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How startups can leverage the power of behavioural economics - Dan Ariely

19th Oct 2013
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“Lets take a walk near the sea,” says Dan Ariely, as I meet him at the Taj Gateway. As we take a walk, we talk about India, about our work and personal lives, and a lot of things in general which can help entrepreneurs and the startup community.Yesterday we reviewed the book - Predictably Irrational. Today we bring to you some insights from the author of the book and talk about his journey and how startups can leverage the power of behavioural economics.

[Edited excerpts from the interview]

Life post accident and journey towards behavioural economics

YS: We would love to know more about you, what happened just after your accident, when you finished your treatment, what you decided about the future course of life?

Dan: When I finished my treatment, I wanted to be a physician. I applied to medical schools, then I had interviews but they wouldn't take me because of my hands. I didn't know what to do but I knew I wanted study something and I couldn't use my hands, so studied maths and physics because I thought that in maths and physics you don't need to use your hands but I was wrong. In high school I didn't use my hands much but in college I had to write something so I used to have somebody who would write for me, I would try to solve the equations while somebody else writes, but its too difficult. So I decided to move to philosophy as I thought in philosophy you really don't have to write anything, and then when my mom went to register me she found out you can't do only philosophy, she had to pick a double major. And there were no cell phones and she had to pick, so she picked psychology.

And I was actually quite annoyed, when she picked psychology because the only thing I knew about psychology was clinical psychology and that used to annoy me. And then I started studying psychology and discovered how much I loved that. And the thing I loved was that there was a way for you to ask questions and get answers and I thought that was really quite amazing and that's what I love about research that you basically can ask questions and there is a method to find out the answers and I think that's just great.

Identifiable victim effect, and how entrepreneurs can use it

YS: In your second book you spoke about 'identifiable victim effect'. How can entrepreneurs use this to get more customers or to market themselves better or to generate investor interest?

Dan: The first use of the identifiable victim effect is in the design of the product; when you think about what people need, if you can make the need clear and salient and have empathy with it, there is a good chance you will be able to design for it better, rather than thinking about people as masses. The second thing is that if you think about how you communicate your benefits to users, one of the easiest things to do is to try and create the realization of what this is, so if I say that this is the problem that most people have, that's not as crucial as saying this is John, here is the problem that he is having, and now you can have a bigger empathy. And I think that same thing happens for investors, so basically think about what decisions are driven by pure reason vs what decisions are driven by some kind of emotional input.

And what the identifiable victim effect does is to basically create a higher input for emotions and if you think that adoption of products, investments and so on...I am saying that they are purely emotional but have an emotional component that helps appeal and that's what storytelling is about. If you say why would you tell a story and describe the statistics in a table, the story basically gives you a way to have empathy, the story kind of basically gives you the nuances, the world around, the stories give you a lot of irrelevant details from a standard perspective but these details allow you to understand what the person is experiencing, and then because of that you are able to better understand the person and therefore have better empathy, and sympathize more and hopefully be willing to invest to a higher degree.

So, if I say, “Here is a new electronic wallet and here is how it works,” it's not the same as saying, “Here are particular people with particular problems and how they are suffering and how would you be in their shoes and here is how your world could look like with this technology”.

Real world application

YS: So if we put what you said in a nutshell and try to get more practical advice, so what we can do is rather than talking about a number when we talk about people, add names of the suffering individuals. So you mean to say rather than giving a number say one lakh people are suffering from this, three case studies would be more effective, like XYZ is suffering, ABC is suffering and we have solved it his way.

Dan: So imagine you've 3 populations that you are approaching and they comprise 60% of the market, you could say 60% of the market has this problem or you could say “this type of person, lets call him Joe and walk through it (the situation and the solution), or let's call her Nancy and walk through it or let's call him Mike.” That approach is much more effective.

Not invented here bias – Why your ideas don't get accepted

YS: How do you get ideas to be agreed upon by people who are in power?

Dan: So this is a question of pride, so basically coming to people and saying I have this idea, it's my idea and you should start loving it its very unlikely to work. And they are most likely to work (sadly) when you convince people it was their idea, but then you give ownership but this is why pride is such a big block, in the road for execution. So you think about a question of would the idea be adopted and the chances are increasing as you are willing to give more people credit and that's a very tough thing to do. As an academic everything we do is just pride of creation but its very very important.

YS: Is it again a similar thing like leaders give more credit to their subordinates and thus they also gain more empathy in turn, so there is a boss and there is a leader and there is a difference in both of them.

Dan: I think that’s right, so no matter if you are the boss or not the boss, giving other people the feeling that they can claim some credit for what you are doing is very useful, very hard but very useful. People are really happy to take credit for ideas that are not theirs. You can quite easily have a discussion with people about an idea, get them to give you feedback, tell you what they think, and very easily they would start believing that it's their idea.

While we post the second part of the interview, you can meet Dan Ariely here.

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