Archive for the ‘Strategy’ category

The Compelling Role of Reciprocation

June 4, 2009

At its core, a “weapon of influence” is a trigger. It stimulates a response that is truly compelling and one that we have difficulty ignoring.

The first “weapon of influence” is one that Cialdini refers to as reciprocation. You can see the concept of reciprocation being put into play every single day. Those address labels that accompany the letter requesting that you donate to a worthy cause… reciprocation, in this case, in the form of an uninvited debt. Gifts to politicians with the intention of receiving support later on…reciprocation. Even the free sample given by manufacturers with the intention of exposing someone to a product is still another form of – you guessed it – reciprocation. And it is core to the way we raise our children (i.e. the golden rule and if you want him to be nice to you, you have to treat him nicely)

The rule of reciprocation states that “we should try to repay, in kind, what another person has provided to us.” The need to reciprocate is a self-imposed obligation that we place on ourselves. You can even see it in our language as “much obliged” has become synonymous with “thank you.” In fact, this sense of obligation is pervasive in all human society.

In reading Cialdini’s work, I was frankly ambivalent. On the one hand, I was concerned that I was becoming wise to ways that I was being manipulated (or, dare I say, in fact, manipulating others). However, as I reflected more and more on the book, I realized that these influence factors are truly an engine for advancement and care.

Some sociologists note that this sense of future obligation has made a significant difference in our ability to evolve because it meant that what we shared, gave, or even taught, would not be lost. Reciprocation is the basis of trade, mutual defense and perhaps even friendship. Those who do not live by the rule of reciprocation are ultimately scorned (i.e moocher or ingrate). Reciprocation does indeed create a positive cultural norm.

The rule is also overpowering that it can even overcome dislike for the requester. Cialdini cites the Hare Krishna as truly understanding the rule. When they would solicit passerbys, they would not only offer a flower, but they would insist that the flower be accepted. They referred to it as “gift” and would not accept no for an answer. Fundraising was so successful that two important phenomena should be noted.

The first is that the passerbys often discarded the flower at the first available trash can. The Krishnas were thus able to recycle the gifts. There is also now a common practice in many airports to restrict solicitations to certain discrete areas simply because the power of obligation to accept a gift and to repay it is so overwhelming.

The reciprocation rule can also trigger unfair exchanges. Cialdini cites a woman whose car wouldn’t start. She was helped by a young man. About a month later, the young man asked to borrow the car, and while the woman hesitated, she felt compelled to lend him her car, even though she had misgivings about his age. Needless to say the young man totaled the car. The lesson though is that indebtedness and the need to reciprocate is an itch that we must scratch.

There are exceptions and they typically fall into the category of circumstance or ability. If circumstances or ability prevent us from reciprocating, we allow ourselves that latitude

The area that was particularly enlightening to me was the concept of reciprocal concession. This is a common tactic in negotiations where one party asks for something that would be deemed inappropriate simple so that the offer can be withdrawn and replaced by a less outrageous offer. The other party often feels a need to reciprocate to the concession and agrees to the new request.

To make this point, Cialdini draws on the testimony of Nixon associate Jeb Stuart Magruder, upon hearing that the Watergate burglars had been caught, responded by asking, “How could we have been so stupid?”

As the story goes, it seems that G. Gordon Liddy, who was in charge of the intelligence gathering for the Nixon campaign, had initially asked for $1,000,000 in cash for a wide range of activities. Magruder and Campaign Director John Mitchell kept declining the offer. Liddy kept scaling back the request until finally the rule of reciprocal concession kicked in and his request for $250,000 in cash for the break-in was approved.

As to more mundane examples, think of the salesman who shows you the top of the line product so that he can scale you back to sell you a more “affordable” item in the product line

Is there a way to say no? Cialdini suggests that one can say no if one adopts a mindset that recognizes the tactic for what is. This requires us to cognitively understand that reciprocation is a tactic and be present so that the tactic can be effectively managed.

The Psychology of Persuasion

June 1, 2009

About a week ago, I had dinner with one of my favorite friends. Andy’s mind is always racing. He had served as CEO of a very successful company in Buffalo, NY that was recognized as being a model for one of the most outstanding places to work in that region. Andy is also a serial entrepreneur and his quick and agile mind has enabled him to create, build and overcome almost any challenge.

I enjoy our dinners for so many reasons. It is a chance to catch up with a friend whom I admire and at the same time, I always discover that I have learned something insightful and valuable after we have spent time together. After four hours of dining and conversation with Andy, I found myself mentally exhausted but intellectually stimulated.

A significant portion of our evening’s discussion focused on the work of Dr. Robert Caldini. He’s the Ph.D. referenced in one of my earlier posts. I had bought his seminal work, Influence, The Psychology of Persuasion, about the same time as I had read the Time Magazine article. It was on my list of must-reads – I just hadn’t created the space to get through it.

