Saturday, October 07, 2006

You'll lose money treating consumers as highly rational

Andrew McAfee is a Harvard professor who coined the term, Enterprise 2.0, to describe social networking technology applied to a company. A warning - you'll be reading a lot more about that here in weeks to come.

But for now, he's written an interesting article about the adoption of these technologies, which can be applied to the commercialization of any innovation. The first thing that caught my eye was:
One of the benefits of being an academic is the ability to attend seminars that seem to have nothing to do with your own work.
Now why would you do that? Well of course, because:
The intersection of disciplines or cultures is a vibrant place for creativity because bringing together very different concepts from very different fields sets off an explosion of ideas.
Where have you heard that before?

Then he cites some insightful research by John Gourville at Harvard.
We need to stop thinking about consumers as highly rational evaluators of the old vs. the new products, lining up pros and cons of each in mental tables and then selecting the winner. Instead, we need to keep in mind three well-documented features of our cognitive 'equipment' for making evaluations.

  • We make relative evaluations, not absolute ones. When I'm at a poker table deciding whether to call a bet, I don't think of what my total net worth will be if I win the hand vs. if I lose it. Instead, I think in relative terms -- whether I'll be 'up' or 'down.'

  • Our reference point is the status quo. My poker table comparisons are made with respect to where I am at that point in time. "If I win this hand I'll be up $40; if I lose it I'll be down $10 compared to my current bankroll." It's only at the end of the night that my horizon broadens enough to see if I'm up or down for the whole game.

  • We are loss averse. A $50 loss looms larger than a $50 gain. Loss aversion is virtually universal across people and contexts, and is not much affected by how much wealth one already has. Ample research has demonstrated that people find that a prospective loss of $x is about two to three times as painful as a prospective gain of $x is pleasurable.
  • 1 comment:

    Tom Neil said...

    Interesting citing of McAfee's article.
    I just returned from the Consortium for Research on Emotional Intelligence in Organizations 10th research seminar of which I am a member. Dan Goleman presented his latest work on Social Intelligence.
    I facilitated an incubator group focusing on EI for Groups, Organizations, & Culture & developed a brief for guidance.
    Also, I have co-authored an article , which investigated the orientation to success vs failure. We found that in allocating a resource (time) to new ventures, the decision-maker took time from above target ventures & gave time to below performing.

    EI at the Group, Organizational, & Cultural Levels: Discussion Points

    Serendipity can be a wonderful experience. After wrestling with the “Gaps” for over a week, I’d narrowed them from about 15 to 5, submitted these to Cary, and received feedback. Over the weekend of August 26th, I meet with one of the entrepreneurial owners of a restaurant venture that was in its 11th month of operations and exceeding projected sales. The issue for this meeting was developing the staff, especially for managerial responsibilities. Interestingly, as the owner described the behavior of two employees, an adult Hispanic and an 18-year old white female, it became apparent the two were collaborating by doing the shift management tasks at which each was best. Then, he described how they used staff to provide feedback on the performance of new hires. Based on his 10 years in the culinary industry, he felt this was not typical. Recognizing he was seeking confirmation not advice, I responded, “Perhaps not, if the reality show ‘Hell’s Kitchen’ is an example. But, your approach fits both research findings and best practices”.
    I’ve being investigating the “virtual world” world for educational, promotional, and experimental purposes. In doing the research, I stumbled across studies focusing on improving ‘new product development’ through more effective social networking, social knowledge development, and communication.
    This serendipity brought back into focus my experiences in facilitating seminars on ‘Leadership & Communications” & “Managing Teams & Groups’ for MSc International Students at ESC Dijon. The student mix has been changing from primarily Western Europe to Central and Eastern Europe to this year including Chinese, Korean, & Indian. These ‘cultural’ differences underscored differences in emotional demeanor, the centrality of effective interpersonal communications, the ability to ‘read’ the non-verbal, ‘listen’ through the hybrid ‘English’, ‘hear’ the ‘emotional’ message, and ‘produce’ an appropriate communication in hybrid ‘English’. All differences relevant for communicating ideas, transferring knowledge, and engaging in the innovative process.
    I offer two themes in regard to the relationship of EI to groups, organizations, and culture;
    1) The centrality of communication, especially the affective component, for developing and sustaining dynamic, diverse groups:
    2) The relationship of EI to social identity, social networks, & social knowledge for performance, creativity, & innovation as demonstrated in ‘new product development’ (NPD).
    In addition, two alternative perspectives provide opportunities for exploring how emotions are used to influence behavior:
    1) Emotional messaging in & across cultures in terms of receptivity and retention to commercial initiatives;
    2) Interfacing on the Internet and in Virtual Worlds for social, learning & commercial purposes.

