Marina Gorbis's Blog, page 1398

Few Consumers Actually Heed Social Media

Ever since Facebook first introduced brand pages in 2007, companies have been flocking to social media. Many business leaders believe that the more they post and share about their products and services, the greater their chances of attracting customers and generating revenue.

But just-released research from Gallup’s State of the American Consumer report suggests that much of these efforts have been misguided.

Social media are not the powerful and persuasive marketing force many companies assumed they would be. Gallup finds that a full 62% of U.S. adults who use social media say that these sites have absolutely no influence on their purchasing decisions. Another 30% say these sites have some influence, and just 5% say they have a great deal of influence.

And although companies may think that people who “like” or follow them on social media are an attentive audience, our research suggests otherwise. Of consumers who report liking or following a company, 34% still say that social media have no influence on their purchasing behavior, while 53% say they have only some influence.

When compared with more traditional forms of social networking, social media initiatives may actually be the least effective method for influencing consumers’ buying decisions. Gallup research has shown that consumers are much more likely to turn to friends, family members, and experts when seeking advice about companies, brands, products, or services. Social media sites have almost no sway.

These findings raise a question: is there an inherent flaw in the idea of using social media to drive purchasing, or have companies just been using social media poorly? The fact that some portion of buyers credit social media with having real influence suggests the latter may be true. Consumers are drawn to social media because they want to take part in the conversation and make connections. But many companies continue to treat social media as a one-way communication vehicle and are largely focused on how they can use these sites to push their marketing agendas.

To positively influence purchasing through social media, marketers should learn to use it to listen and interact. Consumers are more likely to engage when the brand-related posts they encounter are:

Authentic. Social media sites are highly personal and conversational. And, as Gallup finds, consumers who use these sites don’t want to hear a sales pitch. They’re more likely to listen and respond to companies that seem genuine and personable. Companies should back away from the hard sell and focus on creating more of an open dialogue with consumers.
Responsive. The social media world is 24/7, and consumers expect timely responses – even on nights and weekends. Companies must be available to answer questions and reply to complaints and criticisms; ignoring negative feedback can do considerable damage to a brand’s reputation. Instead, companies must actively listen to what their customers are saying and respond accordingly. If they made mistakes, they must own up to them and take responsibility.
Compelling. Content is everywhere, and consumers have the ability to pick and choose what they like. Companies must create compelling, interesting content that appeals to busy, picky social media users. This content should be original to the company and not related to sales or marketing. Consumers need a reason to visit and interact with a company’s social media site and to keep coming back.

When companies focus their social media efforts on pushing product and not cultivating communities, they overlook the real potential of these channels. Gallup research has consistently shown that customers base purchasing decisions on their emotional connections with a brand. Social media are great for making those connections — but only when a brand shifts its focus from communication to conversation.

It’s Time for a New Partnership Between Labor and Management

Lloyd Blankfein recently told a TV audience that income inequality is “very destabilizing” and that “too much of the GDP over the last generation has gone to too few of the people.” When even the CEO of Goldman Sachs is worried about inequality, you know you have a problem.

Rising inequality reflects two trends. One is the rapidly growing incomes of those at the top, a phenomenon publicized by everyone from Occupy Wall Street to Thomas Piketty. The other is the remarkable lack of income growth among the rest of the population. In the three decades after World War II, the income of the lower 90%, meaning the broad middle class as well as the poor, nearly doubled. Since then it has barely budged. Yet overall per-capita income growth in the past 40 years has been nearly as strong as in the postwar era (1.9% a year vs. 2.2%). It’s just that the fruits of this growth went to “too few of the people.”

How can Americans create a society where more people share in the growth? We’d like to see a revived labor movement — but with a new business model.

Suspend disbelief about labor for a moment and look at the facts. In the postwar period, U.S. unions were strong. At their peak they represented nearly one-fourth of private-sector workers. Their influence extended beyond their numbers, since many nonunion employers observed union standards in hopes of avoiding an organizing drive. Labor’s negotiators took productivity gains as their touchstone and bargained for commensurate wage gains. As the economy grew, middle-class income grew with it.

Economic analysis bears out the connection between strong unions and less inequality. Union workers earn 15% to 20% more than similar nonunion workers. CEOs of unionized companies earn 10% to 20% less than their nonunion counterparts. In the public sector, unions remain relatively strong — and have helped prevent the rise in inequality we’ve seen in the private sector. Nearly every developed nation with less inequality than our own has a strong labor movement.

But the business model of private-sector unions is essentially defunct. U.S. unions in the past defined themselves in opposition to management — us vs. them, in the famous labor-movement phrase — rather than as partners in building a successful company. They fought for high wages and restrictive work rules regardless of business conditions. That model worked fine as long as large sectors of the U.S. economy were dominated by a few big firms — the companies could (and did) pass the added costs along to consumers. But it doesn’t work in a global marketplace. As world competition stiffened, some unionized companies moved or went out of business. Others fought labor tooth and nail, ridding themselves of unions whenever they could. As a result, labor sank to its current level: less than 7% of private-sector workers now belong to a union.

What would a better business model for labor look like? Begin with an obvious but often overlooked truth: labor and management don’t have diametrically opposed goals. Both sides want their companies to succeed and grow, creating a bigger pie for everyone. Remember, too, that companies with engaged, committed workforces tend to outperform competitors. Involved employees come up with more innovative ideas, figure out how to solve problems, and go the extra mile for customers.

