#114 - What is success and what is failure? The value of reference points in framing decisions
Here are the highlights from this week’s issue:
A decision frame is a way of defining the problem. All frames keep things out. The better ones keep the most important bits in.
We have a tendency to plunge in when presented with a problem. When we do so, we accept the problem frame as is. This is counterproductive because our future options are determined by the frame we choose.
To understand our own decision frame, we should think about the reference points we use to define success and failure.
A carefully chosen reference point set the limits for our problem-solving. When not, we simply march to the tunes of circumstance and what is available around us.
We must pay attention to how we measure success or else we may just solve a symptom and not the root problem.
This is a now-famous example from a 1984 paper by psychologists Daniel Kahneman and Amos Tversky.
Imagine that you are about to purchase a jacket for $125 and a calculator for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $10 at the other branch of the store, located 20 minutes drive away. Would you make a trip to the other store?
When presented with a problem, we have a tendency to plunge in. We accept the problem as presented and jump to solving it. When we do this, we let the first frame that comes to mind capture the problem. But the thing is, no frame is complete. Any single frame captures only a portion of reality, not all of it. Accepted without examination, what is within the bounds of a frame comes in our spotlight; what’s bounded out stays in the shadows.
Here are three frames with which to look at the Kahneman-Tversky question.
1️⃣There’s a gain of $5 to be enjoyed should you buy from the other store.
2️⃣Your purchase price will drop (33%) from $15 to $10 should you buy from the other store.
3️⃣You’ve to decide between a gain of $5 against the cost of driving 20 min (time, fuel, etc.).
Intuitively, you can tell that the bargain hunters are more likely to pick the first frame. Then there are those who like to nitpick. They’ll pick the third frame. Finally, there are those who judge gains or losses not for what they are but in relation to something else. They’ll probably choose the second frame.
Which frame did respondents most spontaneously use for this decision?
To find this, Kahneman and Tversky made one simple change. Keeping the size of the gain ($5) and the size of the inconvenience (20-min drive, fuel costs, time of the day, etc.) the same, they created a second version of the question where they switched the price of the items. The jacket now cost $15 and the calculator cost $125 at the first store. The same calculator was available at the distant store for $120.
What did they find?
More than two-thirds (68%) of the respondents (N = 88) were willing to drive to the distant store to save $5 on a $15 calculator, but less a third (29%) of the respondents (N = 93) were willing to do the same to save $5 on a $125 calculator.
If the size of the gain ($5) and the size of the inconvenience (time, fuel costs, etc.) were exactly the same across the two situations, why did the respondents judge them differently? Because of the decision frame they used.
Breaking a frame down
The first frame kept only the size of the gain within its boundaries. $5 was the only point of salience. Within this frame, it only mattered whether or not you were making a saving. The cost incurred to enjoy that saving was outside the frame, and hence not considered. The question that frame #1 asked of the participants was simple and narrow: Is $5 a big enough amount for me to save?
The second frame was broader. It considered the trip worthwhile because it resulted in a reduction in the price of the calculator by $5. Yet, this frame too was narrow, though not as narrow as frame #1. Why?
It linked the potential savings to the price of the calculator. It excluded the price of the jacket. Imagine if it did. The participants would’ve realized, ‘Hey, for these two things I need, I’m spending $140 in all at the first store and $135 if I visit the other store. That’s a saving of $5 on $140!’
But clearly, it didn’t as seen in the responses of the survey participants. Most of them excluded the price of the jacket in their mental math. They only paid attention to the price of the calculator when considering the relative savings. The question in their minds was: Save $5 on $15 or $5 on $125?
The second frame therefore differentiated between two gains of the same size ($5) by introducing a reference point (save $5 on a $15 calculator or $5 on a $125 calculator?). It seemed to tell the respondents: The size of your gain should be inversely related to the price of the calculator and should be independent of the price of the jacket. Framed this way, the choice was obvious. But was it?
In the second frame, the willingness of the participants to drive 20 minutes to the second store increased significantly when the price of the calculator changed without any change to the size of the savings.