Andy had met with Cialdini and was very favorably influenced by his thinking. This was the impetus that I needed to pick up Cialdini’s book.

Cialdini’s book is a mix of theoretical study and empirical research. He cites the works of others but frequently intertwines their research with his own experiences and investigations into how our minds assist others in moving us to certain decisions – often without us even realizing it.

His work is important. While it teaches us how our minds work, it also teaches us how to move people to appropriate directions. I don’t view his book as a study in manipulation. In fact, I believe it to be just the opposite. If you subscribe to the strategy of pre-eminence, that is, that as leaders and business consultants we have an obligation to help people past their fears while addressing their concerns, Caldini gives us methods to consider. Like everything in the world, it can be used appropriately or not.

With that as introduction, let us look at the six factors that he refers to as “weapons of influence.” These six are:

  1. Reciprocation
  2. Commitment and Consistency
  3. Social Proof
  4. Liking
  5. Authority
  6. Scarcity

Effectively employing these six factors allows one to perform a mental ju-jitsu on the other party. In his terms, it allows one to leverage the natural beliefs and inclinations of the buyer to create a preferred outcome for the seller.

To illustrate these weapons of influence / ju-jitsu perspectives, he poses the question about whether a salesperson would be more effective selling a high priced item before selling a low priced item or the other way around. In other words, which approach is more likely to result in both items being sold?

One’s initial thought might be to sell the low priced item and establish a “foot in the door.” However, marketers have discovered, particularly with higher priced items, that the exact opposite is true.

Think about it.

After you have bought the tailored suite or the fashionable dress, it is only then that the salesperson suggests that you might want to look at shirts, ties, socks, or accessories and shoes. There is a simple reason for this approach and it is the concept of “contrast.”

After spending a significant amount of money, the cost of the additional item does not seem all that much. By contrast, buying a sweater to complete a look is an insignificant purchase.

In our next post, we’ll look at the first of these weapons that Cialdini outlines – reciprocation.

How the Obama Administration Motivates Behaviors

May 26, 2009

The Time Magazine article was extremely instructive in helping us to understand the behavioral science oriented steps being taken by the Obama administration. In this post we’ll focus on a number of them. Specifically, they are:

  1. Supplying knowledge
  2. Making it easy
  3. Creating social norms
  4. Legislating the activity

According to the Time Magazine article, studies suggest that better information can help us make better choices. This information can be disseminated in the forms of public service announcements (PSA’s) or appeals from well respected figures (remember our discussion about the use of Hubs in building communities) and even serial dramas.

What this means is that aggressive rules for disclosure and clarity will likely result in people making more informed and better choices. Documenting best practices will also produce meaningful results.

The second way to influence behavior is to make it easy for those who wish to make the choice that you wish them to make. This is why default options – opt-out instead of opt-in – are very successful. The push to create an electronic health record (EHR) is one step along the path of making generic drugs our default prescription of choice.

The creation of social norms is yet another way to influence what we choose. An appeal to conformity is very effective as we are a herdlike species. If our peers are obese, we are more comfortable choosing to be that way. What works is creating a sense that choosing not to participate in an effort sets us apart from social norms and therefore, we will take steps to be in sync with our peers. This is a technique that has been used successfully even in forwarding goals that are inappropriate or morally wrong (think McCarthyism).

The last factor that the Time Magazine article addresses is what happens when a nudge is insufficient. At that point, a strategy of making something mandatory is very useful. That’s why there is interest in taxing undesirable behaviors such as cigarettes, alcohol and even trans-fats consumption and subsidizing desirable behaviors such as weatherizing a home or the purchase of fuel efficient cars.

Now, when we hear a new initiative being proposed by the Obama Administration, our awareness to the work of the behavioral scientists will be present. Let’s hope that these efforts though are used to move us in the right directions.

In the ensuing posts, we’ll look at like some of the other models and variants that allow us to influence others.

Understanding the Science of Change

May 22, 2009

I have always been a big believer that the universe has a tendency to bring ideas, concepts and even people to you when you need them to be in front of you. When that occurs in my life, after I finally recognize that it is happening – and yes, sometimes it takes me a while to notice — I begin to immerse myself in the idea or get to know that person better.

Lately, a new concept has been showing up and so over the next few posts, I’m going to write about it. I’m also going to read about it and share what I learn along the way.

In the April 13th, 2009 edition of Time Magazine, there was an article by Michael Grunwald called “How Obama is Using the Science of Change.” The article cited the work of behavioral scientist Robert Cialdini who found that that the most powerful motivator was that “people want to do what they think others will do.” Cialdini is the author of the best seller “Influence.” (For what its worth, Cialdini is the name that keeps popping up…more on that in the next few posts)

According to Time, Obama leans heavily on the work of the behavioral scientists to understand what makes people tick and then, using this knowledge, he intends to spur behavioral change throughout the country. He’s leveraging what he learned about people to move forward his agenda on the economy, healthcare and energy.