So imagine a partnership approach. The union says to management, We’re here to make your business more productive and profitable. We’re experts in team-based and participative systems. We have the credibility to get employees really involved in the business, and we know how to do so. Over time, the union label might come to denote a world-class company, one with the skills to do things that competitors can’t.

The union’s message to employees would be similar. We’ll make you more productive and we’ll give you valuable skills — the only path to greater job security and future opportunities. In hard times we’ll help the company find ways to cut costs short of layoffs. In good times we’ll negotiate for a healthy share of profits, stock, or both, as well as for higher wages. That seems like an approach worth an employee’s dues.

No U.S. company has a labor-management relationship exactly like this, but Southwest Airlines comes close. Its unions — which represent 83% of the airline’s workforce — have generally cooperated with management on business improvement initiatives even as they bargained over pay and benefits. A few years ago, for example, jet fuel prices were climbing sharply. The company and the pilots’ union launched a joint program known as Plane Smart Business to get pilots involved in tracking their own fuel usage and coming up with ways to reduce it.

Lloyd Blankfein is right to be worried: if nothing changes, our capitalist system will continue to look more and more like that of the Gilded Age, with the majority of households suffering from stagnating income and a relative handful growing very rich. This level of inequality is bound to become destabilizing, which means we should be thinking now about how to mitigate the trend. Unions played a key role in the past. Maybe they can in the future as well.

Make Customers Want to Buy Offline

Showrooming, once a worry primarily for consumer electronics retailers, is expanding into markets we might have thought exempt. Today we can investigate everything from cars to books to groceries in person and then proceed to order them online, often with greater ease and significant savings.

Chalk this up to the efficiency of digital retailers, who’ve systematically dismantled every obstacle to online shopping. Shipping is fast and cheap, returns are a snap, and customer service is often better than what you find in a store. Price competition these days is a guaranteed losing strategy, especially with Amazon, whose long cash floats and high inventory turnover allow them to stay profitable even with no margin. Stores like Best Buy and Walmart once seemed unstoppable as they displaced independent retailers; now the Goliath has become David.

Yet for each Radio Shack and Barnes and Noble fighting for its life, there are still those beloved corner stores and discount chains that manage to thrive. Many keep a close eye on the prices being charged by their digital competitors, and work to keep theirs from straying too much higher. Most learn to emphasize their advantage in immediacy. More than anything, these successful brick-and-mortar stores know to compete on experience.

A satisfying real-life retail experience is something Amazon can never duplicate – but the trick is translating that satisfaction into dollars spent on-site. We should see this as an experience design problem. A look at retailers who succeed despite showrooming reveals three design imperatives.

Design for empathic expertise. When a shopper uses a physical retail setting as a showroom, what are they looking for? A better look at the merchandise, and the benefits of touch and feel – but even more, for expertise that could guide their choice. You probably have a business you patronize for exactly this reason, whether it’s the boutique that knows what’s on trend, or the specialty grocer who can advise on preparation of a dish, or the wine seller who can recommend the right bottle to go with that meal. Backcountry.com and Zappos, for example, are excellent online retailers, but they haven’t displaced REI or the local shoe store, because people value that hands-on expertise. Especially when the purchase is something we really care about, we’re willing to pay extra for a trusted advisor helping us make the right choice.

How could the shopping experience be designed to emphasize your expertise – and get it paid for? The challenge begins with improving staff hiring and training. Good people also need good information. If you can create a data system to give employees quick access to information about products and customers, you can equip them to advise as experts. Conversely, if shoppers perceive that the kid behind the counter knows little more than they do – or worse, has an incentive other than the consumer’s interests to steer them toward certain choices – they will have no qualms about leaving the store and buying online. Design your retail setting to be a showroom for your empathic experts even more than for the products you sell.

Design for whole solution provision. When you buy a new computer, you may also need new peripherals and software to accomplish what you’re hoping to do with it. A new bike often means a new helmet, lock, and lights. A new coat calls for a matching scarf and gloves. Especially in the consumer electronics category, where technologies shift with blinding speed, customers are often happy to take care of these purchases all at once, in person, even if it means spending a few dollars more. Concerns about compatibility are certainly part of it (how do you choose wisely if you can’t tell USB from HDMI, or a Schrader valve from a Presta?), but so are perceptions of price. Spending an extra five or ten dollars seems reasonable when investing in a solution that costs hundreds or thousands. The desire to assemble a combination that works, right away, can derail an obsession with paying the lowest price.

For retailers, this has implications not just for the expertise you need in problem solving, but also for the products you stock and how they are displayed. The extras here are very different from the impulse buys we make while waiting in the supermarket checkout line. They’re considered purchases that weigh current and future needs against budget, and must respect the requirements of the central product they work with. They can also add up to hundreds of dollars.

This means designing your store to serve as a source for solutions, both now and in the future. Again, heightening your staff’s expertise helps immensely. So does offering customers a complete ecosystem of secondary products, rather than simply hanging some earbuds and cases within easy reach. Design with an eye to the outcome the customer is seeking, whether that’s more reliable transportation, more exciting entertainment, or higher productivity. Deliver a system of products and services that works with their primary purchase to provide those outcomes, and they’ll reward you for it, rather than try to reconstruct it all for themselves online.

Design for community. Portland, Oregon, where Ziba has its headquarters, is so saturated with bike-oriented businesses that when a newcomer, Velo Cult, announced in 2012 it was moving its bicycle repair shop here from San Diego, observers wondered loudly whether it had any chance of success. It didn’t help that even the local mainstays were being challenged by online competitors discounting the products they sold at retail.

