interventions?
It doesnt have to be either/or. In any complicated context
making decisions about retirement savings, climate change,
or what to eat there is a conflict between doing something
that benefits us now vs. doing something that benefits us in the
future. As indicated, people tend to focus too much on the
here and now, because in simpler times, it was all about sur-
vival; the future didnt matter as much. But these days, as we
live longer, the future does matter: None of us wants to be
obese in 20 years time; we want to have enough money for
a comfortable retirement; and we want to leave the earth in
an inhabitable fashion for future generations. But because of
our in-bred myopia, we cant simply depend on ordinary citi-
zens to make the right decisions intuitively and instinctively.
Both of the options you mentioned mandating chang-
es to the status quo and choice architecture interventions
that nudge people to do what is in their long-term inter-
est are viable ways of helping to overcome human myo-
pia. Of course, the feasibility of mandated change depends
somewhat on the political context. In an environment where
mandated change is not feasible, choice architecture inter-
ventions are certainly a great tool, as peoples autonomy is
not restricted. The research shows that in many cases, nudg-
ing people in the right direction can achieve the same goals
as mandated change.
On that note, both carbon taxes and carbon offsets are
carbon user fees, but the two have very different conno-
tations for people. Please discuss.
This gets us back to Query Theory and the importance of
which option is considered first. The million-dollar ques-
tion is, what determines which option people consider first?
One important answer to that is, the default gets considered
first. That can be a default in the sense that you have been
doing something the same way for a while, or in the sense
that someone is recommending that you do something (like
sign up to be an organ donor) unless you decide otherwise.
Making arguments for the default first makes good sense,
because if youve been doing something for a while, you
probably had a good reason for doing it in the first place; and
if the government is recommending something, they prob-
ably have your best interest in mind.
However, in lots of situations, there is no default to work
with: there are just two or more choice alternatives, and the
question is, what determines which option you consider
first? In these cases, we have found that the surface attrac-
tiveness of the option matters a lot. Something as simple as
whether something has a nice name can determine whether
you consider it first.
A prime example is carbon user fees. One name for
them is carbon offsets, whereby you can travel across the
country and offset the carbon emissions of your flight by
paying a user fee. Ever since these offsets have been in ex-
istence, their uptake has increased each year. People love
them in part because they can fly without feeling guilty. At
the same time, carbon taxes, another name for a carbon user
fee, have been very unpopular in the U.S. A few years ago I
wondered, Are the people who love offsets and those who
hate taxes different people, or are they the same, but react
differently to the two labels?
We decided to study this question, and found that the
answer depended on your political affiliation. When the fee
was described as a carbon offset, 67 per cent of users happily
chose to pay the fee. If it was called a carbon tax, it didnt mat-
ter for the self-described Democrats in the study: They were
just as likely to pay it (67 per cent.); but for self-described Re-
publicans, the uptake went way down from 67 to 27 per cent.
When we looked at which option people considered
first, we found that consistent with Query Theory when
Republicans heard the words carbon tax, they said to them-
selves, I hate taxes, and so immediately looked at the op-
tion without the user fee. But when it was called a carbon
offset the attractive label they considered that option
first, just like the Democrats, and were much more likely to
choose it.
You have said: If we can gure out ways to motivate be-
haviour change in the domain of environmental action,
every other looming social issue will become tractable,
including retirement savings, smoking and obesity.
Please explain.
Thirty years ago, when I started to study decision making
related to climate change, I realized that I was tackling a per-
fect storm, because all of the barriers to making rational de-
cisions apply in this context, and they apply in spades. If you
think about the timeline for fixing climate change, it will
take decades maybe even hundreds of years but may
require significant sacrifices right now. And yet we know
that humans dont like to pay costs up front, especially when
the benefits will only come in the future. We also dont like
to give up comfort, or to give something up for the benefits
of people in faraway places and faraway times. As a result,
we tend to deny the problem or postpone solving it. On top
of all that, there is the collective action problem: What if I
sacrifice today, but the people in China and India dont? My
sacrifice will be in vain.
Other big issues smoking, obesity, or saving for your
retirement face similar challenges, in the sense that the
costs are up front and the benefits come later. I cant have
my pie today, but in the future, I will be healthy, and I might
even live longer. But at least these kinds of decisions are
made for my future self; it is much more challenging to
think about changing the way you live now so that other
people down the road who you will never even meet
will have a decent life. Thats why I believe that if we can
find solutions for the most severe example of a behavioural
perfect storm climate change solutions to the others
will become obvious.
rotmanmagazine.ca / 111
 In terms of the environment, you have said that neither
behavioural or economic solutions in isolation are going
to save us. What will?
There are many different approaches to solutions underway,
and they all have to be applied in parallel. That includes cli-
mate science and knowing when and by how much we have
to reduce our C02 emissions; it includes advances in tech-
nology that create greater energy efficiency and/or different
non-carbon sources of energy; it includes carbon user fees
and encouraging lifestyles that use less energy. We can do
that with taxes and with mandates, so that brings econom-
ics and the government into the equation. The private sector
can play a role by addressing any of these areas; and Psychol-
ogy can play a role alongside Economics, by teaching us how
to present options in ways that make them more attractive to
people. There is no silver bullet, but in combination, these
approaches multiply their power, and they just might get
us there.
ations, people were actually doing better, because they were
not as likely to discount future consequences.
When we delved further, we found that there is another
form of intelligence called crystallized intelligence, which
is the crystal-like residue of our past experiences. You can
think about it as the wisdom that comes with acquiring
knowledge about the world, and it is tested by things like
how well people do on crossword puzzles.
It turns out that crystallized intelligence increases
with age, up to a limit. Once you get into your 80s or 90s,
it also levels off; but up to a pretty high age, it can continue
to increase. And it seems to compensate for our ongoing de-
crease in fluid intelligence. We somehow manage to make
up for the decrease in raw processing power with our stores
of real-world knowledge.

In preparation for the coming Gray Tsunami (where-

by the number of people aged 65 and older worldwide
will double by 2035), you have also studied older adults
nancial decision-making ability. What were your key
ndings?
You are referring to a series of studies that Eric Johnson and
I conducted to explore the effects of aging on decision mak-
ing, as predicted by Query Theory. I explained earlier that in
Query Theory, inhibition plays a large role: when you think
about what is good about Option A the first option that you
consider you temporarily inhibit arguments for all other
options. And we know that as people grow older, they have a
harder time recovering from inhibition. So, we hypothesized
that as people get older, they might actually start to make
more inconsistent decisions as they consider different op-
tions first.
Our findings surprised us: It turns out that, as we get
older, we do not make more inconsistent or worse decisions.
We were puzzled as to how that could be. The reason people
get worse at recovering from inhibition has to do with some-
Elke Weber is a Professor of Psychology and Public Affairs at Princeton
thing called fluid intelligence. This is the raw power of our University, where she holds the Gerhard R. Andlinger Professorship in
brains. As we get older, our neurons just dont fire as quickly Energy & the Environment. Previously, she was Co-Director of Colum-
and we have a harder time with things like following logic. bia Universitys Earth Institutes Centre for Research on Environmental
Decisions and its Centre for Decision Sciences. Her papers, The Global
We tested our respondents for these things and found that, Climate Regime: Explaining Lagging Reform and Complementary
yes, they were getting worse on fluid intelligence as they got Cognitive Capabilities, Economic Decision-Making, and Aging can be
older, but their decisions didnt look any worse. In some situ- downloaded online.

112 / Rotman Management Spring 2017

QUESTIONS FOR Varun Gauri, Senior Economist, The World Bank

Q
&A The World Bank is now
using behavioural insights
to tackle wicked problems.
The World Banks Global INsights Initiative (GINI) was
formed to put the key ndings of your World Development
Report into practice. Please summarize those ndings.
The main message that came out of that report was that de-
velopment policy is due for a redesign, based on a more re-
alistic understanding of how people think, behave and make
decisions.
In contrast to the rational model whereby people have
unlimited computational power to make rational decisions
on the basis of consistent and self-interested preferences
and explicit information realistic thinking is very differ-
ent. It relies on three principles: We usually think automati-
Interview by Nina Maar cally and fast; we are highly influenced by our environment
and by social norms; and explicit and implicit information
derived from our worldviews (i.e. mental models) affect how
we interpret information and make decisions. In the report,
we emphasized that everyone thinks this way not only end
users and consumers, but policy makers, heads of compa-
nies, and even heads of state.
Put simply, decision making is highly contextual.
You might typically assume that if you raise the price of

