Psychology

The Loss Aversion Mental Model: A Case Study on Why People Think Spirit is a Horrible Airline

August 11, 2022 By Nagesh Belludi 1 Comment

When Spirit Airlines pivoted to competing on price in the late 2000s, it quickly gained a reputation not only for operational inefficiencies but also for its in-your-face, take-it-or-leave attitude towards customer service.

Where other airlines charged by-the-package fares for the flight experience, Spirit pared back service and introduced an a la carte pricing model. Charging for the “ancillaries”—i.e., everything optional, including water—allowed Spirit to keep ticket prices down and appeal to price-sensitive travelers willing to sacrifice the usual amenities for a lower ticket price.

In the ensuing years, the unconventionality of this business model did not go down well with customers. Much of the flying public’s frustration with Spirit had to do with Loss Aversion. That’s the notion that the emotional disappointment of a loss is more extreme than the joy of a comparable gain. If finding a cheaper fare on Spirit felt delightful, giving up some—or all—of the savings to purchase ancillaries and surrender the savings felt utterly miserable.

Passengers felt ripped off by these seemingly hidden fees, especially when the true cost of flying Spirit ended up greater than what the initial ticket price led them to believe.

Spirit became quickly convinced that there was a perception problem—its customers didn’t fully understand how its fares work. Particularly, first-time customers blindly presumed that Spirit Airlines works the same way as other airlines. In reality, there were no hidden or excessive fees, and passengers could only pay for what they need or want. In 2014, the airline introduced its “Spirit 101” campaign to educate customers and alter their perceptions. With time and the increased adaptation of the “Basic Fare” model and curtailed customer service by every other airline, passengers’ expectations have since been right-sized. Spirit Airlines has come a long way, and its customer service has improved vastly.

Further studies on loss aversion have shown that a cascade of successive fees is worse than the cumulative: i.e., three ancillary fees that add up to, say, $70, feel a lot worse than a single $70 fee. Appropriately, Spirit offers a “Bundle it Combo” package.

Why Groups Cheat: Complicity and Collusion

July 2, 2022 By Nagesh Belludi Leave a Comment

News broke out that Ernst & Young revealed this week that its employees cheated on ethics exams. The accounting behemoth is being fined $100 million. That’s one of the biggest fines ever levied against an audit firm.

It’s absurd that specialists responsible for keeping things straight and steering moral enterprise cheated on ethics exams! Ernst & Young’s leadership evidently disregarded the internal reports about the cheating. Perhaps because when people identify so strongly with a group, they’re much more swayed to view the group’s actions positively and accept that group’s norms.

Research by Vanderbilt University’s Jessica Kennedy and colleagues suggests that high-flying people are sometimes more inclined than low-ranking people to adopt what their group recommends, even when it represents an ethics breach. Power sometimes provokes people to so strongly want to identify with their group that they’re willing to overlook when the group’s collective actions cross an ethical line. This affinity is, therefore, urged to sustain transgression instead of stopping its spread, especially when the odds of being caught and punished are slim.

The Ethics Test

February 26, 2022 By Nagesh Belludi Leave a Comment

Since 1961, Texas Instruments has had a multi-step guideline that it wants employees to use to decide whether or not a contemplated decision is ethical. One version:

Is the action legal?

Does it comply with our values?

If you do it, will you feel bad?

How will it look in the newspaper?

If you know it’s wrong, don’t do it!

If you’re not sure, ask.

Keep asking until you get an answer.

Idea for Impact: Use such decision-making models for clear direction about ethical behavior when the temptation to behave unethically is strongest.

Let’s Hope She Gets Thrown in the Pokey

November 16, 2021 By Nagesh Belludi 1 Comment

The Elizabeth Holmes-Theranos criminal trial hasn’t been without its share of theatrics.

Yes, Holmes’s massive fraud is obvious. She entranced (read WSJ reporter John Carreyrou’s excellent chronicle, Bad Blood (2018; my summary)) journalists, investors, politicians, and business partners into believing her fantasy science. She may even be responsible for negligent homicide if people died because of her company’s fake test results.

Then again, these sorts of cases generally hang on subtle distinctions between hyperbole and outright dishonesty and whether such deceit was deliberate.

Holmes’s lawyers will argue that she was merely an ambitious entrepreneur who failed to realize her vision but wasn’t a fraudster. Her lawyers will make a case that she is not to be blamed because people took her puffery and exaggeration as factually accurate. At what point do her wishfulness and enthusiasm go from optimism to intentional fraud? That’ll be the critical question.