Rather than compete on price or selection, though, Velo Cult works “to be equal parts bike shop, venue, and bar” – in other words, a community. The large space they occupy is open plan, with long tables and benches, repair stations along one side, and a beer and coffee bar along the other. They offer the space up to local organizations for seminars, meetings, and parties, whether bike-related or not. Within months, Velo Cult became a de facto community center for many of the city’s two-wheeled enthusiasts. It also became a profitable business.

It’s an unusual model, but a great design solution in a saturated market. Any shop can sell you a rack or floor pump, or tune up your road bike; for consumers, the decision of where to shop (online or off) comes down to convenience and trust. By establishing itself as a community hub, Velo Cult showed thousands of potential customers that it was easy to get to, pleasant to visit, and aligned with their own values. If you visit a store three times to attend an event or grab a drink, your fourth visit could be to buy a new pair of tires…even if you could’ve ordered them from Amazon for a few dollars less.

Not every retail environment can be a community center, of course, but the demand for such spaces is huge and unmet, and there are endless ways to build community — even in surprising environments, like financial institutions. Since its “Slow Banking” redesign in 2003, Oregon-based Umpqua Bank has provided ample seating, free coffee, and wifi to its customers, and offered up its branches for meetings, workshops, and concerts. In that time, it’s grown from less than 70 branches to nearly 400, becoming the largest regional bank in the Western US.

Both Umpqua and Velo Cult succeeded by orienting their spaces around community first, and sales second. Companies looking to emulate their success should realize that the visual differences are relatively small, but policy shifts can be fundamental, from encouraging events that generate little or no revenue, to changing the way employees are incentivized and trained.

One fundamental point deserves to be underscored, because it informs all three of these design imperatives: shopping is emotional. The internet offers many functional advantages: selection is endless and endlessly searchable, prices are excellent, and there’s none of the hassle of going to the store. Most purchases, though, aren’t purely functional, and a well-designed shopping experience works with that by heightening the positive emotions and countering the negative ones.

More than just satisfying emotional needs, shopping is part of how we form identity. The decisions we make about how we will spend our money are part of how we present ourselves to the world. Offer customers an experience that deepens their sense of identity and reflects positively on it, and you’ll earn the higher margin you’re asking them to pay.

How to Help an Underperformer

As a manager, you can’t accept underperformance. It’s frustrating, time-consuming, and it can demoralize the other people on your team. But what do you do about an employee who isn’t performing up to snuff? How do you help turn around the problematic behavior? And how long do you let it go on before you cut your losses?

What the Experts Say

Your company may have a prescribed way of handling an underperformer, but most of those recommended processes aren’t that useful, says Jean-François Manzoni, a professor of management at INSEAD and coauthor of The Set-Up-to-Fail Syndrome: How Good Managers Cause Great People to Fail. “When you talk to senior executives, they’ll usually acknowledge that those don’t work,” he says. So chances are, it’s up to you as the manager to figure out what to do. “When people encounter an issue with underperformance, they really are on their own,” says Joseph Weintraub, a professor of management and organizational behavior at Babson College and coauthor of the book, The Coaching Manager: Developing Top Talent in Business. Here’s how to stage a productive intervention.

Don’t ignore the problem

Too often these issues go unaddressed.  “Most performance problems aren’t dealt with directly,” says Weintraub. “More often, instead of taking action, the manager will transfer the person somewhere else or let him stay put without doing anything.” This is the wrong approach. Never allow underperformance to fester on your team. It’s rare that these situations resolve themselves. It’ll just get worse. You’ll become more and more irritated and that’s going to show and make the person uncomfortable,” says Manzoni. If you have an issue, take steps toward solving it as soon as possible.

Consider what’s causing the problem

Is the person a poor fit for the job? Does she lack the necessary skills? Or is she just misunderstanding expectations? There is very often a mismatch between what managers and employees think is important when it comes to performance, Weintraub explains. It’s critical to consider the role you might be playing in the problem. “You may have contributed to the negative situation,” says Manzoni. “After all, it’s rare that it’s all the subordinate’s fault just as it’s rare that it’s all the boss’s.” Don’t focus exclusively on what the underperformer needs to do to remedy the situation — think about what changes you can make as well.

Ask others what you might be missing

Before you act, make sure to look at the problem objectively. You might talk to the person’s previous boss or someone who’s worked with him, or conduct a 360 review. When approaching other people, though, do it carefully and confidentially. Manzoni suggests you might say something like: “I’m worried that my frustration may be clouding my judgment. All I can see are the mistakes he’s making. I want to make an honest effort to see what I’m missing.” Look for evidence that might prove your assumptions wrong.

Talk to the underperformer

Once you’ve checked in with others, talk to the employee directly. Explain exactly what you’re observing, how the team’s work is affected, and make clear that you want to help. Manzoni suggests the conversation go something like this: “I’m seeing issues with your performance. I believe that you can do better and I know that I may be contributing to the problem. So how do we get out of this? How do we improve?” It’s important to engage the person in brainstorming solutions. “Ask them to come up with ideas,” says Weintraub. Don’t expect an immediate response though. The person may need time to digest your feedback and come back later with some proposals.