The power of these nudges is huge. For example, is there a difference in the number of people who participate in a 401 K plan if they have to sign up or would that number change if they were signed up already and had to opt out? Well, a 2001 study showed that only 36% of women joined a 401K plan when they had to sign up for it…but when they had to opt out, 86% participated.

The implications of using behavioral science in our business and personal lives are huge. This notion affects sales, marketing, management, leadership and even how we lead our communities or exist within our families.

So how is the Obama Administration using what they have learned? Consider the way Americans received the $116 billion in payroll tax cuts from the stimulus package. Obama chose NOT to send one lump sum check even if that would have put the money in the hands of Americans faster. His administration was concerned that a lump sum check might be viewed as a windfall and deposited in a bank account instead of being spent to rev up the economy. Instead, the money is being released through decreased payroll withholding. Smaller amounts spread over time are more likely to be spent. The idea is to subtly nudge us to spend the extra cash.

Make no mistake – this is a radical departure from the way that we have let the free market dictate how things work. Some might call this “manipulation,” but to change our ingrained behaviors, this might be necessary. And we may discover that behavioral science is compatible with free market thinking as it may prove to be an accelerator in how we interact with the free markets.

The Time magazine article goes on to highlight several elements that help us to change behavior. And that will be the subject of the next post.

The Importance of Looking at External Threats and Opportunities

May 17, 2009

My recent forays into the housewares industry and events within my own community have heightened my sensitivity to the importance of looking at our businesses and organizations in the context of the environment within which we operate.

My friends in the housewares industry are very concerned about how their major clients will react to any efforts that they undertake to create new channels for their products and services. Still, the advent of online communities, while representing a unique opportunity, also represents a perilous threat. If the industry ignores the opportunity and someone else chooses to capitalize on it, their businesses may be further imperiled.

Closer to home, my community is experiencing a tuition crisis. The core lifeblood of the community for several generations has been its ability to educate its children about religious and cultural values. The recent economic downturn has accelerated a crisis that has been developing, and been largely ignored, for years. Parents are finding it difficult to pay for this type of education and many, by economic necessity, are choosing to send their children to schools that do not supply this core sustaining educational program. Leadership in identifying and addressing this problem has been conspicuously absent.

What both situations have in common is that there is an external environmental factor that needs to be seriously considered and addressed.

In the case of our housewares friends, failing to act and create that other channel may result in a significant competitor that further erodes their businesses. In the case of the community, failing to act may decrease the connection between the members of the community and their culture and ultimately lead to an unwillingness or lack of desire to support projects that are integral to the community’s growth, simply because the connection to its values has been compromised.

The lesson in external threats and opportunities is that failing to act has as significant a set of consequences as choosing to take action. Decisions and non-decisions have consequences. As long as one is prepared to accept the consequences, any decision is acceptable.

The important thing is to make sure that those consequences are considered before choosing whether to move ahead or whether to pass on an opportunity.

Returning to “Normal”

May 15, 2009

ile it is valuable to know how this challenging economic situation occurred, the gnawing question on everyone’s minds is “when will things turn around?”

Joel Naroff thinks that we are on our way but he does have some concerns for the future. In his own words, Naroff notes that “the pendulum has begun to swing.” Yet, it will likely take years to clean up the mess that was made while cleaning up the mess.

For the most part, he believes the government stimulus was the right solution.

His rationale is pretty straightforward.

For a country to exit a recession there needs to be a particular sector leading the way. We’d love it to b the business / housing sector. However, the business / housing sector assumed the turtle position. They went into a shell and reduced costs.

Our second choice would be the household sector but that sector is worried about having jobs and is hoarding cash, so this group won’t be our savior.

That leaves only one other segment to create growth – the government.

The reality is that there will be a lot of spending from the stimulus bill and it will start with construction.

And soon, 90% of those who have jobs will realize by the summer that they will make it and start to buy.

The jumpstart from the government will jumpstart the household sector which will jumpstart the private sector.

More good news…

The housing market is starting to bottom out. We know that this is happening because distressed assets (foreclosed homes) are starting to be purchased. If people are willing to make a deal, it means that they believe the price is close to its bottom.

Confidence is starting to rise.

And a lot of things have stabilized…even though we now need growth and not stabilization.

There are clouds though on the horizon.

The first concern rests on managing the potential for significant inflation. Naroff thiks that the Federal Reserve will have to increase the current low interest rates quickly – perhaps to 5 or 6% — and doing so will likely slow down growth.