At any rate, the Theranos verdict is unlikely to deter others from the swagger, self-assurance, hustle, and the “fake it till you make it” ethos that is so endemic to start-up culture. Investors will never cease looking at people and ideas rather than the viability of their work.

Idea for Impact: Don’t be so swayed by story-telling that has a way of making people less objectively observant. Assemble the facts, and ask yourself what truth the facts bear out. Never let yourself be sidetracked by what you wish to believe.

Compartmentalize and Get More Done

September 16, 2021 By Nagesh Belludi Leave a Comment

One way you can achieve “living in the moment” is by putting your emotional issues into “compartments” within your head and your heart. You can deal with those feelings on your own when you need to.

Many aspects of life can get you sidetracked and distraught. Finding a place to retreat within yourself can be challenging. By compartmentalizing, you can put your feelings where they belong, and you can earmark one challenge to tackle another challenge.

You can focus on the one task at hand and deal with the rest when appropriate.

Mental compartmentalization has a darker side, however. Psychologists identify extreme compartmentalization as a major defense mechanism by which some evade the acute anxiety that can spring from the clash of contradictory values or conflicting emotions. (A very pious scientist, for instance, could hold opposing beliefs about the Judeo-Christian and scientific notions of life’s origins. Compartmentalizing, she may live different value sets depending on whether she’s at church or her laboratory.) Some individuals also fall back on compartmentalization to cope with the lingering trauma of childhood abuse, neglect, and other emotional conflicts.

The day-to-day compartmentalization I’m talking about isn’t denial or avoidance. It isn’t evading conflicts and sidestepping problems—instead, it’s putting things out of the way for the moment and not letting them impede the rest of your life.

You can’t just ignore your issues and expect them to go away, but obsessing on them won’t help either.

Idea for Impact: Compartmentalize and get more done. Putting away the things that hurt or upset you, even if just for a short time, can also help you gain valuable perspective on dealing with them.

Lessons from David Dao Incident: Watch Out for the Availability Bias!

August 23, 2021 By Nagesh Belludi Leave a Comment

In the weeks and months after the United Airlines’David Dao incident and the ensuing customer service debacle, news of all kinds of disruptive airline incidents, coldblooded managers, and inconsiderate airline staff showed up everywhere.

The United incident raised everyone’s awareness of airline incidents. Expectedly, the media started drawing attention to all sorts of airline incidents—fights on airplanes, confusion and airports, seats taken from small children, insects in inflight meals, snakes on the plane—affecting every airline, large and small. However, such unpleasant incidents rarely happen, with thousands of flights every day experiencing nothing of the sort.

Parenthetically, the underlying problem that led to the David Dao incident wasn’t unique to United. The incident could have happened at other airlines. All airlines had similar policies regarding involuntary-denied boarding and prioritizing crew repositioning. Every other airline, I’m sure, felt lucky the David Dao incident didn’t happen on their airline.

In the aftermath of the incident, many people vowed to boycott United. Little by little, that negative consumer sentiment faded away while the backlash—and media coverage—over the incident diminished.

Availability bias occurs when we make decisions based on easy or incomplete ideas.

The David Dao incident’s media coverage is an archetypal case of the Availability Bias (or Availability Heuristic) in force. Humans are inclined to disproportionately assess how likely something will happen by how easy it is to summon up comparable–and recent–examples. Moreover, examples that carry a fierce emotional weight tend to come to mind quickly.

The availability heuristic warps our perception of real risks. Therefore, if we’re assessing whether something is likely to happen and a similar event has occurred recently, we’re much more liable to expect the future possibility to occur.

What we remember is shaped by many things, including our beliefs, emotions, and things like intensity and frequency of exposure, particularly in mass media. When rare events occur, as was the case with the David Dao incident, they become evident. Suppose you’re in a car accident involving a Chevy, you are likely to rate the odds of getting into another car accident in a Chevy much higher than base rates would suggest.

If you are aware of the availability bias and begin to look for it, you will be surprised how often it shows up in all kinds of situations. As with many other biases, we can’t remove this natural tendency. Still, we can let our rational minds account for this bias in making better decisions by being aware of the availability bias.

Idea for Impact: Don’t be disproportionately swayed by what you remember. Don’t underestimate or overestimate a risk or choosing to focus on the wrong risks. Don’t overreact to the recent facts.