Confirm whether the person is coachable

You can’t coach someone who doesn’t agree that they need help. In the initial conversation — and throughout the intervention — it’s critical that the employee acknowledge the problem. “If someone says, ‘I am who I am’ or implies that they’re not going to change, then you’ve got to make a decision whether you can live with the issue and at what cost,” says Weintraub. On the other hand, if you see a willingness to change and a genuine interest in improving, chances are you can work together to turn things around.

Make a plan

Create a concrete plan for what both you and the employee are going to do differently, agreeing on measurable actions so you can mark progress. You should also ask what resources the employee needs to accomplish those goals. You don’t want her to make promises she can’t meet. Then, give her time. “Everyone needs time to change and maybe learn or acquire new skills,” says Weintraub.

Regularly monitor their progress

It may seem obvious, but unfortunately, many managers fail to follow up. Ask the person to check in with you regularly, or set up a time and date in the future to check progress. It may be helpful to ask the employee if he has someone that he’d like you to enlist in the effort. Weintraub suggests you ask: “Is there anyone you trust who can provide me with feedback about how well you’re doing in making these changes?” Doing this sends a positive message: “It says I want this to work and I want you to feel comfortable; I’m not going to sneak around your back.”

Respect confidentiality

Along the way, it’s important to keep what’s happening confidential — while also letting others know you’re working on the underperformance problem. Manzoni admits that this is a tricky line to tow. Don’t discuss the specific details with others, he says. But you might tell them something like: “Bill and I are working together on his output and lately we’ve had good discussions. I need your help in being as positive and supportive as you can.”

If there isn’t improvement, take action

If things don’t get better, change the tenor of the discussion. “At some point you leave coaching and get into the consequences speech. You might say, ‘Let me be very clear that this is the third time this has happened and since your behavior hasn’t changed, I need to explain the consequences,’” says Weintraub. Disciplinary actions, particularly letting someone go, shouldn’t be taken lightly. “When you fire somebody, it not only affects that person, but also you, the firm, and everybody around you,” says Manzoni.

While it may be painful to fire someone, it may be the best option for your team. “It’s disheartening if you see the person next to you not performing,” says Weintraub. Manzoni elaborates: “The person you’re asking to leave is only one of the stakeholders. The people left behind are the more important ones . . . When people feel the process is fair, they’re willing to accept a negative outcome.”

Praise and reward positive change

Of course if the person makes positive changes, say so. Make clear that you’re noticing the developments and reward him accordingly. “At some point, if the non-performer has improved, be sure to take them off the death spiral. You want a team that can make mistakes and learn from them,” says Weintraub.

Principles to Remember

Do:

Take action as soon as possible­ — the sooner you intervene the better
Consider how you might be contributing to the performance issues
Make a concrete, measurable plan for improvement

Don’t:

Forget to follow up — monitor their progress regularly
Waste your time trying to coach someone who is unwilling to admit that there’s an issue
Talk about specific performance issues with others on the team

Case study#1: Be ready to invest time

Allie Rogovin managed a five-person team at Teach for America when she brought in Max* as a recruiting coordinator. The job had two main responsibilities: completing administrative duties that supported the recruiting team and managing special projects. Allie recognized that the administrative component wasn’t that exciting. “So I let him know that the better and faster he completed these tasks, the more time he’d have for the fun projects,” she says. But before long, Max was struggling with the core part of his role. “I realized a couple months into the job he wasn’t getting his administrative duties done in time,” she says.

Allie started by giving Max an action plan template. She asked him to take 20 minutes at the end of each day to enter and prioritize all of his tasks . She then reviewed his list every evening and gave him input on how he might shuffle his priorities for the next day. They also started meeting three times a week instead of just once a week.

“He was a very valuable team member and I knew he could do a good job. That made me want to invest time in working with him,” she says. She continued meeting with Max regularly and reviewing his priorities for three months. “I didn’t think it was going to be that long but I wanted to see that he was building new habits,” says Allie. Max still occasionally missed deadlines but he was showing definite signs of improvement. “We tweaked the plan along the way and he eventually got into the swing of things,” she says.

“I frankly wouldn’t have done it if I didn’t see huge potential in him,” says Allie.

Case study #2: Make clear what needs to change

Bill Wright*, a business developer at a residential building company, hired a new project manager last summer. We’ll call him Jack. Right from the start, Bill saw performance issues. One of Jack’s primary responsibilities was to develop small projects. That meant defining the scope of the project, talking with homeowners, negotiating with subcontractors, and coordinating with design professionals. “He was taking too long to get things done. What should’ve taken days, was taking three to four weeks,” Bill says. This was problematic for many reasons: “I was supposed to be billing his time to the client but I couldn’t bill for the amount of time he was putting in. Plus I had disgruntled homeowners who were wondering why things were taking so long.”

Bill met with Jack weekly to review the current workload, prioritize tasks, and resolve any issues. “I wanted to help him move things forward but eventually I got so frustrated that I started to take projects over,” Bill says. At Jack’s 90-day review, Bill had a frank conversation with his employee about the consequences of not being able to turn around his performance. “When I asked what he needed, Jack said that he wanted more than an hour of my time each week to get more input on his work. I said I was happy to do that and asked him to go ahead and schedule a regular meeting time,” Bill says. But Jack never followed up or put any additional time on Bill’s calendar.

“It was very clear that it wasn’t working out. There were never signs of any progress.” That’s when Bill sat Jack down and made it clear that his job was on the line. Again, there was no change in behavior, so several weeks later, he let Jack go. “I look back on it and realize I made a bad hire. I recently hired his replacement and it’s like night and day. He already gets the job.”