rotmanmagazine.ca / 113
 Development policy is due for a redesign, based on
a more realistic understanding of how people think.
something by 10 per cent, people will demand less of
it and supply will increase; but when you make some-
thing 10 per cent more salient in an interaction, depend-
ing on the environment, a wide variety of things can
happen. Thats why it is so important to understand the
decision-making context.
Why are insights from behavioural science so well suited
to the policy realm?
Because every policy relies on explicit and implicit as-
sumptions about how people make decisions and why they
do what they do. As indicated, most of those assumptions
rely on the rational, idealized model of how people think.
By embracing behavioural insights, we can redesign pub-
lic policies using new tools, including choice architecture;
social rewards and recognition; the way information is pre-
sented; and activating new social norms.
Your goal is to incorporate behavioural insights into some
of the World Banks work. How are you going about this?
We have three main criteria for selecting projects. The first
is, do they address an important developmental challenge?
Areas that address basic human rights are given high prior-
ity. Second, is the initiative owned by the World Bank, or a
development partner? That is really important for sustain-
ability and ensuring a long-term impact. Then finally, can
the intervention be evaluated? At this stage of our work,
its really important to show that were having an impact,
so we look for projects where we can provide some form of
evaluation.
So far, our main areas of work are in tax compliance,
digital finance and savings, education, gender norms and
organizational effectiveness.
Why is this extra work necessary?
Because time and again, we find that people have a very hard
time following through on their commitments. We might
114 / Rotman Management Spring 2017
want to save more, lose weight, or stop smoking, but we just
cant follow through because we overvalue the present and
the willpower exertion is too large. Governments often of-
fer programs from conditional cash transfers to health and
education programs and are shocked when people dont
take them up on it. This happens a lot, particularly in the
poorest environments. The question is, why? One reason is
that availing yourself of such programs requires effort and
takes time. Even though in the long run, it makes sense to
take advantage of the program, in the short run, people may
not have the bandwidth to do it.
As a result, all people rich and poor alike some-
times make choices that dont promote their own well-being.
People may also get stuck in habits, succumb to inertia, and
repeatedly procrastinate despite intentions to do otherwise.
There was a study in Morocco in which the government
was providing a credit subsidy for a water hookup. Water
availability is a big problem there: people spend seven to
nine hours each week collecting water, and it is often the
women doing the work. Yet, people werent signing up for
the program. The researchers found that the problem was
the hassle factor making time to sign up for the pro-
gram. So, they decided to go directly to peoples homes
and get the necessary documentation, and they brought
it to the municipality. The result: the sign up rate went up
from a baseline of 10 per cent to 69 per cent! The implica-
tion is that making things easier for people can have a huge
impact.
Should governments be getting involved in shaping indi-
vidual choices?
I believe they should, for three reasons. First, doing so helps
people obtain their own goals. Reminders to save money
or take medicine help people achieve objectives that they
themselves have set. Research shows that commitment
contracts, which markets under-provide, can reinforce
decisions to adopt beneficial behaviours. Matching the
 People dont respond to incentives plainly: We respond
to incentives as they are represented in our own minds.
timing of social transfers to the timing of charges for school
enrollment, or making it easier to buy fertilizer at harvest
time when cash is at hand, helps to overcome intention-to-
action divides for people who may be forgetful or possess
insufficient willpower (that is to say, most of us). Many devel-
opment policies that operate at the boundary of Economics
and Psychology can be understood in these terms.
Second, because decision making is often based on
only the most accessible and salient information and is
also influenced by subtle social pressures and existing men-
tal models peoples preferences and immediate aims do
not always advance their own interests. Individuals might
choose differently, in ways more consistent with their high-
est aspirations, if they had more time and scope for reflec-
tion. The assumption that we always make choices that pro-
mote our own interests often a fundamental benchmark
for policy analysisis misguided. But if decision makers do
at times require assistance, what guidelines are to be used
for the policy interventions aimed at shaping choice? We be-
lieve that governments should focus on the most important
freedoms, and in the development context, those include
freedom from poverty, disease, and oppression.
Third, socially-reinforced practices can block choices
that promote well-being and prevent individuals from even
conceiving of certain courses of action. Our Report argues
that social interdependence and shared mental models af-
fect choices, sometimes creating traps for communities and
individuals, including low trust, ethnic prejudice, and gen-
der discrimination.
You believe that behaviourally-informed approaches
and traditional economic interventions can be comple-
mentaryand that some of the biggest payoffs emerge
from adapting traditional interventions. Please walk us
through this.
Traditional interventions usually take two forms: incentives
and education/information. Incentives usually take the form
of changing prices in some way, or changing penalties asso-
ciated with rules. The key idea is that people dont respond
to incentives plainly: they respond to incentives as they are
represented in their own minds. Sometimes, they forget
about the consequences of a certain behaviour and pay little
attention to it; or they might miscalculate the probabilities
associated with a penalty. This provides scope for chang-
ing interventions that highlight penalties. For instance, in
the tax compliance domain, people know that theres a pen-
alty for non-payment, but if you highlight this fact, it might
change how they behave. If you think about it, virtually all
information can be made more salient, more timely and
easier to understand.
How can leaders know if behavioural insights apply to a
particular project?
They would need to think through a few things. First, are
individuals aware of what they need to do, but unable to
accomplish it, or does a desired behaviour need to be acti-
vated? Second, are individuals motivated enough to nudge
themselves? Third, will more deliberation lead people to un-
dertake the desired behaviour, or are they already suffering
cognitive overload? And fourth, is the desired action not be-
ing accomplished because of a competing action, or due to
inertia? Consequently, should you aim to discourage a com-
peting action or encourage a target action?
GINI has developed a ve-step process to using behav-
ioural insights (see page 116). Which step have you found
to be the most challenging?
The most challenging is probably learning from piloting an
intervention (the fifth and last step), because time is always
short for policymakers and they tend to want things done
very fast. Carving out time for a pilot, especially one that has
learning embedded into it, requires a mindset change. We
have found it challenging to make the case to policymakers
about the importance of this step.
rotmanmagazine.ca / 115

The problem is, policymakers are often looking for off-
the-shelf solutions, in the way that economists might ad-
vise them to raise the price of something by five per cent.
Done. They dont quite realize that if you are going to walk
down this road of believing that decision making is highly
contextual, you need to take the time to make sure you get
your intervention right. Maybe someday well be able to give
a quick prescription like, Make this information 10 per cent
more salient; but were not there yet.
Also, the target behaviour (step 2) needs to be very pre-
cise. It should not be decomposable into other constituent
behaviours. For example, increasing retirement savings of a
household is general and could be decomposed into precise
behaviours such as opening a new retirement account, set-
ting aside more money each month, reducing spending on
discretionary items, etc. The behaviour should also be eas-
ily observable.
Describe some of the complex issues you are currently
tackling.
We are finding that a richer understanding of why people
save, use preventive health care, work hard, learn and con-
serve energy can provide a basis for innovative and often
very cost-effective policies and development interventions.
At the moment, we have a few projects on increas-
ing womens participation in economic and social life. In
Jordan, were doing a very long pilot. Rather than going right
to an intervention, were trying to understand how social
norms influence womens decisions about whether to join
the labour force, participate in public life, and open a bank
account.
We started out with a survey that asks households
men and women about how they perceive social norms
in this area, what they think other people do and what they
think other people think they should do. Were also looking
at implicit biases, to see whether these affect decision mak-
ing on the part of women as they decide whether or not to
join the workforce. Were taking a long time to do this, be-
cause we want to really understand whether our interven-
tions should target social norms, the stories people tell about
themselves or implicit biases.
116 / Rotman Management Spring 2017
Five Steps for Implementing Behavioural
Insights at the World Bank
1. The Framework
Define the development objective.
2. The Desired Behavioural Change
Identify a specific target behaviour that needs to
change to reach the development objective.
3. Context & Analysis
Identify the stages of the current and desired decision-
making process as well as potential bottlenecks that
keep people from behaving in a better way.
4. The Intervention
Describe the solution to reach your development
objective
5. Learning
Pilot and document the effectiveness of your
intervention.
Looking ahead, how do you see the GINI initiative evolving?
Our aim is to start using behavioural insights to address
some of the worlds biggest problems. What we need to do,
therefore, is remain relevant to policymakers by working
with them to enable quick wins. For example, we can help
them collect more revenues through taxes relatively quickly,
or reduce energy consumption with changes in messaging.
We are truly understanding more about influencing peoples
behaviour every day.
Varun Gauri is Head of the Global Insights Initiative (GINI) and Senior
Economist in the Development Economics Vice Presidency of the
World Bank. He serves on the editorial boards of the journals Behavioural
Public Policy and Health and Human Rights, the World Economic Forum
Council on Behaviour and the Advisory Board of Academics
Stand Against Poverty.
Nina Maar is an Associate Professor of Marketing at the Rotman
School of Management and Co-Director of Behavioural Economics
in Action @ Rotman (BEAR). She is on leave from the School until
November of 2017 to serve as a Senior Behavioural Scientist for
the Global INsights Initiative (GINI) at the World Bank.
QUESTIONS FOR James Bettman, Professor of Marketing, Duke University