    Communication, verbal and non-verbal, is essential for understanding the human condition, in its metaphysical sense, through describing the reasoning and emotions associated with being and existing within social organizations.
    An organization’s success rests upon its individual members’ ability and willingness to share information and tacit expertise, to share and collaborate on creative and innovative ideas, and interact cooperatively, when faced with both threats and opportunities. An organization thrives when its members, from different functional areas, technical skills and perspectives, are encouraged and supported in becoming ‘emotionally competent’. Emotional competence enhances the individual’s capacity to apply and transfer technical knowledge, both explicit and implicit, through social relationships. An organization that seeks to develop and sustain emotionally competent members needs a systematic process that provides the conditions, which facilitate accurate information about each individual's current emotional intelligence, communication skills, and a continuous learning program.

    “Information is thus not just the result of a particular distribution or retrieval process, using and applying existing knowledge to new problems – although this, of course will still be a major impetus for innovation -, but is also the result of communication processes. This can be called the network or communication approach to knowledge management.” [Kuhlen, 2003, Change of Paradigm in Knowledge Management - Framework for the Collaborative Production and Exchange of Knowledge, http://www.inf-wiss.uni]
    Knowledge management - is an essentially cooperative process in which different people collaboratively work together to share and build up knowledge. Tacit knowledge, especially related to the firm’s technology, must be effectively transferred within and across functional partners. Communicative behaviors, which facilitate respect, openness, understanding, and trust, have been linked to the transfer of tacit knowledge between collaborating partners. Research on cross-functional project groups, especially in technological research and new product development settings, indicates that relational communication is essential in determining performance outcomes.
    Research Resources
    Cultural Perspectives – Using Marketing & Learning Research Lens
    - Empathy versus Pride: The Influence of Emotional Appeals across Cultures, Jennifer L. Aaker & Patti Williams,
    - Emotional Response to Advertisements (or Commercials) Across Cultures, J. D. Morris, K. L. Strausbaugh, M. Nthangeni,
    - Culture-Specific Patterns in the Prediction of Life Satisfaction: Roles of Emotion, Relationship Quality, and Self-Esteem, Sun-Mee Kang, Phillip R. Shaver, Stanley Sue, University of California, Davis, Kyung-Hwan Min, Seoul National University, Hauibin Jing Sun Yet–Sen University,
    - - The purpose of the conference is to stimulate research and to foster interaction of researchers and practitioners in Intercultural Communication and Cross-Cultural learning.
    - Fostering creativity and productivity through emotional literacy: the organizational context, James Park, Development and Learning in Organizations Volume 19 Number 4 2005 pp. 5-7. Investigated the extent to which individuals were able to be curious, resilient, creative, strategic and interdependent, when organized to communicate with each other in an emotionally literate way.