*Not their real names

Do You Really Want to Be Yourself at Work?

Would you love to work in a place where you could truly be yourself?  Where you didn’t have to spend a single moment of your time and energy making sure you put only your best self forward?

Most people would, according to research recently published by Rob Goffee and Gareth Jones in “Creating the Best Workplace on Earth.” For three years they went around the world, asking hundreds of executives to describe the attributes of their ideal workplace. Topping the list was an environment where people could be themselves and where the company invested in developing them (and everyone they worked with) to be the very best they could be.

Interestingly, during a comparable three-year period, Harvard education professor Robert Kegan was researching the other side of the equation, looking for companies that pursued competitive advantage by developing every person to his or her fullest potential. He and his colleagues Lisa Lahey, Andy Fleming, Matthew Miller, Claire Lee, and Inna Markus had put out the word among their extended networks in academia, consulting, HR, and corporate C-suites: Did anyone know of any organization, anywhere in the world, dedicated to developing every one of its people by weaving personal growth into day-to-day work?

The researchers found precious few companies that took that approach. In their initial pool of only 20 candidates, just two with 100 or more employees had been operating fully and successfully in that mode for at least five years. One was an East Coast investment firm called Bridgewater Associates, the other a West Coast real estate and movie theater management company called Decurion. The researchers spent hundreds of hours viewing the two firms’ practices and interviewing their people (and wrote about them in detail in “Making Business Personal”).

In these companies employees didn’t spend any time hiding their inadequacies or preserving their reputations. Rather, everyone — from the CEO on down — was expected to make mistakes and learn from them and grow. In fact, both organizations had elaborate systems designed to promote individuals into roles a bit beyond their comfort zones to ensure that they would inevitably learn from failure. In this way people became masters not of any particular skill but of learning to adjust to new situations, which produced organizations that were remarkably resilient.

Does that sound appealing? Before you answer, consider this anecdote, which Kegan also records in his article.

Not long ago, HBS professor Heidi Gardner presented a case she’d cowritten on Bridgewater to her class. “So how many of you would like to work at Bridgewater?” she inquired toward the end of the discussion. Fewer than five hands went up in a class of 80. “Why not?” she asked. One young woman who’d been an active and impressive contributor to the conversation answered: “I want people at work to think I’m better than I am; I don’t want them to see how I really am!”

And yet, how many people would disagree with Ted Mathas, the head of the mutual insurance company New York Life, who told Goffee and Jones: “When I was appointed CEO, my biggest concern was, would this [job] allow me to truly say what I think? I needed to be myself to do a good job. Everybody does.”

What to make of these two views? Are people being disingenuous (or perhaps naive) when they aspire to bring their true selves to work? Certainly one might want to work in a company that makes you the best you can be without widely advertising the missteps you make along the way. Kegan is quick to point out that there are other ways to realize people’s full potential. But he also suggests that some people think they’d prefer an embarrassment-free work zone because they cannot imagine how something so painful at work could lead to something expansive and life changing.

Before you decide which view you agree with, take this assessment that Kegan and his associates have developed, and see how well suited you are to traveling down the no-spin path to fulfilling your highest potential. 

Strategic Humor: Cartoons from the July-August 2014 Issue

Enjoy these cartoons from the July–August issue of HBR, and test your management wit in the TWO HBR Cartoon Caption Contests we’re running this month. The first contest, for our September issue, is at the bottom of this post, and the second contest, for our October issue, can be found here. If we choose your caption as the winner, you will be featured in an upcoming magazine issue and win a free Harvard Business Review Press book.

Bob Eckstein

“Good. Now we’ll take things up a notch and have you check your work e-mails…”

Paula Pratt

“It works, but is it scalable?”

Kaamran Hafeez

“Admittedly, it’s a niche market.”

Crowden Satz

“We’ve updated the company manual.”

Bob Vojtko

And congratulations to our July–August caption contest winner, Lance Kelly of Manchester, Connecticut. Here’s his winning caption: 

“I’m loving this blue ocean strategy.”

Cartoonist: Ken Krimstein

SEPTEMBER CAPTION CONTEST

Enter your caption for this cartoon in the comments below—you could be featured in the September magazine issue and win a free book. And don’t forget we’re running TWO caption contests this month—the second contest, for our October issue, can be found here. To be considered for either of this month’s contests, please submit your caption by August 3.

Cartoonist: Paula Pratt

Strategic Humor: Caption Contest for the October 2014 Issue

Test your management wit in the TWO HBR Cartoon Caption Contests we’re running this month. The first contest, for our September issue, can be found here, and the second contest, for our October issue, is below. If we choose your caption as the winner, you will be featured in an upcoming magazine issue and win a free Harvard Business Review Press book.

OCTOBER CAPTION CONTEST

Enter your caption for this cartoon in the comments below. To be considered for either of this month’s contests, please submit your caption by August 3.

Cartoonist: Crowden Satz

You’re More Likely to Reject Hierarchies if You Feel Unattractive

Research participants who had been asked to write about an incident in which they felt physically attractive were about half as likely to donate their $50 compensation to the Occupy movement as people who had been primed to think of themselves as unattractive, say Peter Belmi and Margaret Neale of Stanford. When people believe they’re attractive, they see themselves as belonging to a higher social class, a perception that results in their taking a more-favorable view of inequality, the researchers say. People who feel unattractive, by contrast, are more likely to reject inequality and social hierarchies.