Q
&A A consumer behaviour
research pioneer
discusses some of his
most important findings.
You have found that people dont always have well-de-
ned preferencesand that we often make up the rules
for a decision on the spot. Describe how this works.
When people make choices, they dont simply refer to a
master list of preferences in their memory, or some pre-
existing choice algorithm. They use a wide variety of ap-
proaches and rules-of-thumb and my colleagues and I
found that these are often developed on the spot. We came
up with the constructive process view of decision making,
which states that individuals often build strategies opportu-
nistically, changing their processing on the spot depending
upon the information they encounter during the course of
Interview by Karen Christensen
solving the decision problem.
At the time, we realized that, if people are making
things up as they go along, and if as many studies had
shown the information that is most salient or noticeable
in an environment is what gets peoples attention, these are
very significant findings for marketers. There are endless
ways to embrace these insights, whether it means that you

rotmanmagazine.ca / 117

SHUTTERSTOCK
Shoppers want to be able to compare your product to
its competitors and as a result, you should make that
easy to do.
make part of your message appear in larger print or that you
ensure your brand is placed next to a well-known competi-
tor, so people can make comparisons (assuming that those
comparisons would be favourable to you). Making salience
work for you varies depending on the environment, and
how information is displayed in that environment. A general
principle is to try to use the package, ads, information dis-
plays or other factors under your control to make processing
that is favourable to your product easy to do.
Of course, in some cases, people do have well-articulat-
ed preferences. This usually occurs when they are familiar
and experienced with the product involved, and a more tra-
ditional, rational choice theory may be applicable in these
situations. But I have found that, even in such cases, contex-
tual factors often intrude.
118 / Rotman Management Spring 2017
Talk a bit more about the importance of the decision-
making context.
The notion is, if the context matters so much and re-
search indicates that it does then when you are doing any
kind of market research, you should start by studying the
context. Then, you need to match the context that consum-
ers will face as best you can to your product or service
design. This is what we call context matching.
Lets say you produce a gourmet coffee product, but
there is nothing systematic about where it appears with
respect to competing products. That is a lost opportunity.
You need to look into the real-world environment of the
brick-and-mortar store. You cant ignore it. Furthermore,
if people often make decisions on the spot, and if they will
process whatever information is the easiest to grasp in that
situation, then, as noted above, you need to make informa-
tion that is favourable to your brand very easy to process.
For example, suppose youve cut the sodium in your
soup by 10 per cent. You can say on the package that its 10
per cent lower in sodium, but you havent made it easier for
people to find out what they really want to know which is,
how does your soup compare to its competitors? To address
this, you might put an image of a table with a few bowls of
soup on the package that shows how your brand compares
to others. This way, you dont have to worry about how
close your product is placed to other brands in the store.
Talk a bit about how our identity is tied to the brands we
consume.
Whether its the clothing you wear, the kind of car you drive
or the music you listen to, all of these things send signals
to other people about your identity. Brands become linked
to our identity when they are able to help us achieve goals.
For example, brands can be used to meet self-expression
needs, publicly or privately; they can serve as tools for so-
cial integration or for connecting us to the past; and they
 Whether its the clothing you wear, the kind of car
you drive or the music you listen to, all of these things
send signals to other people about your identity.

may act as symbols of personal accomplishment, provide
self-esteem, allow one to differentiate oneself and express
individuality, and help people through life transitions.
Some products, like paper towels, are used in a very
utilitarian fashion: People only care about how they function.
But, other products have meaning far beyond their utilitar-
ian aspects. Smartphones, for instance, have meaning above
and beyond the device itself: There is meaning attached to
whether you use Apple or, say, Samsung products.
What is a symbolic brand?
These are brands that are better able than others to com-
municate something about the person using them. For ex-
ample, research shows that publicly consumed (vs. private-
ly consumed) and luxury (vs. necessity) products are best at
conveying symbolic meaning about an individual.
Meanwhile, brands that are very popular and used by
many different types of people (e.g., a Honda Civic, one of
the best-selling cars in North America) may not commu-
nicate specific associations about the person who uses it.
How do reference groups inuence our consumption?
A big part of our relationship with brands is based on who
else uses those products. Your readers might remember
those Apple advertisements from a few years back, featur-
ing the characters Mac and PC, and focusing on humor- are holding 51 pounds vs. 50.
ous stereotypes of what each user was like. Basically, if you
use that product, the image of the prototypical user associ-
ated with that product is going to be associated with you;
so, the question becomes, Is this products image consis-
tent with who I am?
If the prototypical user for a brand matches the kind of
person you think you are or aspire to be you are much
more likely to connect to that brand. On the other hand, if
the prototypical user does not indicate anything about who
you are, you will avoid it.
In your early research, you found that consumers are sys-
tematically biased in their concept of time. Please explain.
Unlike robots, human decision makers face limitations in
their capacity for processing information, have limited com-
putational abilities and are subject to a wide array of biases.
Our concept of time is one aspect of this, and it leads to two
categories of time: objective time and subjective time.
Objective time is time that can be accurately measured
with a calendar or a stopwatch. But subjective time is very
different. We humans are notoriously poor at judging time.
In our studies, we asked people, If you had to wait one week
for Product X, how long would that seem to you? Then we
asked, How long would three weeks seem? We found that in
consumers minds, three weeks time is actually much less
than three times what one week feels like. The implications
of this are significant, because people are often willing to
trade off receiving a benefit in the future, vs. getting some-
thing with a lesser benefit right now.
Tell us how the economic concept of diminishing marginal
returns relates to consumer behaviour.
If I give you a two pound weight to hold, and then add one
pound to it, you can easily tell me that the second load is
heavier. But if I give you a 50-pound weight and then add
one pound to it, it will be much harder for you to tell that you
If we created a graph of your subjective feeling of
weight, versus the objective weight, the subjective feeling
would go up more steeply in the beginning because you
can tell the difference when the initial weight is low; but as
you get to higher amounts of weight, your perception of that
incremental change gets smaller and smaller, and it kind of
flattens out at a certain point.
We have found the same effect with time: One week
more time waiting for something seems like really a big deal
for something where the normal wait time is two weeks

rotmanmagazine.ca / 119
 Academics have started to consider how their research
can help consumers lead better, healthier lives.

but is not a big deal for something where the normal wait ad (Think of how proud youll be to have made a differ-
time is twelve weeks. ence); we found that the latter actually makes people less
likely to want to donate to distant causes.
Recently, youve been studying pro-social consumption. To me, the most fascinating aspect of human decision-
How do you dene it? making behaviour is the flexibility and dynamism with
In the past couple of decades, researchers have started to which people respond to a wide variety of different environ-
look beyond how this research can help marketers to con- mental conditions. Even very minor changes in a decision
sider how consumer research can help people lead better, environment can affect peoples choices. The issue is, if our
healthier lives. I would define pro-social consumption as preferences are affected by subtle changes in the presenta-
consumption based on the notion that buying or consum- tion of information, decision makers become vulnerable to
ing this product will have positive consequences for others. strategic manipulation and they should always be aware
That can range from making a donation to a cause to buying of that.
an environmentally-friendly product.
My colleagues and I have looked at the effects of dif-
ferent forms of positive emotions on pro-social behaviours.
Most academics study negative emotions because they are
more differentiated. Anger is clearly quite different from
fear, which is clearly different from sadness, and so on; on
the other hand, positive emotions tend to get bunched to-
gether, but we felt that distinct positive emotions could also
be differentiated and that they might affect behaviour in dif-
ferent ways.
We looked at how the presence of emotions like love,
hope, pride and compassion in messaging are related to
things like donating to a charity. We had a theory, namely
that the important way in which these emotions differ is the
degree to which they relate to how closely you connect with
others. Love, for example, is all about connection; while pride
is more about me and how I am separated from others.
We found that, if you ask people whether they want to
help someone who is located close to them (for instance,
someone who lives in their city), most people say Yes. And,
if you make the person feel good about themselves, they are
even more likely to say Yes. Its when you ask them to help
with a cause that is not physically close to them that the posi-
tive emotion you choose to invoke makes a difference.
For instance, we found that love is much more effective
James R. Bettman is the Burlington Industries Professor of Business
at getting people to donate to causes that are more psycho-
Administration, a member of the Marketing area at the Fuqua School of
logically distant. You can imagine either a love-focused ad Business and Professor of Psychology and Neuroscience at Duke
(i.e. showing a father hugging his child) or a pride-focused University. Most of his papers can be downloaded online.