    Emotional Intelligence, Communication & Social Interaction
    - The development of communicative abilities within small group contexts: a cross cultural perspective, B. Campbell et al, Intercultural Communication, 2000, 3 (April)
    These authors stress that communicative ability is central in importance regarding an individual’s knowledge of how to behave in any given social context and her/his ability to select appropriate behavioral responses.
    - “Emotional communication – a theoretical model”, Anne Bartsch, IGEL-Conference 2004, Using a communication-theoretical framework, the author posits that people communicate in order to exchange information and to exchange emotions.
    - “Reconceptualizing social skills in organizations: exploring the relationship between communication competence, job performance, and supervisory roles” Payne, Holly J., Journal of Leadership & Organizational Studies: Winter, 2005 - High job performers had significantly higher levels of motivation to adapt communication and higher levels of communication skill (empathizing, adapting communication, and managing interactions).
    - Postmes, T. (2003) “A social identity approach to communication in organizations”, (pp. 81-98) In S. A. Haslam, D. van Knippenberg, M. J. Platow & N. Ellemers (Eds.) Social identity at work: Developing theory for organizational practice, Philadelphia, PA: Psychology Press.

    EI & Social Skills, Social Identity, Social Network, Social Knowledge
    - The Ripple Effect: Emotional Contagion and Its Influence on Group Behavior: Sigal G. Barsade; Administrative Science Quarterly, Vol. 47, 2002
    - Virtuality, communication, and new product team creativity: a social network perspective, R.T.A.J. Leenders, J.M.L. van Engelen, J. Kratzer
    Journal of Engineering and Technology Management, Volume 20, Issue 1-2, June 2003, Pages 69-92, Creativity is essential to the performance of new product development (NPD) teams. Since the creative NPD task requires teams to combine and integrate input from multiple NPD team members, the team’s communication pattern is an important determinant of NPD team creativity.
    - “A Model of Collaborative Knowledge-Building”, Stahl, G. (pp. 70-77) In B. Fishman & S. O'Connor-Divelbiss (Eds.) Fourth International Conference of the Learning Sciences, (2000). Mahwah, NJ: Erlbaum.
    - B├╝rger, Michael and Griesbaum, Joachim and Kuhlen, Rainer (2003) Building information and communication competence in a collaborative learning environment (K3). In Proceedings The SINN03 conference on Worldwide Coherent Workforce, Satisfied Users - New Services For Scientific Information -, Oldenburg (Germany).

    Virtual Interfaces – Connecting Across Time & Space
    Computer-Mediated Communication (CMC) is any form of communication between two or more individuals who interact and/or influence each other via computer-supported media. CMC mainly focus on social effects of different computer-supported communication technologies. Many recent CMC methods involve internet-based social networking supported by social software.

    - Journal of Computer-Mediated Communication
    June 1998 Vol. 3(4) Virtual Organizations; July 2005 Vol. 10(4) Computer-Mediated Collaborative Practices; October 2005 Vol. 11(1) Cultures & Computer-Mediated Communication
    - Virtual Worlds: MySpace (Socializing), Second Life (Entrepreneurial), Stagecoach Island (Commercializing - Wells Fargo)
    - “Experienced presence within computer-mediated communications: Initial explorations on the effects of gender with respect to empathy and immersion” Nicovich, S. G., Boller, G. W., and Cornwell, T. B. (2005). Journal of Computer-Mediated Communication, 10(2) - The sense of presence refers to the subjective feeling of existence in an experienced environment.
    - “The language of online intercultural community formation”, Cassell, J., and Tversky, D., Journal of Computer-Mediated Communication, 2005, 10(2), Information and communication technologies provide opportunities for understanding the processes of community formation, in regard to differences of age, culture, economic benefits, language, and other dimensions. For example, as people age, they use more positive emotion words, fewer negative emotion words, fewer first person singular self-references, more future tense, and show more cognitive complexity, more causation and insight in wording.
    - “Fostering creativity and productivity through emotional literacy: the organizational context”, James Park, Development and Learning in Organizations Volume 19 Number 4 2005 pp. 5-7. Investigated the extent to which individuals were able to be curious, resilient, creative, strategic and interdependent, when organized to communicate with each other in an emotionally literate way.
    - Swarm Creativity & Collaborative Innovation Networks (COINs).
    A Collaborative Innovation Network (COIN) is a cyber team of self-motivated people with a collective vision, enabled by technology to collaborate in achieving an innovation by sharing ideas, information, and work.