Morning People Are Less Ethical at Night

Employees face many temptations to behave unethically at work. Resisting those temptations requires energy and effort. But the energy that is essential to exert self-control waxes and wanes. And when that energy is low, people are more likely to behave unethically. This opens up the possibility that even within the same day, a given person could be ethical at one point in time and unethical at another point in time.

Over the past few years, management and psychology research has uncovered something interesting: both energy and ethics vary over time. In contrast to the assumption that good people typically do good things, and bad people do bad things, there is mounting evidence that good people can be unethical and bad people can be ethical, depending on the pressures of the moment.  For example, people who didn’t sleep well the previous night can often act unethically, even if they aren’t unethical people.

Our research started from this idea. Drawing from recent research indicating that people can become more unethical as the day wears on, we asked whether this plays out the same way for people who show different patterns of energy during the course of a day. Fatigue researchers have discovered that alertness and energy follow a predictable daily cycle that is aligned with the circadian process. However, different people may be shifted in their circadian rhythms. Some people are “larks” or “morning people” in that their circadian rhythm is shifted earlier in the day. They are most easily detected by their natural tendency to wake early in the morning. Others are “owls” or “evening people” and they are shifted in the opposite direction. Larks tend to get up early, and owls tend to stay up late.

Building from this research, we predicted that larks and owls would follow different patterns of ethical and unethical behavior over the course of a day. Because their energy levels should follow different patterns, and this energy is crucial for resisting temptation, we expected larks to be more unethical late at night than early in the morning, and owls to be more unethical early in the morning than late at night. To test this prediction, we conducted two laboratory studies.

In our first study, we focused only on behavior in the morning. We brought research participants into a laboratory, and gave them a simple matrix task in which we paid them additional money for each additional matrix that they said they solved. Participants believed that their work was anonymous, and could thus over-report to earn more money. But we were able to go back and determine how many they actually solved. In other words, we could determine who cheated by over-reporting the number of solved matrices. Consistent with our prediction, since these were morning sessions: night owls were more likely to cheat than larks.

In our second study, we tested the full prediction—that unethical behavior would depend on both circadian rhythms and the time of day. We randomly assigned a new set of research participants to a laboratory session either early in the morning (7-8:30am) or late at night (midnight-1:30am). Participants undertook a die rolling task previously established as a test for unethical behavior. In this task, they anonymously rolled a die and reported the number back to us, and we paid paying them based on the number they reported (higher amounts for higher rolls).

Although we didn’t know what numbers participants actually rolled, we did know that everyone should report an average of 3.5. So any systematic differences across conditions (morning people in the morning vs. evening people in the morning, for example), would indicate cheating. Consistent with our prediction, an interesting and statistically significant pattern emerged. Larks in the night session reported getting higher rolls (M=4.55) than larks in the morning sessions (M=3.86), and owls in the morning session reported higher rolls (M=4.23) than owls in the night sessions (3.80). This evidence is consistent with the idea that larks will be more unethical at night than in the morning, and that owls will be more unethical in the morning than at night. A more detailed description will be provided later this year in our forthcoming article in the journal Psychological Science.

The important organizational takeaway from these findings is that individual may be more likely to act unethically when they are “mismatched” –that is, making a decision at the wrong time of day for their own chronotype. Managers should try to learn the chronotype (lark, owl, or in between) of their subordinates and make sure to respect it when deciding how to structure their work. Managers who ask a lark to make ethics-testing decisions at night, or an owl to make such decisions in the morning, run the risk of encouraging rather than discouraging unethical behavior.

Similarly, people who control their own work schedules should structure their work with their chronotype in mind. Many of us are tempted to squeeze in that extra hour of work. If we’re a morning person squeezing it in at night, though, we create a situation in which resisting temptation may be harder than ever. Larks who schedule extra hours for themselves early in the morning face the same issue.

Instinct Can Beat Analytical Thinking

Researchers have confronted us in recent years with example after example of how we humans get things wrong when it comes to making decisions. We misunderstand probability, we’re myopic, we pay attention to the wrong things, and we just generally mess up. This popular triumph of the “heuristics and biases” literature pioneered by psychologists Daniel Kahneman and Amos Tversky has made us aware of flaws that economics long glossed over, and led to interesting innovations in retirement planning and government policy.

It is not, however, the only lens through which to view decision-making. Psychologist Gerd Gigerenzer has spent his career focusing on the ways in which we get things right, or could at least learn to. In Gigerenzer’s view, using heuristics, rules of thumb, and other shortcuts often leads to better decisions than the models of “rational” decision-making developed by mathematicians and statisticians. At times this belief has led the managing director of the Max Planck Institute for Human Development in Berlin into pretty fierce debates with his intellectual opponents. It has also led to a growing body of fascinating research, and a growing library of books for lay readers, the latest of which, Risk Savvy: How to Make Good Decisions, is just out.

During a visit to HBR’s New York office, Gigerenzer discussed his work for an Ideacast podcast, which you can listen to here:

Download this podcast

We then continued talking well past the Ideacast time limit. What follows is a much-edited rendition of the full conversation.

HBR: Most of us are used to hearing about how bad we are at making decisions under conditions of uncertainty, and how our intuitions often lead us astray. But that’s not entirely the direction your research has gone in, correct?

Gerd Gigerenzer: I always wonder why people want to hear how bad their own decisions are, or at least, how dumb everyone else is. That’s not my direction. I’m interested to help people to make better decisions, not to state that they have these cognitive illusions and are basically hopeless when it comes to risk.