120 / Rotman Management Spring 2017

FACULTY FOCUS Avni Shah, Assistant Professor of Marketing, University of Toronto Scarborough
Promoting
Healthy Eating
AROUND THE WORLD, many countries are
facing an obesity epidemic. In the U.S.
alone, obesity rates have more than dou-
bled in the past two decades, to a preva-
lence rate greater than 20 per cent; and
the Canadian rate is virtually the same.
Although obesity is a multifaceted disease, increased con-
sumption of unhealthy food and beverages is a major driver.
Experts contend that large-scale interventions are
required to dissuade people from eating unhealthy food
particularly in restaurant settings, where we are consuming
an increasing proportion of our calories: Food eaten outside
of the home accounted for 34 per cent of the food budget in
1970. By the late 1990s, that number had increased to 47
per cent, and it is still growing. As a result, experts have pro-
posed initiatives to address unhealthy choices in restaurants.
Some government policies have already attempted
to eliminate unhealthy choices by banning unhealthy in-
gredients such as trans fats and sugary beverages; others
have focused on gentler nudges to improve individual food
choices, such as adding more extensive nutrition labeling
on food packaging.
Between the bans and the nudges lie two other promis-
ing approaches:
1. Applying a surcharge (i.e. a sin tax) on less-healthy
foods; and
2. Attaching an unhealthy label to these foods.
In recent research conducted with Duke Universitys James
Bettman, Peter Ubel and Julie Edell and Dartmouths
Punam Anand Keller, we found that the best way to cur-
tail the consumption of unhealthy food is to use both an un-
healthy label and a surcharge. When combined, we call this
an unhealthy surcharge. Before delving further into our
findings, lets take a look at the effect of sin taxes and label-
ing on their own.
Sin taxes on products like tobacco, alcohol and gaso-
line are intended to influence behaviour through a tradi-
tional economic mechanism: The higher price is designed
to reduce demand. There is some evidence that surcharges
actually reduce unhealthy consumption: Sin taxes on ciga-
rettes have been cited as one of the major drivers of sub-
stantially-reduced smoking rates; five-cent shopping bag
fees decreased the fraction of customers using disposable
rotmanmagazine.ca / 121
 People often believe that if they work hard,
they have earned the right to indulge.
Almost half of our meals are now eaten in restaurants.
bags; and price increases in gasoline have led consum-
ers to substitute more fuel-efficient vehicles and encour-
aged automakers to manufacture new vehicles with better
fuel economy.
Would a surcharge on unhealthy foods work as well as
these other sin taxes? In contrast to other types of sin tax-
es, we felt that a tax for less-healthy food might not func-
tion in a straightforward economic manner. For example,
people may believe that higher-quality foods cost more or
are more special, thereby increasing the demand for un-
healthy meals that have been taxed. In addition, some peo-
ple may perceive the higher price to be a sign of healthiness
or freshness rather than as a surcharge on unhealthiness.
Similar to price surcharges, we felt that unhealthy la-
bels on their own would have complex effects, because peo-
ple may use food labels to signal identities that they would
122 / Rotman Management Spring 2017
like to portray. For instance, gender stereotypes can signifi-
cantly affect the preference for healthy vs. unhealthy foods.
Research shows that a preference for healthier foods is rat-
ed as more feminine and less masculine; and that women
are regarded as more attractive when they eat fewer calo-
ries. However, unhealthy labels could backfire for men
for whom eating high-fat foods is associated with masculin-
ity, whereas healthy eating is perceived as wimpy.
Men have also been shown to be less inclined to choose
products that are associated with women, and this effect is
magnified in public settings. Therefore, an unhealthy label
could actually encourage men to choose these items par-
ticularly if they are eating with other men.
We also felt that the selection of unhealthy food might
reflect a temporary goal state. For example, unhealthy prod-
ucts tend to be preferred when a hedonic (i.e. pleasure) goal
is salient. Because unhealthy products are often perceived
as tastier, people often believe that if they work hard, they
have earned the right to indulge. Thus, an unhealthy label
could be construed as a sign of true indulgence and may ac-
tually encourage consumption.
We hypothesized that men would be more sensitive
to price increases when dining alone, but that a price in-
crease may not decrease unhealthy food consumption for
men when they are dining with others. We also expected
that an unhealthy label alone might backfire for men.
For women, we expected that an unhealthy label would
be more potent than a price surcharge. However, we ex-
pected that the combined effect of a price surcharge and
an unhealthy label (i.e., an unhealthy surcharge) would
be effective in reducing unhealthy choices for both men
and women.
As expected, we found significant gender effects: Men
significantly reduced unhealthy food choice when a simple
surcharge was added to unhealthy items, compared with
 In our study, adding an unhealthy surcharge resulted in a
37 per cent decrease in demand for unhealthy products.
women and compared with no intervention. But compared
with the no intervention condition, both men and women
significantly decreased unhealthy food choice when our un-
healthy surcharge was added with women reducing de-
mand significantly more than men. Finally, compared with
no intervention, women significantly reduced unhealthy
food choice when just a label was added to unhealthy items.
Across two experiments, we found that adding an
unhealthy surcharge both an unhealthy label and a sur-
charge significantly reduced the demand for unhealthy
food compared with a surcharge, unhealthy label, calo-
rie and fat information, or no intervention at all. Overall,
adding the unhealthy surcharge resulted in a 37 per cent
decrease in demand for unhealthy products compared
with the no intervention menu, and the proportion or
subjects ordering an unhealthy entre item reduced from
47 to 29 per cent.
There was also a significant three-way interaction be-
tween dining partner, gender and surcharge condition:
When a surcharge alone was added, men who imagined
eating alone significantly reduced demand for unhealthy
food compared with a no-intervention menu. In contrast,
men who imagined eating with a male friend did not sig-
nificantly reduce demand when a surcharge was added.
Women showed the opposite pattern: When eating alone, a
surcharge did not significantly affect demand for unhealthy
food compared with the no intervention condition; how-
ever, women who imagined eating with a female friend sig-
nificantly reduced demand when a surcharge was added.
Consistent with our main hypothesis, adding an unhealthy
surcharge significantly reduced demand compared with no
intervention for both men and women.
In a third experiment, restaurant tables with a higher
proportion of men than women significantly increased the
percentage of unhealthy entre items ordered from a menu
with an unhealthy label, compared with tables that had an
equal number of men and women. In contrast, tables with a
higher proportion of women significantly decreased the per-
centage of unhealthy entre items ordered compared with
tables with an equal number of men and women. This third
experiment demonstrates that although an unhealthy label
on its own reduces unhealthy choices in some cases, it may
actually have the aforementioned backlash effect among
men who may view the unhealthy label as a positive iden-
tity signal.
Across three studies, having an intervention that con-
tained both a surcharge and an unhealthy label was most
effective in significantly reducing demand for unhealthy
food among both men and women. However, the reasons
for its effectiveness may differ by gender, with men reacting
against a price increase specifically linked to healthiness and
women responding to the unhealthy label.
Our research contributes to the understanding of how
gender and gender stereotypes affect preferences for un-
healthy and healthy food. When the social impact of a choice
is more strongly felt (i.e., by making gender salient or dining
in a social setting), an unhealthy label may lead people to
make choices consistent with those stereotypes.
However, coupling the unhealthy label with a price
surcharge enables people to react not only to stereotypes
associated with eating behaviour, but also to the perceived
fairness associated with imposing a surcharge on just un-
healthy items.
Our research also demonstrates that peoples choices
may vary considerably depending on with whom they are
dining. More research is needed to examine how specific
characteristics of a persons dining companions (e.g., num-
ber, gender, relationship closeness and type (romantic or
platonic) affect how successful various interventions are in
curtailing unhealthy eating.
rotmanmagazine.ca / 123
 In closing
Marketers and managers alike stand to benefit from under-
standing how financial disincentives and unhealthy labels
influence consumer behaviour. Another promising finding
is that despite making the inclusion of a price hike due to
a meal being unhealthy more salient to consumers, diners
ratings of meal enjoyment and likelihood to return remained
unaffected, across conditions.
Our results provide guidelines for policymakers consid-
ering the use of behavioural economics and social market-
ing to enhance individual and collective well-being. If the
goal is to reduce demand for unhealthy products, the most
effective method across our studies was an unhealthy sur-
charge approach, which entails both a financial disincentive
and an unhealthy food label.
It is important to remember that governments are likely
to face resistance from businesses that may lose profits from
lower demand for higher-priced unhealthy menu items.
However, our results indicate that these losses may be com-
pensated by increased loyalty to the restaurant, due to a
WELCOME TO
YOUR GLOBAL CAMPUS
124 / Rotman Management Spring 2017
sense of its greater concern for customers.
Going forward, one way to meet both profit and health
goals might be to encourage customers to select at least one
healthy item in order to get a price break. Another option
might be to implement our unhealthy surcharge for a short
period (e.g., three months) to help consumers break their
unhealthy habits.
Avni Shah is an Assistant Professor of Marketing at the University of
Toronto, Scarboroughs Department of Management and a Research Fel-
low of Behavioural Economics in Action at Rotman (BEAR). Her paper,
Surcharges Plus Unhealthy Labels Reduce Demand for Unhealthy
Menu Items, written with James Bettman, Peter Ubel, Punam Anand
Keller, Julie A. Edell, was published in the Journal of Marketing Research.
Rotman faculty research is ranked #3 globally by the Financial
Times.
ROTMANS OMNIUM
GLOBAL EXECUTIVE MBA
at the University of Toronto
www.RotmanGEMBA.com
18 MONTHS, 5 CONTINENTS, 1 CAREER TRANSFORMATION
POINT OF VIEW Antonio Nieto-Rodriguez, GlaxoSmithKline/Duke University
Get Your Priorities
Straight: The Hierarchy
of Purpose
Prioritizing is usually seen as an individ-
ual skill that some are good at, others not
so much. We prioritize whenever we think
about how we will spend our time today,
this week, this month or this year. But
the fact is, prioritizing is also a key orga-
nizational capability. Indeed, how and why organizations
prioritize their activities is vital to their success. Yet, surpris-
ingly, this is one of the least understood and most neglected
areas of organizational life.
The word priority appears in the English language as
early as the 14th century. The Merriam Webster dictionary
defines it as, what matters most. In organizational terms,
prioritization sets the agenda in terms of what really matters,
which is reflected in how resources are allocated especial-
ly the scarcest resources: Time and money.
Based on 20-plus years of executive experience with
large corporations including GlaxoSmithKline and Price-
waterhouseCoopers, I have found that one of the main
reasons companies fail in this area is that they lack a clear
sense of what is truly urgent and simply select the wrong pri-
orities. The results can be calamitous, as evidenced by two
classic corporate failures of recent times.
In the case of Kodak, it wasnt that it didnt foresee
the rise of digital photography, but that it chose to prioritize
the wrong things. In the 1990s, Kodak invested billions of
dollars into developing technology for taking photographs
using mobile phones and other digital devices. But in a clas-
sic case of Clay Christensens innovators dilemma, it held
back from developing digital cameras for the mass market,
because it feared that it would cannibalize its all-important
film business. Meanwhile, the Japanese company Canon
recognized the strategic priority presented by digital pho-
tography and rushed in.
Similarly, Finnish company Nokia developed the tech-
nology for smartphones earlier than most of its competitors
yet it decided not to launch projects in this field and in-
stead, prioritized the exploitation of existing products. If it
had chosen different priorities, Nokia might still be one of
the leading telecom operators in the world.
If an executive team doesnt clearly prioritize, middle
management and employees will do so, based on what they
think is best for the organization. At first, this might appear
to be a good practice: empowering people to make decisions
is something that has been heralded since the times of Peter
Drucker. The key is to have a clearly prioritized set of strate-
gic objectives to work from.
To illustrate, lets look at a real-life example. Sam
worked as a teller in a local bank, serving customers. He
loved his job. His father had also spent his entire career in
the same bank. But like many other banks, this one was
struggling to survive due to low interest rates, increased
competition and the burden of cumbersome regulation.
The executive team worked for months to identify a new
rotmanmagazine.ca / 125
 If executives dont clearly prioritize, middle management and em-
ployees will do so themselves, based on what they think is important.