Perfect—Or Perfectly Miserable?

May 22, 2021 By Nagesh Belludi Leave a Comment

The American actor Mandy Patinkin has a reputation as a “self-oriented” perfectionist. He’s one of those who impose exacting standards on themselves and engage in rigorous self-evaluation.

In this interview for The New Yorker, Patinkin reveals how he overcame this tendency:

My children watched me be too hard on myself for years. They’d come to performances, concerts. Then they’d hear their father criticizing it afterwards. One day, my son Gideon and I are walking down the street on the Upper West Side and he wants to talk about his life. He’s talking about bad nights, good nights, et cetera. And he says, “I watched you suffer for so many years over things that I could never understand what you were suffering about, because I was there and I saw it and it was great. I watched you suffering, and I learned that it was meaningless, that it had no worth, it was for nothing.” And I started to weep. My sons knew that it was never worth it.

Idea for Impact: If you tend to fixate on undue self-standards, ask yourself, “To what end?” Recalibrate your expectations. Don’t let your perfectionist tendencies hold you back.

Ever Wonder Why People Resist Gifts? // Reactance Theory

April 12, 2021 By Nagesh Belludi Leave a Comment

People are more likely to resist or reject well-intentioned proposals, advice, or gifts when it feels like their freedom is being threatened in some way.

For instance, I hate receiving clothes for gifts—clothing is mostly a matter of personal taste. I’ll grin and bear it. I may even wear said clothes once or twice just to please the giver.

Turns out that my indifference isn’t atypical. Psychological studies of the gift-giving process indicate that giving clothing gifts involves greater risk than with other kinds of gift objects. The chosen gift may not match the recipient’s self-image, identity, or dress style.

The so-called Reactance Theory explains why giving gifts and offering uncalled-for advice could rankle so much. According to the American Psychological Association,

Reactance theory is a model stating that in response to a perceived threat to—or loss of—a behavioral freedom, a person will experience psychological reactance (or, more simply, reactance,) a motivational state characterized by distress, anxiety, resistance, and the desire to restore that freedom. According to this model, when people feel coerced into a certain behavior, they will react against the coercion, often by demonstrating an increased preference for the behavior that is restrained, and may perform the behavior opposite to that desired.

Reactance can come into play when you’re persuading someone to buy a specific product at the grocery store, forbidding a child from using a mobile phone at school, or insisting that an employee perform some detestable task for the boss.

Idea for Impact: Think twice before you do anything that, though meant well, may threaten another person’s sense of behavioral freedom. People who are threatened thus usually feel uncomfortable and angry—even hostile.

In gift-giving, offering advice, or any other attempt at social influence, know your limits. Beware that it’s not always easy to recognize the limits until you overshoot them.

Why Your Judgment Sucks

April 5, 2021 By Nagesh Belludi Leave a Comment

Israeli-American psychologist Daniel Kahneman’s bestselling Thinking, Fast and Slow (2011) describes the finer points of decision-making. It’s an engaging showcase of the innate biases of the mind and unthinking approaches to decision-making.

Human Beings are Intuitive Thinkers

Kahneman is a behavioral economics pioneer and the winner of the 2002 Nobel Memorial Prize in Economic Sciences. His lifelong collaboration with Amos Tversky (1937—96) has molded humans’ thinking about human error, risk, judgment, decision-making, happiness, and more. Tversky died in 1996, so he did not share in the Nobel.

Thinking, Fast and Slow explores what Kahneman calls the “mind’s machinery” as two coexisting modes of thought (“fast and slow,” as the title says.) Kahneman splits the brain into two radically divergent ways, employing a two-tier model of cognition.

System One makes judgments instantly, intuitively, and automatically, as when a cricket batsman decides whether to cut or pull. A significant part of System One is “evolved heuristics” that lets us read a person’s expression in a microsecond from a block away, for example. And it can’t be switched off. System One’s thinking is fast and effortless. It often jumps to the wrong conclusions, relies on hunches and biases, and perhaps overconfident.
System Two is slower, conscious, calculated, and deliberate, like long division. Its operations require attention. System Two is what we think of as “thinking”—slow, tiring, and essential. It’s what makes us human. Even if System Two believes it is on top of things, System One makes many of our decisions.