But a lot of your research over the years has shown people making mistakes.

Just imagine, a few centuries ago, who would have thought that everyone will be able to read and write? Now, today, we need risk literacy. I believe if we teach young people, children, the mathematics of uncertainty, statistical thinking, instead of only the mathematics of certainty – trigonometry, geometry, all beautiful things that most of us never need – then we can have a new society which is more able to deal with risk and uncertainty.

By teaching people how to deal with uncertainty, do you mean taking statistics class, studying decision theory?

If you’re in the world where you can calculate the risk, then statistical thinking is enough, and logic. If you go in a casino and play roulette, you can calculate how you will lose in the long run. But most of our problems are about uncertainty. So, for instance, in the course of the financial crisis, it was said that banks play in the casino. If only that would be true — then they could calculate the risks. But they play in the real world of uncertainty, where we do not know all the alternatives or the consequences, and the risks are very hard to estimate because everything is dynamic, there are domino effects, surprises happen, all kinds of things happen.

Risk modeling in the banks grew out of probability theory.

Right, and that’s the reason why these models fail. We need statistical thinking for a world where we can calculate the risk, but in a world of uncertainty, we need more. We need rules of thumb called heuristics, and good intuitions. That distinction is not made in most of economics and most of the other cognitive sciences, and people believe that they can model or reduce all uncertainty to risk.

You tell a story that I guess is borrowed from Nassim Taleb , about a turkey. What’s the problem with the way that turkey approached risk management?

Assume you are a turkey and it’s the first day of your life. A man comes in and you believe, “He kills me.” But he feeds you. Next day, he comes again and you fear, “He kills me,” but he feeds you. Third day, the same thing. By any standard model, the probability that he will feed you and not kill you increases day by day, and on day 100, it is higher than any before. And it’s the day before Thanksgiving, and you are dead meat. So the turkey confused the world of uncertainty with one of calculated risk. And the turkey illusion is probably not so often in turkeys, but mostly in people.

What kind of rule of thumb would help a person, or a turkey, in that sort of situation?

Let’s use people for that. For instance, the value at risk and other standard models that rating agencies used before the crisis in 2008 — the same thing happened there. The confidence increased year by year, and shortly before the crisis, it was highest. These types of models cannot predict any crisis, and have missed every one. They work when the world is stable. They’re like if you have an airbag in your car that works all the time except when you have an accident.

So we need to go away from probability theory and investigate smart heuristics. I have a project with the Bank of England called simple heuristics for a safer world of finance. We study what kind of simple heuristics could make the world safer. When Mervyn King was still the governor, I asked him which simple rules could help. Mervyn said start with no leverage ratio above 10 to one.  Most banks don’t like this idea, for obvious reasons. They can do their own value-at-risk calculations with internal models and there is no way for the central banks to check that. But these kinds of simple rules are not as easy to game. There are not so many parameters to estimate.

Here’s a general idea: In a big bank that needs to estimate maybe thousands of parameters to calculate its value-at-risk, the error introduced by these estimates is so big that you should make it simple. If you are in a small bank that doesn’t do big investments, you are in a much safer and more stable mode. And here, the complex calculations may actually pay. So, in general, if you are in an uncertain world, make it simple. If you are in a world that’s highly predictable, make it complex.

What about the role of intuition and gut feelings in all of this? Clearly, in business, that’s a big issue.

Gut feelings are tools for an uncertain world. They’re not caprice. They are not a sixth sense or God’s voice. They are based on lots of experience, an unconscious form of intelligence.

I’ve worked with large companies and asked decision makers how often they base an important professional decision on that gut feeling. In the companies I’ve worked with, which are large international companies, about 50% of all decisions are at the end a gut decision.

But the same managers would never admit this in public. There’s fear of being made responsible if something goes wrong, so they have developed a few strategies to deal with this fear. One is to find reasons after the fact. A top manager may have a gut feeling, but then he asks an employee to find facts the next two weeks, and thereafter the decision is presented as a fact-based, big-data-based decision. That’s a waste of time, intelligence, and money. The more expensive version is to hire a consulting company, which will provide a 200-page document to justify the gut feeling. And then there is the most expensive version, namely defensive decision making. Here, a manager feels he should go with option A, but if something goes wrong, he can’t explain it, so that’s not good. So he recommends option B, something of a secondary or third-class choice. Defensive decision-making hurts the company and protects the decision maker. In the studies I’ve done with large companies, it happens in about a third to half of all important decisions. You can imagine how much these companies lose.

But there is a move in business towards using data more intelligently. There’s exploding amounts of it in certain industries, and definitely in the pages of HBR, it’s all about Gee, how do I automate more of these decisions?

That’s a good strategy if you have a business in a very stable world. Big data has a long tradition in astronomy. For thousands of years, people have collected amazing data, and the heavenly bodies up there are fairly stable, relative to our short time of lives. But if you deal with an uncertain world, big data will provide an illusion of certainty. For instance, in Risk Savvy I’ve analyzed the predictions of the top investment banks worldwide on exchange rates. If you look at that, then you know that big data fails. In an uncertain world you need something else. Good intuitions, smart heuristics. But most of economics is not yet prepared to admit that there would be another tool besides expected utility maximization.

You tell the story in your book of Harry Markowitz , who introduced expected utility maximization to the world of investing with modern portfolio theory. How does he actually choose his investments?