important, but he had to make a decision. As did all the

other bank tellers, every single day.
The executive team thought that it had clearly com-
municated its strategic objectives, but in fact, it had cre-
ated an operational dilemma. The result: The banks
performance didnt improve and many employees who
worked hard to implement the new strategy were let go.
As this example indicates, all too often, there is a gap and
lack of alignment between corporate strategic objectives
and those of different business units and departments.
SHUTTERSTOCK

To address the challenges of prioritization that I have

confronted throughout my career, I have developed a sim-
ple framework called the Hierarchy of Purpose. Following
are its five principles.
LEGO, Amazon, IKEA and Apple are examples of
companies with a highly-developed sense of priorities.
strategy that would help to turn the bank around even-
tually identifying two strategic priorities that they believed
would secure its future.
In a series of townhall meetings, the CEO informed
staff Sam included that the new strategy was based on
two priorities: 1) improve the customer experience, increas-
ing satisfaction by 20 per cent; and 2) increase efficiency by
serving 20 per cent more customers per day. The message
was crystal clear: As long as Sam and his colleagues stayed
focused and met the two strategic priorities, the banks
future and their jobs were assured.
The following day, Sam was extra motivated, after hear-
ing his CEO say that the company he cared so much about
was, basically, in his hands. He kept in mind the two strate-
gic objectives and started to serve customers as efficiently
as possible. That worked fine, until a customer started to
talk about a personal loss and the terrible situation he was
going through. He clearly wanted to talk with Sam, who was
initially pleased with the idea as it would significantly in-
crease customer satisfaction. However, after a few sec-
onds, Sam froze.
What about the second strategic objective, efficiency?
If he spent a few extra minutes talking with this custom-
er, his client-servicing rate would suffer. What should he
do? He didnt know for certain which objective was more
1. PURPOSE: Vision and mission are often used inter-
changeably, and their key differences are not well
understood. The sad result: staff dont know what
really matters. My advice: Use the term purpose in-
stead: State the purpose of your organization and
the strategic vision supporting it. The purpose must
be crystal clear and understood by everyone. Ama-
zons purpose to be earths most customer-centric
company is clear, compelling and eliminates any
ambiguity.
2. PRIORITIES: The number of priorities an organization
sets is revealing. If the risk appetite of the executive
team is low, they will tend to have a large number of
priorities; they dont want to take the risk of not hav-
ing the latest technology, missing a market opportu-
nity, and so forth. On the other hand, if the executives
are risk takers, they tend to have a laser-like focus on
a very small number of priorities. They know what
matters, today and tomorrow. My advice: Define the
priorities that matter most to your organization, now
and in the future. Take the example of Amazon: Their
purpose clearly puts the customer at the centre. As
opposed to Sam, everyone working at Amazon knows
what to do when they have to make a decision.
3. PROJECTS: Nowadays, companies have a large num-
ber of projects running in parallel, mostly because
it is easier to start projects than to finish them. Very