Second, the latest budget projections has the federal deficit  approaching $2 trillion. And if interest rates go up, the debt service on this deficit will increase dramatically.

Banks will also move much more cautiously when lending money, in part because of their need to avoid the mistakes that were made so recently.

All of these factors will moderate growth.

Still – and this may actually be a good thing – we will need to learn to spend our income and not the appreciated financial or housing assets that so dramatically rose.

The bottom line for Mr. Naroff:.

Cleaning up the mess that cleaned up the mess will take 5 – 10 years. We have problems with interest rates, the deficit and the government being in the private sector.

We have not had real innovative growth for 20 years. We need to have technology innovation rather than financial innovation.  We have had recession then bubble then recession then bubble. Our growth has been driven by bubbles.

You can expect long periods of modest to moderate growth as growth conditions have changed dramatically

The Fed will raise the funds rates quickly because we will be worrying about inflation. Long term rates will likely rise by the Fall. He suggests that the Fed will be raising the funds rate from zero to 5- 6% in a year.

The ride will still be bumpy but it looks like, according to Joel Naroff, at least we are riding in the right direction.

The Financial Crisis — One Leading Economist’s Perspective

May 12, 2009

Earlier this week, I had the opportunity to hear nationally acclaimed economic expert Joel L. Naroff, Ph.D. Naroff is a well decorated economist.  He was selected for having the most accurate economic forecast among the Blue Chip Economics Indicators survey participants for the years 2004 to 2007. Bloomberg Business News also named Naroff Top Forecaster in America for 2008 and he has been quoted in most of the major business publications and appeared on many of the major business news networks.

I was therefore very interested in what he had to say about the economy. Because I found his perspective unique, I thought to share my understanding of what he said with you.

Generally speaking, he presented an optimistic view of the immediate economic future, although he had some concerns about the long term picture.

Naroff first explained that the most important responsibility of an economist is to tell when things change. In fact, this is the same major role of a business leader. S/he too must know when conditions change. He views his job as looking at turning points.

So here was his take on what got us into this mess…

Naroff believes the villain in all of this is the dot coms. (The dot coms? Yes, that was what he said…read on) The dot coms taught us all a very valuable lesson and that was not to invest in vapor. Companies needed to have value and be tangible.

Learning this lesson paved the way for what we are experiencing today.

The byproduct of this lesson is that our next investment choice would be something that is the antithesis of vapor and something that always appreciates. And so we targeted real estate.

As you may recall, in order to get a mortgage, one needed to place 20% down, have a credit rating of 720 and show several years of meaningful income as evidenced by your tax returns. This was a good way of determining who was willing to put “skin in the game” (the downpayment part) and who could afford to make payments on a mortgage.

So the real estate market gets hot, and the finance industry sells to this target segment that has these credentials to purchase real estate.

Eventually, though they exhaust this target segment, and therefore a new target segment is needed. The financial community then lowers the standards by which one could be deemed worthy of receiving a loan in order to increase the size of the segment. In 2003, the standards are lowered and then, they are lowered again in 2004.

Before long, the requirement of putting money down disappears, people with less than stellar credit ratings are considered appropriate and all one had to do was spell the word “j-o-b.”

People began to flip houses because it is easy to do. Real estate prices increase 40% in one year and then 30% in the next.

And so, we experience a dot com boom all over again. People are “investing” in real estate without placing any money down. As Naroff explained, when you place no money down on a house, it is not a mortgage – it is a lease.

This bubble had to burst.

Construction starts to collapse and its collapse ripples to all supporting businesses including electrical, woodworking and manufacturing.

Meanwhile, Wall Street discovers that it can bundle all of these distressed mortgages and have them rated as securities. And with no money down, these bundles get AAA ratings.

Housing starts to devalue and once the mortgage exceeds the value of the property, people decide not to pay their mortgage. With no money down, it is easy to walk away.

The problem began to mushroom when many of the banks keep these securities on their books. This was a huge mistake. When people walk away from their obligations,  the housing values plummet and when they plummet, so do the values of these securities.

The decelerating cycle was now underway.

In September, Lehman Bros goes under. A bank actually sends several million marks to Lehman twelve minutes before Lehman marched into Federal Court. When a bank learns it can’t lend to another bank and, because everything in our economy operates on credit, this is tantamount to a kiss of death.

A crisis of confidence emerges as we listen each weekend for news that another major financial institution is about to go bankrupt.

In October, we get TARP, the first financial bailout program. It is partly designed to mask the problem before the national election – and even though we wasted money, the financial system was stabilized.

So in 2005 – 2006 – everyone got credit

And in 2007 – 2008, no one gets credit.

In our next post, we’ll share what Joel Naroff explains about how and when he thinks we will get out from this crisis.