When Harry Markowitz made his own investments for the time after his retirement, he relied on a simple heuristic. A quite intuitive one, which is invest your money equally. If you have two options, 50-50; three, a third, a third, a third; and so on. It’s called “one over N.” N is the number of options. We and others have studied how good one over N is. In most of the studies, one over N outperforms optimizing Markowitz portfolios.

Can we identify the world in which a simple heuristic, one over N, is better than the entire optimization calculation? That’s what Reinhard Selten and I call the study of the ecological rationality of a heuristic. If the world is highly predictable, you have lots of data and only a few parameters to estimate, then do your complex models. But if the world is highly unpredictable and unstable, as in the stock market, you have many parameters to estimate and relatively little data. Then make it simple.

To use the taxonomy popularized in the last couple of years by Daniel Kahneman, it’s not about putting system two in charge, and keeping system one under control. It’s about figuring out which situations are best for each.

I have my own opinion about system one and system two, and if you want me to share …

Well, I know you and Kahneman have been debating these things for decades, so sure.

What is system one and system two? It’s a list of dichotomies. Heuristic versus calculated rationality, unconscious versus conscious, error-prone versus always right, and so on. Usually, science starts with these vague dichotomies and works out a precise model. This is the only case I know where one progresses in the other direction. We have had, and still have, precise models of heuristics, like one over N. And at the same time, we have precise models for so-called rational decision making, which are quite different: Bayesian, Neyman-Pearson, and so on. What the system one, system two story does, it lumps all of these things into two black boxes, and it’s happy just saying it’s system one, it’s system two. It can predict nothing. It can explain after the fact almost everything. I do not consider this progress.

The alignment of heuristic and unconscious is not true. Every heuristic can be used consciously or unconsciously. The alignment between heuristic and error-prone is also not true. So, what we need is to go back to precise models and ask ourselves, when is one over N a good idea, and when not? System one, system two doesn’t even ask this. It assumes that heuristics are always bad, or always second best.

It seems like in leadership in business and elsewhere, you really are stuck or blessed with heuristics, because the whole idea is you’re pushing into unknown territory. For a leader, what are some of the key heuristics you’ve found over the years that seem to work?

There are heuristics that we can simulate and mathematically treat. But others are more like verbal recipes. The more uncertain the world is, the more you need to go into verbal recipes.

There’s an entire class of heuristics that I call one-good-reason decision-making. Assume you have a large company with a customer base of 100,000, and you want to not target those customers who will never buy from you. So, how to predict which customers will buy, and which will not? According to standard marketing theory, it’s a complex problem, so you need a complex solution — for instance, the Pareto negative binomial distribution model, which has four parameters you estimate and gives you the probability for each customer that he or she will make future purchases. The other vision is it’s a complex problem in a world of uncertainty. Therefore, you need to find a simple solution because you will get too much error by making all these estimates.

The hiatus heuristic is an example: if a customer has not bought for at least nine months, classify as inactive; otherwise, active. Now, you might say, relying on one good reason can never be better than relying on this reason and many others, and doing impressive mathematical computation. But that’s a big error in a world of uncertainty. Studies have shown that for, instance, at an airline, the simple heuristic predicted future customer behavior better than the complex Pareto model. The same for an apparel business.

Less was more.

Yeah, less is more. A number of studies have shown, for instance, that in language learning what works is a limited memory and simple sentences. Parents do this intuitively. It’s called baby talk. And that works. And children learn. And then, the sentences get a little bit more complex, and the memory gets extended and this is the way to make a good language understanding.

The problem of the heuristics and biases people, including much of behavioral economics, is they keep the standard models normative, and think whenever someone does something different, it must be a sign of cognitive limitations. That’s a big error. Because in a world of uncertainty, these models are not normative. I mean, everyone should be able to understand that.

I hope that at some point, the economists turn around and realize that their models are good for one class of situations, but not for another. And also, that psychologists and also economists realize that there’s a mathematical study of heuristics. That heuristics are not just words like availability or representative that explain everything post-hoc, but can predict things. One over N, recognition heuristic, one-good-reason can predict very well, and can be shown to be wrong in certain situations.

The recognition heuristic is a classic one, where there’s been lots of stock market research done by people like Terry Odean at Berkeley about how people made bad decisions in investing because of the recognition heuristic. But you’ve done studies that found Americans were better than Germans at picking which of various pairs of German cities had the higher population, and Germans were better than Americans on the American cities, because the foreigners simply picked the cities they recognized.

The fun thing is that the entire idea that a simple heuristic could do well arises so much resistance. There were two Germanpsychologists who said okay, we believe that people rely on this heuristic, but it can’t be good. And they were arguing that because the cities are a stable world, it may work there. But they selected a world where they thought that Germans were really biased. It’s the prediction of all Wimbledon tennis matches in gentlemen’s singles.

They were arguing, first, it’s a highly dynamic environment. The winner of last time is no longer the winner this time. Second, we use Germans’ predictions and German players did not do very well. This was the time after Becker. They had three gold standards, which was the two ATP rankings — one is a moving year, the other is calendar year — and the Wimbledon seeding. Then, they needed people who are semi-ignorant, and the ideal group is those who has heard of half of the players and not heard of the other half. They found German amateur players in Berlin, who had not even heard of half of these guys. So they made a recognition ranking.

What was the result? The ATP ranking number one got 66% correct. The other ATP ranking got 68%, the Wimbledon seedings did 69%. And the recognition heuristic correctly predicted 72% of the match results. That was not what they wanted to show. That was repeated two years later, with basically the same result.