126 / Rotman Management Spring 2017

 Amazons purpose, to be earths most customer-centric
company is clear, compelling and eliminates any ambiguity.
often capacity, and not strategy, determines the launch
of projects. If people are available, the project is
launched. If not, it is dismissed. By using the answers
to the first two points of the hierarchy of purpose, ex-
ecutives can identify which are the strategic initiatives
and projects that align best with their purpose and
priorities. It also helps to identify projects that should
be scrapped. My advice: Although some theorists sug-
gest developing formulas that automate the process of
prioritizing and selecting ideas, my recommendation
is not to use such a systematic approach. The ultimate
decision has to be made by senior management, based
on human judgment and intelligence.
4. PEOPLE: Large organizations are made up of individu-
als with their own strong sense of what matters. In
most cases, these are by their nature self-serving, in-
formed as much by personal ambition and aspiration,
as by any sense of alignment with the organizations
strategy. Yet, as shown in the example with Sam, em-
ployees are the ones performing the day-to-day busi-
ness activities and delivering on projects. As a result,
they have to make many minor decisions and trade-
offs every day. Creating clarity around your priorities
will ensure that every employee works in the same di-
rection. My advice: It is important to allocate the best
resources to the most strategic projects and to liberate
them from day-to-day operational tasks. Projects are
delivered more successfully when they have a fully
dedicated team and a strong, committed and proac-
tive sponsor.
5. PERFORMANCE: Project metrics tend to measure inputs
(scope, cost, time) instead of outputs. Inputs are much
easier to track than outputs (such as benefits, impact
and goals). Identify indicators linked to your orga-
nizations priorities, and to the outcomes expected
from the selected projects. My advice: Less is more
in this case: One or two for each area will do the job.
It is better if people can remember at all times how
performance will be measured. Finally, management
should have the right information to quickly react
to market changes and to supervise the pipeline of
new priorities.
In closing
Think of your organizations purpose and priorities. Are all
of your employees working according to those priorities?
Are their activities prioritized to align with the best interests
of the organization as a whole? How would your priorities
change in case of a sudden economic downturn?
One of the main hidden benefits I see whenever I carry
out the first round of prioritization with top management is
that the discussion turns into a very interesting strategic dia-
logue. For example, the CEO might ask the director of sales,
How are we going to meet that international growth target
if currently, we only invest in existing markets? Is this sus-
tainable in the long term? What would be the consequences
of balancing our portfolio and investing more in growth and
cost optimization, and less in compliance?
Among the organizations I have worked withand
others such as Apple, Amazon, Lego, IKEA and Western
Union, all of which have a highly-developed sense of priori-
tiesthe payoffs of a hierarchical approach to priorities are
clear: they can result in significant cost reductions, as prior-
ity activities that fail to deliver against clearly-articulated
measures will be stopped; there is potential to reduce dupli-
cation, consolidate activities and decrease budget overruns;
and there is increased alignment and focus around strategic
priorities. Most importantly, the firm as a whole will shift to
an execution mindset and culture.
Antonio Nieto-Rodriguez is Director of the Program Management
Office at GlaxoSmithKline Vaccines and Chairman of the Project
Management Institute. He is author of The Focused Organization: How
Concentrating on a Few Key Initiatives Can Dramatically Improve Strategy
Execution (Routledge, 2012) and is a visiting professor at Duke Univer-
sitys and Spains Instituto de Empresa, among others. He was recently
nominated as Thinker of the Month by the prestigious Thinkers50.com.
For more: antonionietorodriguez.com.
rotmanmagazine.ca / 127
 POINT OF VIEW Andrew Atkins, Vice President, Bates Communications
How to Apply
Behavioural Insights
to Leadership
NO ONE WOULD EVER DISPUTE that Cal
Chambers was the smartest guy in the
room, least of all Cal. As Chief Science
Officer of Obsidian Pharmaceuticals,
Cal holds multiple patents and has been
responsible for developing the core bio-
logical platform on which all of Obsidians therapies are
based. To a researcher like Cal, science isnt just the focus
of his work: The pursuit of scientific truth is foundational
to his identity and values. To question his conclusions in
any matter, scientific or otherwise, is to betray ones foolish
ignorance and Cals response is often withering. A brilliant
scientist who has developed clinical breakthroughs, he also
produces breakdowns in the workplace, through both his re-
flexively combative and harsh interpersonal behaviour and
his micromanagement-induced bottlenecks in processes
and reporting.
Cals interpersonal challenges havent been limited to
his own team: They also complicated his working relation-
ships with the rest of the Obsidian leadership team. Put sim-
ply, few on the team would trust Cal to have their back. Cal
has often lamented that things would be so much easier if
other people would just be as rational and thoughtful as he
is. Ironically, despite his considerable intellectual gifts, Cal
has been no more exempt from irrationality and biases in
making decisions than any of his colleagues.
Throughout this article, I will use the real-life case of
Cal and Obsidian (names changed) to explore applying dimensions. I have already described this framework and
insights from Behavioural Economics in coaching leaders
128 / Rotman Management Spring 2017
to greater effectiveness. After a brief orientation to leader-
ship-relevant Behavioural Economics principles, I will de-
scribe how we set out to help Cal in two areas: managing his
behavioural triggers and building trust among co-workers.
First, though, a question: Has anyone ever met Homo
Economicus that wonderous Economics avatar endowed
with perfect information, flawless logic, and a relentless
drive to maximize utility? While Economic theories provide
useful guidelines in the abstract, our daily decisions are
typically coloured by the myriad biases and irrationality de-
scribed by Behavioural Economics. The application of these
principles provides perspectives on both what drives leaders
and how to help them.
Managers attend to reliable execution of the day-to-
day, but we look to leaders to take us to new places. What
distinguishes a leader from a manager is the leaders ability
to influence and provide direction and perspective. In our
ongoing work with leaders, we call the factors that distin-
guish a leader from a manager Executive Presence, and it
is these factors that organizations typically seek to develop
in leaders by having them work with a coach or participate
in leadership-development programs.
Most people think of Executive Presence (EP) as cha-
risma or owning the room. While these factors are im-
portant, they only tell part of the story. EP encompasses
the qualities that help a leader engage, align, inspire and
move people to act, and these qualities fall into three broad
Bates Executive Presence Index (ExPI) on these pages [see
So You Think You Can Innovate, Rotman Management,
Winter 2016], so I will just briefly summarize the three di-
mensions:
CHARACTER, which affects the connection people feel with
the leader and includes a leaders authenticity, integrity,
concern for others, restraint and humility;
SUBSTANCE, which affects credibility, includes a leaders
practical wisdom, confidence or bias for action, composure
under pressure, resonance and vision; and
STYLE, or the approach to execution, includes a leaders ap-
pearance and readiness, intentionality in aligning actions,
inclusion of others in decisions, the quality and quantity of
interactivity, and assertiveness in managing conflicts.
When executives develop fluency in all three dimensions,
they distinguish themselves as leaders rather than manag-
ers and are able to help organizations capitalize on new op-
portunities.
Coaching a leader usually begins with providing feed-
back, often from interviews, but even more powerfully
when it includes a quantitative 360 assessment. Frequently,
the feedback received includes areas where a leader tends
to react impulsively. Helping that leader gain awareness
of what triggers these reactions is an important first step
to gaining greater control and demonstrating restraint and
composure.
In Thinking Fast and Slow, Daniel Kahneman de-
scribes two thought processes of the human mind: System 1
thinking is quick and reactive, and involves little conscious
thought. It is useful, especially in routine situations, but is
prone to error and biases. System 2 thinking is also respon-
sive to the situation, but is much more measured. It comes
into play when we are learning to do something or when
we are being more deliberate. For example, experienced
drivers in North America use System 1 thinking most of the
time, but would likely revert to System 2 when driving in the
UK for the first time.
In coaching leaders, we always explore, In which situ-
ations will they be most prone to reacting unproductively?
Ironically, some of the triggers leaders have develop as a
result of having an over-strength or too much of a good
thing. For instance, high levels of professional competence,
particularly in technical areas, and a strong commitment to
ones chosen discipline can result in an individual treating
their expertise in much the same way as they treat their val-
ues: Questioning their professional conclusions feels tanta-
mount to questioning their integrity. In these situations, lead-
ers often react defensively and may dig in and stall progress.
In our assessment work with the ExPI, we have seen
this reflected in relatively low correlations between Integri-
ty (actions consistent with principles) and Confidence (bias
for action).
The System 1 reactive process is similar to the Ladder
of Inference model by Chris Argyris, which describes how
feedback loops from our noble certainties can cause us to
behave reactively. As with all biases, awareness of the dy-
namic is the first step in slowing down the process, shifting
from System 1 to System 2 thinking, and becoming reflective
rather than reflexive to situations.
In Cals case, his identity is inextricably linked to his
deep technical knowledge. His encyclopedic command of
the intricacies of science and drug development compels
him take a stand on matters across the organizationin-
cluding areas outside of his discipline. His strong sense of
his own superior expertise has become such a fundamental
part of his self-perception that any disagreements with his
point of view are experienced as personal affronts, and he
reacts bitterly.
In coaching Cal, we worked on developing his aware-
ness of how questions about his opinions act as triggers
to his negative reactions. With increased self awareness,
Cal was able to recognize situations where he was get-
ting triggered and, with practice, to slow down and re-
spond intentionally rather than reacting impulsively. The
result: Others noticed his improved ability to temper his
responses, and his colleagues became more open to work-
ing with him.
Our assessment of leaders across the 15 facets of the
ExPI entails measuring 90 specific behaviours. Looking at
data from thousands of assessments over the past couple
of years, we have been able to isolate and compare two co-
horts of leaders: Those who are highly trusted and those
who are not trusted. Comparing these cohorts, we found a
statistically-significant difference: Highly-trusted leaders
outperformed untrusted leaders in 86 of the 90 behaviours
on the ExPI.
Clearly, trust is foundational to a leaders ability to in-
fluence, and each of the 15 facets contribute to building it.
Trust comes in the following two forms:
1. RELATIONAL TRUST. Some experiences of trust are almost
visceral or automatic. They involve a strong sense of
connection or relationship with the other person. This
relational trust operates through System One: We pick
up on initial cues in an interaction and consider some-
one trustworthy. Relational trust is about interpersonal
connection and is affected by behavioural biases such
as representativeness (per Kahneman and Tversky),
whereby we experience someone as having qualities
rotmanmagazine.ca / 129
 The loss aversion described in Prospect Theory
can contribute to a general reluctance to trust.

How to Build Trust, Establish Credibility and Drive Execution:

The Bates Executive Presence Index (ExPI)
CHARACTER: Five qualities are funda-
mental to the leader as a person, to his/
her identity, and give us reason to trust
him/her.
SUBSTANCE: Five qualities inspire STYLE: Five qualities are overt, skill-
commitment, inform action, and lead to based patterns of communicative
above-and-beyond effort. leadership that build motivation and
shape and sustain performance.

Authenticity being real, genuine, Practical Wisdom displaying highly Appearance looking and acting like
transparent, and sincere in ones relations honed qualities of insight and judgment an able executive, adapting dress and
and interactions with others. that get to the heart of issues and pro- demeanor to the situation, and handling
duce prudent decisions. social situations with tact.

Integrity acting with fidelity to ones Confidence being self-assured Intentionality clarifying direction and
values and beliefs, living up to high in decision-making and action; ready keeping actions aligned and on track,
standards of morality and promise to accept the risk and responsibility all without stifling dissent or neglecting
keeping. for taking timely action. needs to adjust course.

Concern demonstrating interest Composure proving to be steady in Inclusiveness actively involving

in others, encouraging adaptive a crisis, able to calm and focus others, others, welcoming diverse points
development, and promoting a healthy, and to bring objectivity and perspective of view, encouraging ownership in
sustainable culture. to critical decisions. mission, and empowering initiative.

Restraint displaying a calm
disposition, characterized by
reasonableness and by avoidance
of emotional extremes or impulsiveness.
Humility showing awareness of ones
strengths and weaknesses, an openness
to others, and a belief that all persons
have worth.
Resonance connecting with others;
being attentive, attuned, and responsive
to feelings, motivations, and thoughts.
Vision generating an inspiring,
enterprise-wide picture of what could
be; recognizing emerging trends, and
engaging all in strategy.
Interactivity promoting an inter-
personal style of dialogue and timely
exchange of information and questions
to coordinate action.
Assertiveness speaking up, valuing
constructive conflict, and raising issues
directly without shutting others down.

we value and this affects the overall assumptions we
make regarding that person.
2. TRANSACTIONAL TRUST. Other experiences of trust are
more measured, and involve a willingness to put our-
selves at risk, based on the other persons actions. This
is transactional trust, and it often operates through
System Two. The risk assessment aspect of transaction-
al trust echoes Kahneman and Tverskys work on Pros-
pect Theory, which describes our behaviour around risk.
Simply put, we are often loss averse and will do what we
can to prevent loss even at the expense of realizing
potential gains.
Where transactional trust is concerned, we base our deci-
sions on three factors:
our past experience with the individual;
our perceptions of their expertise or capabilities; and
our sense of shared purpose or alignment around goals.
In short, we regularly make decisions to trust or not to trust,
and those decisions can be reflexive (System One) or reflec-
tive (System Two). In either case, they are prone to biases
like any other decisions. For instance, the loss aversion
described in Prospect Theory can contribute to a general
reluctance to trust.
The clear differentiation between trusted and untrusted