System One Isn’t All Flawed

In a world that often necessitates swift judgment and rapid decision-making (e.g., fight or flight,) a person who solely relies on deliberative thinking (System Two) wouldn’t last long. Doctors and firefighters, for example, through training and repetition, develop what’s called “expert intuition” that helps them identify patterns and impulsively devise the right response to a complex emergency.

We as humans are not simple rational agents. Consequently, our thinking boils down to two “Systems” of thinking/processing. As we strive to make better decisions in our work and personal lives, it benefits us to slow down and use a more deliberate System 2 way of thinking. Learn to doubt your fast/quick way of thinking!

Human Intuition is Imperfect

Thinking, Fast and Slow is an eye-opener in various ways. It can be a frightening catalog of the biases, shortcuts, and cognitive illusions that come to err our judgment—the endowment effect, priming, halo effect, anchoring effect, conjugation fallacy, the narrative fallacy, and the rest. Such mental processes are not intrinsically flawed; they are heuristics—rules of thumb, stereotypes, shortcuts. They are strategies the mind embraces to find a path in a tsunami of data.

Kahneman teaches how to recognize situations that require slower, deliberative thinking. Kahneman asserts that the value of the book is to give people the vocabulary to spot biases and to criticize the decisions of others: “Ultimately, a richer language is essential to the skill of constructive criticism.”

Recommendation: Read Daniel Kahneman’s Thinking, Fast and Slow (2011.) As one of the most popular non-fiction books in the last decade, it’ll open your eyes to the quirky and error-prone ways in which you can be influenced in ways you don’t suspect.

The conceptions behind behavioral economics make Thinking, Fast and Slow a laborious read. Many chapters are bogged down by hair-splitting details of his rigorous scientific work and academic gobbledygook. It’s a commanding survey of this field, but it’s superbly written and intelligible to non-experts.

Complement with Rolf Dobelli’s accessible The Art of Thinking Clearly (2013.)

The Unthinking Habits of Your Mind // Book Summary of David McRaney’s ‘You Are Not So Smart’

April 1, 2021 By Nagesh Belludi Leave a Comment

Psychologists have argued that many cognitive biases are rooted in mental shortcuts. They are heuristics—rules of thumb, stereotypes, instincts—that help you make sense of the world. They aren’t intrinsically flawed, but, they’re often quirky and error-prone. Your mental models can affect you in ways that you don’t suspect.

David McRaney’s You Are Not So Smart (2011) suggests a brief—if hurried—tour of 48 cognitive biases that can deceive you. Based on the author’s popular blog, the book is a satisfying assessment of understanding people’s—and your own—behavior a little bit better.

There is a growing body of work coming out of psychology and cognitive science that says you have no clue why you act the way you do, choose the things you choose, or think the thoughts you think. … From the greatest scientist to the most humble artisan, every brain within every body is infested with preconceived notions and patterns of thought that lead it astray without the brain knowing it. So you are in good company.

Each chapter starts with a brief statement of a misconception followed by the fact. Then a synopsis of a related behavioral study shows how our brains produce the counterpart deception and the truth. Some of the less-known preconceptions discussed are,

Confabulation. You tend to create unreliable narratives to explain away your choices post hoc. These reassuring perceptions can make you think you’re more rational than you actually are.
Groupthink. People tend to fall in with the rest of the group to minimize conflict and foster group cohesiveness and social acceptance. No one wants to be the one person with a dissenting opinion.
Social Loafing. That others in a team will pick up your slack may induce you to put in less effort if you think you’ll get away with it. This can curb your own performance, even if you’re a conscientious, hardworking type. If you don’t feel your participation will be noticed, why bother putting in the effort?
Availability Heuristic. You’re likely to estimate the likelihood of an event based on your ability to recall immediate and easily accessed examples.
Fundamental Attribution Error. You tend to assign external reasons for your own behavior but internal motives to other people. For instance, if you’re late for a meeting, you’ll blame it on public transport. If someone else is running late for a meeting with you, you’ll blame it on her poor time-keeping.

Recommendation: Read David McRaney’s You Are Not So Smart. It’s an engaging, easy-to-read primer to how the mind works. Read it as a lead up to Daniel Kahneman’s bestselling dissertation Thinking, Fast and Slow (2011; summary forthcoming.)

Idea for Impact: Once you learn to spot the cognitive biases we all grapple with, they’re easier to overcome.

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Psychology

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Availability bias occurs when we make decisions based on easy or incomplete ideas.

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Human Beings are Intuitive Thinkers

System One Isn’t All Flawed

Human Intuition is Imperfect

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