130 / Rotman Management Spring 2017

 Highly-trusted leaders outperformed untrusted
leaders in 86 of the 90 behaviours on the ExPI.
leaders serves to illustrate how leaders can build or undercut
both relational and transactional trust. Now, lets return to
Cals case, to illustrate some of these behavioural insights in
action.
BUILDING RELATIONAL TRUST. The subliminal sense of con-
nection that underlies relational trust is facilitated by the
ExPIs character facets and others with a socio-emotional
element. Colleagues experienced Cal as authentic in that
he was genuine in his interactions, and this contributed to
their persistence in working with him; his strong sense of the
values of scientific inquiry were unquestionable though
weve noted that an over-strength in integrity contributed
to a lack of emotional restraint and loss of composure when
under stress. Cals protectiveness of his team was a demon-
stration of concern, as was his advocacy for the professional
and technical development of some favoured researchers.
Consequently, some on his team were fiercely loyal to him.
However, Cals almost complete lack of humility was
off-putting and damaged his relationships. Although he had
sufficient resonance to recognize what others were thinking
or feeling, his commitment to his own ideas interfered with
any tendency to acknowledge others point of view. Mean-
while, Cals commitment, energy, and preparation projected
an appearance of thorough professionalism. Given this mix
of qualities, it is not surprising that people often felt a strong
initial trusting connection with Cal that waned as they
gained more exposure to him.
BUILDING TRANSACTIONAL TRUST. The contributing elements of
transactional trust are present in all three Executive Pres-
ence dimensions (Character, Substance and Style), and in
each case, Cals behaviour within each of these dimensions
affected peoples willingness to trust him. Research shows
that we trust people based on our past experience with them
because we believe they are more likely to display that same
behaviour again. We noted above that exposure to Cals
off-putting behaviours decreased initial Relational Trust,
because this experience increased the risks associated with
trusting Cal in the future. Similarly, past experience with his
low restraint and composure led people to expect emotional
outbursts, which eroded trust in Cal. While his decisiveness
and bias for action in the facet of confidence and his asser-
tiveness in taking a stand enhance trust, Cals inability to ef-
fectively manage conflicts arising from his assertiveness and
difficulty in maintaining a reliable pattern of interactivity in
communication worked in the other direction.
Being the smartest guy in the room in sharing his
practical wisdom added to perceptions of Cals expertise and
competence, which bolsters trust. Similarly, Cals confidence
in making decisions contributed to his perceived expertise:
he was visibly committed to a vision of Obsidians potential
and painted a compelling picture of the promise of their ther-
apies. Cal was also authentically transparent about his pas-
sion and commitment, making his intentionality abundantly
clear. Others were able to clearly see how they and Cal had a
shared purpose and trusted Cal to act in alignment with those
goals. On the other hand, Cals belief that he alone needed to
be the final arbiter on decisions decreased the sense of inclu-
siveness others felt and bottle-necked the intentionality in work
processes, creating execution risks and decreasing trust.
In working with Cal on his relationships with his team
and peers, we were able to help him appreciate that trust was
something he could build intentionally by working across
many of the Executive Presence Index facets. Working
across these 15 facets decreased the likelihood of Cals trig-
gering risk-averse responses, and from a Behavioural Eco-
nomics perspective, allowed him to leverage Prospect The-
ory insights to increase trust. The result: Cals colleagues
were able to better appreciate his underlying motivations
and he was able to build bridges across disciplines during a
crucial phase of Obsidians growth.
In closing
Behavioural Economics has enhanced our understanding of
decision processes and individual behaviour in many areas
of business. Going forward, leaders can only gain from in-
sights into the biases and mental habits to which we are all
prone. The case of Cal provides a window into how to shift
from being subject to those biases, to being able to use them
constructively to shape your leadership behaviour.
Andrew Atkins is Vice President of Client Experience at Bates
Communications, based in Wellesley, Massachusetts. In 2014 and 2015
he was named a Top 100 Thought Leader by Trust Across America.
rotmanmagazine.ca / 131
 POINT OF VIEW Dan Markovitz, Author, Building the Fit Organization
Nudge Your Way
to Better Results
WHEN YOU FIRST SEE THE FLIES, its a bit un-
settling. Your first reaction is that the
washroom you are in is unhygienic; but
you soon realize that the flies in the uri-
nals of the mens room at Amsterdams
Schiphol Airport arent real: They are only
images etched into the porcelain. However, they are famous
enough to be featured in the academic literature for both
Economics and Psychology. As the New York Times reported,
after the flies were added to the urinals, spillage on the
mens room floor decreased by 80 per cent.
According to Nudge co-author Richard Thaler, behav-
ioural economist at the University of Chicago, the explana-
tion is simple: Men like to aim at targets. Thaler says the flies
are one of his favourite examples of a nudge a harmless
bit of engineering that alters peoples behaviour in a positive
way, without actually requiring anyone to do anything:
To date, the most well-known nudges have been cre-
ated in the context of larger social issues. For example, Oo-
power leveraged peer influence to reduce electricity usage
by showing people how their power consumption compared
to their neighbours; and Watersmart Software did the
same thing with water usage in drought-stricken California.
132 / Rotman Management Spring 2017
Other nudges aim to make a socially-desired behaviour
easier: At the time of issuing a drivers license, various ju-
risdictions have increased participation in organ donor pro-
grams by having Department of Motor Vehicles workers ask
people if they want to register as a donor. Similarly, as Prof.
Thaler and others have shown, employers have increased
participation in retirement savings plans by automatically
enrolling people, and forcing employees to actively opt-out
of the program.
Still other nudges exploit well-known cognitive biases,
such as loss aversion. For example, at goal-setting website
stickK.com, users set a personal goal and sign a commit-
ment contract. If they fail to meet the goal, they forfeit the
money they pledged, and it is given to a friend or a charity.
Although nudges are most often used in situations that
promote social welfare organ donation, health, savings,
conservation, etc. they are a powerful tool that can help
deal with seemingly-intractable business problems that be-
devil a companys operations.
The burden of processing large volumes of email, for
example, is a necessary evil that comes with the blessing
of instant, free and easy communication. But the infuriat-
ing plague of useless Reply All emails that clog inboxes is
nothing less than Satan-spawn. Telling people not to use
Reply All except when truly necessary doesnt seem to
work even though everyone complains about those mes-
sages, and its clearly in everyones best interest to stop send-
ing them.
Fed up with the burden of this electronic garbage and
the ineffectiveness of simply asking people to think twice
before hitting Reply All, the CIO of the Nielsen Company
created a nudge by completely removing the button from the A y in the mens room at Schiphol Airport in Amsterdam.
companys Outlook toolbar. Actually, this example might be
closer to a shove: A nudge probably would have moved the
button to an inconvenient position on the toolbar.
While were on the subject of email, many people com-
plain that its difficult for them to carve out uninterrupted
time for cognitively-demanding work. The incessant ding
of incoming emails, along with their own habit of interrupt-
ing their work to check or send emails, makes it nearly im-
possible to focus for long periods of time. Turning off email
alerts, and setting cell phone email apps to fetch rather than
push, is an elegant nudge to keep people from responding dont even have a clear objective. Even though Roberts Rules
immediately to all incoming messages. of Order has been around since 1876 (and the rules arent
One of my own consulting clients frustrated by the all that complicated), theyre most often observed in their
amount of time that his team was spending on email gave breach rather than their adherence. Nudges, however, can
each person four poker chips for handling mail. Each chip change meeting behaviour without the need for lengthy
was worth 30 minutes in Outlook; and when all the chips memos or announcements. At Google, the time remaining
were spent, people werent allowed to go back into their in a meeting is projected in four-foot high numbers on the
email. wall. Nothing focuses the mind like the guillotine blade of a
Elsewhere, Massachusetts General Hospital changed giant countdown timer.
the eating habits of both customers and employees at its A former boss of mine locked the door of the meeting
hospital cafeteria. Leaders in the Department of Nutrition room at the appointed start time though of course, as
and Food Services applied traffic light labels green for president of the company, he could get away with that. And
the healthiest items, such as fruits, vegetables, and lean one of my former clients took advantage of the innate hu-
sources of protein; yellow for less-healthy items; and red for man desire for patterns and consistency by putting a chart
those with little or no nutritional value to all items in the up on the wall showing whether his teams weekly meet-
main hospital cafeteria. They also rearranged the displays to ing started/ended on time (green dot) or was late (red dot).
put more healthful items where they were most likely to be Once they had a string of green dots, no one wanted to be
selected (e.g., bottled water at eye level, sugar-laden drinks the person who broke the chain with a red dot. Another cli-
down below). Over the next two years, purchases of green- ent was disappointed with his sales teams lack of focus.
light items increased 12 percent, while red-light purchas- They were working hard, but the leadership wanted them
es dropped by 20 per cent; sales of sugar-sweetened drinks to invest more effort on accounts that werent carrying the
alone fell by 39 percent. full breadth of the product line (or the line at all). The visual
Most organizations bemoan the inefficiency of their board they put on the wall was an effective nudge in redirect-
meetings they start late, they end late, and many of them ing their sales efforts.

rotmanmagazine.ca / 133
 At Google, the time remaining in a meeting is projected
in four-foot high numbers on the wall.

Nudges can also be a powerful way of creating and rein- to good work. Nurturing a social norm that explicitly cele-
forcing the corporate culture you desire. Grey Advertising brates honesty and high quality will make it a lot easier to do
wants people to be innovative and to take risksnot always the right thing.
easy to do in a large company with layers of management. The celebrated nudges in the world of Behavioural Eco-
However, its quarterly Heroic Failure Awardwhich comes nomics are usually public sector, or large-scale initiatives
complete with a two-foot high trophycelebrates failures of aimed at improving social welfare. However, as indicated
daring and audacity. The awardand the ceremony around herein, with a little creativity, the principles underlying
itis really nothing more than a nudge that reduces the these nudges can also be used to improve performance on
emotional stakes of making an error. both the individual and the organizational level.
For organizations committed to pursuing a lean ap-
proach, it is essential to eliminate the fear that comes with
surfacing problems. And although Toyota doesnt use the
term, the company uses nudges around social norms to cre-
ate that kind of culture, as epitomized by the experience
of Mike Hoseus, author of Toyota Culture. When he first
joined Toyota in 1987, Mike was sent to work at a plant in
Japan for a month of training. He didnt speak Japanese, and
his co-workers didnt speak any English. One day on the line,
he slipped with a tool and scratched the inside of a fender, in
a place that no one on the production line and no customer
would ever notice. Intellectually, he knew that he was sup-
posed to report any problems to his team leader, but he was
afraid to do so. No one saw the mistake, and he didnt want
to tell anyone that he screwed up. Hoseus writes:
After a little hesitation, I got paranoid and pulled the an-
don [emergency stop] cord, and the team leader came
over and taught me how to do it right. We got the scratch
fixed, and the line went back to work. Shortly after, at a
daily meeting, the floor workers gathered with their line
managers to discuss any problems during the shift. Af-
ter a brief huddle, [the line managers] all started patting
me on the back and congratulating me, and the transla-
tor said the supervisor had said, Thanks for admitting
your mistake.
Daniel Markovitz is the author of Building the Fit Organization: Six Core
To create a culture where people are unafraid to surface their Principles for Making Your Company Stronger, Faster, and More Competitive
errors, follow Toyotas example and create nudges where (McGraw Hill Education, 2015) and the principle of Markovitz Consult-
people actually thank the error-maker for their commitment ing. He has held senior positions at Adidas, CNET and Asics Tiger.

134 / Rotman Management Spring 2017

QUESTIONS FOR Utpal Dholakia, Professor of Marketing, Rice University

Q
&A A marketing expert argues
that nudging is a powerful
tool but that it shouldnt
be used in isolation.
How do you dene nudge marketing?
Nudge marketing is all about structuring a consumer choice
environment to get the consumer to do a certain thing. The
issue is, we can think about consumer behaviour as a series
of single decisions or actions; or we can think about it as a
constellation of behaviours that eventually lead to an out-
come, down the road. Using the latter definition, nudge mar-
keting is just one piece of the puzzle: It essentially focusses
on the first step of consumer behaviour. If you think about
consumer behaviour more broadly, you can do a lot more to
influence positive long-term outcomes.

You have found that nudging has a dark side. Please ex-
plain.
Interview by Karen Christensen
The problem is, as a methodology, nudging often stops
short. Vanguard is one of the biggest retirement plan ad-
ministrators in the U.S. In 2015, 61 per cent of the people who
joined their retirement savings plan signed up for automatic
enrollment which is a classic nudge. These consumers ba-
sically said, Take this amount of money from my paycheque
every month.

rotmanmagazine.ca / 135
 If someone is not interested in saving money, no matter how
often you nudge them, they wont want to save money.
Thats great; but the downside is, almost half of them
(48 per cent) are saving just three per cent; and, another 27
per cent are saving four to five per cent. Only 16 per cent had
a savings rate of six per cent or more. To put this in context, if
you ask a financial counsellor how much you should save for
retirement, most of them will say 15 per cent, at a minimum
and many will say 18 or 20 per cent.
This is the dark side of nudging: You might be nudging
people to do the right thing, but you might not be nudging
them far enough to get them to the desired long-term out-
come. Essentially, if this continues, we will have a bunch of
people who think they are saving enough money for their
future; and, when the time comes, they will only have saved
about one-third of what they require maybe even less.
Describe how the broader eld of Motivational Psychol-
ogy differs from nudge marketing.
Nudging implicitly assumes that without the nudge, the
person is going to do the wrong thing. In contrast, Moti-
vational psychology focuses on creating a lifestyle where
the consumer is empowered, can think for herself and is
supported to set the right goals and more importantly, to
strive towards those goals. That is obviously much more dif-
ficult than just getting someone to do something one time.
If, as you indicate, nudges rely on a one-dimensional
model of consumer behaviour, what does a better model
look like?
Let me be very clear: Im not saying that nudges are a waste
of time, by any means. What Im saying is, they should be
part of a broader solution; they cant be the majority of the
solution.
Lets return to the realm of saving money. If I really
want to have enough money saved for my retirement and
to have a sustainable lifestyle, no one single thing is going
136 / Rotman Management Spring 2017
to get me there: I not only have to contribute on a regular
basis, but I have to manage my buying habits properly; I
have to adequately use the things I already have and have
a proper budgeting procedure in place. I have to do a lot of
different things.
If you think about this in Motivational Psychology
terms, you suddenly realize that problems like this have
complex solutions, and we have to think about all the dif-
ferent things that can lead consumers to save money. One
really good thing about Behavioural Economics research
programs is that they provide a very clearly-defined para-
digm of measurement. In most cases, there is one particular
action that is being measured. With Motivational Psychol-
ogy, I cant really design one large experiment to measure
lifestyle changes, because there are so many different
things going on and the outcome will only be revealed in
the future. However, what I can do is give the consumer the
tools and support that they need and then let them take
charge. If someone isnt interested in saving money, no mat-
ter how often you nudge them, theyre not going to want to
save money. They have to decide for themselves that, this
is important to me. That is the core idea behind the Motiva-
tional Psychology approach to changing behaviour.
In other research, you found that many leading brands
today behave like organized religions. How so?
Every religion has three core components: A set of values
and beliefs; a set of rituals or practices; and a community.
The practice of traditional religion has been on the decline
for decades, with fewer and fewer people participating in
organized religion. The question is, what are people doing
instead? What is the substitute?
I have found that brands are coming in and taking over
this empty space in peoples lives and thats not necessari-
ly a bad thing. There are lots of positive things about being in
 Brands have begun to take over the empty space in
peoples livesand thats not necessarily a bad thing.

a community of people who appreciate the same things you your pain level will likely diminish; and it can increase your
do. However, it becomes a problem when it goes to extreme overall subjective well-being and make you a happier per-
levels. For example, if you spend all day long on a PlaySta- son. In short, visualization is an easy way to increase your
tion and are completely engrossed in the gaming communi- happiness, and it doesnt cost a thing.
ty, clearly, that is a problem. But letting any particular brand
take over too much of your life is a problem, because brands
are inherently self-interested. At the end of the day, they
just want your money. They are not equipped to provide all
of the intellectual and social supports that non-commercial
domains, such as religion, can provide.

You have also studied how visualization can help us be

more optimistic. Please explain why this is important.
It turns out that in virtually every domain of life, optimism is
a real asset. For instance, it can really help a person to work
through a health or career setback. The second interest-
ing thing about optimism is that it is not a fixed personality
trait: We are not inherently optimistic or pessimistic we
can change the level of our optimism or pessimism, and its
something we can manage.
So, if optimism has positive outcomes and if it is some-
thing that we can control and manage, the question is, how
do you do that?
Lots of studies show the power of visualization exercis-
es. The idea is very simple: you think about some point in the
future not too near, but not too far, either maybe five or
ten years down the road; and you visualize a very specific set
of positive circumstances that you would like to find yourself
in. Spend some time single-mindedly thinking about what
that future will look like. This is much easier than meditat-
ing, because you are almost daydreaming in a very struc-
tured way as opposed to focusing hard on a single concept.
Research indicates that, for those who do visualiza-
Utpal Dholakia is the George R. Brown Professor of Marketing at Rice
tion exercises consistently, there are some really significant Universitys Jesse H. Jones Graduate School of Business. You can read his
benefits. If you are suffering from chronic pain, for example, blog, The Science Behind Behaviour, at psychologytoday.com

rotmanmagazine.ca / 137
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Nudging Creativity in Your Organization
19th Annual Rotman Lifelong Learning Conference for Managers on May 26
Breaking Down the Barriers to
Creativity in the Modern Organization
by TIM BROWN, CEO, IDEO and Author
& ROGER MARTIN, Premiers Chair
in Productivity & Competitiveness,
Rotman and Author
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Self-Doubting Procrastinator Like Me
(Harper, 2016) by PHYLLIS KORKKI,
Business Writer and Editor, The New
York Times, and Author with LAURA
DOERING, Assistant Professor of
Strategic Management, Rotman
PM: 40062461
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