The third frame fixed this anomaly by expanding the parameters under consideration. It was the most comprehensive. It compared the size of the savings with the total size of the inconvenience. Which is, gas costs, driving time, car running costs, and any other opportunity costs. The third frame is also the most work.
💡A hat tip to avoid wasteful expenses that may feel like a bargain at the time of purchase: Sometimes we get drawn to mouth-watering prices and that weighs disproportionately in our purchase decision. That is, the quality of the bargain is dominant in our frame. But you should only consider the relative gain after it is clear to you that the item of purchase is valuable to you. Don’t buy shoes you don’t need just because they’re on sale at throwaway prices. See issue #113 for more examples.
Reference points
We find it hard to know our future preferences. We sometimes need an anchor to hold on to, to make it easy for us to decide whether or not we want something. My toddler wants things that she sees her friends play with. Those things become her reference point. While not that arbitrary for adults, we all experience an inevitable anchoring of our wants to things around us.
We’re wired to compare. Someone in your team got a double-digit hike? Well, of course anything less than that will make you feel worse. Or maybe you got a fat bump-up. You’re chuffed until you come to know that a teammate beat your hike by 2 percent. Now you feel sodden.
If reference points are so misleading, especially when it comes to money, why do we hang on to them? Why don’t we instead stop thinking proportionally---that is, relative to reference points?
You may not know what a good price for renovating your house is but relative to the market value of the house it becomes an easier choice. You may not know what target to set for a new service you’re about to roll out but relative to your annual turnover you can think of something. You may not know how much to pay for a cook but relative to your monthly food expenses it becomes an easier choice.
👉Reference points make it easier to make a purchase by juxtaposing it relative to the value of something we know.
Or, quite simply, reference points make it easier to choose.
Yet, it is a mistake to cast all our judgments relative to reference points.
👉Some things are better judged relative to a reference point. Others should be judged on their own.
When you buy something, you’re often making a prediction about your future preferences based on a comparison. Is this car bigger than the other one? Cheaper than that? A number of attributes can be compared with those of another make or brand. But not all.
Beauty, aesthetics, appearance don’t require a comparison point. You can tell if a car is ugly or beautiful. What you consider ugly may be pretty to someone else—someone with different tastes—but you know your tastes.
When making a purchase we sometimes get stuck in comparison mode and therefore underemphasize how we will feel about incomparable aspects of the future experience. We end up buying an ugly car because it has the best mileage and feel no good having to drive the ugly thing every day.
Not everything that can be compared (or counted) counts. Not everything that counts can be compared (or counted).
Change the reference point to get better at what you do
In their book Decision Traps, Edward Russo and Paul Schoemaker write:
Use of the wrong reference point can turn good organizations into mediocre ones. For example, many major British companies fell into low productivity, shoddy design, and general lack of innovations in the 1950s and ’60s when they continued to use each other’s performances as their reference points instead of comparing themselves with the excellent innovations developing overseas.
The clearest way to force yourself to get better at what you do is to change what you measure yourself against.
In January 1999, the then men’s world #1 Pete Sampras withdrew from the Australian Open, one of four of the biggest tournaments annually in the sport of tennis, because he was exhausted. It was an excruciating decision for Sampras, as he was on the heels of Roy Emerson’s all-time record of 12 grand slam singles tournaments that had stood for over three decades. Sampras had to wait six months before winning Wimbledon and equaling Emerson’s record. Eventually, he went on to add two more grand slam tournaments to close out a stellar career at fourteen.
By all accounts, Sampras closed out his career as the greatest men’s singles player ever. Little did he know that his record would be surpassed not once, not twice, but thrice in the next two decades (Roger Federer, Rafael Nadal, Novak Djokovic).
Yet, I bet that a young turk like Carlos Alvarez, who at 20 years of age is already a two-time grand slam winner is not even thinking of Sampras’ fourteen. Fourteen, if at all, is merely a pit stop. The finish line is Djokovic’s twenty-three and counting. To be the best ever, Alvarez has to design a career that will bring him as of now at least twenty-three grand slams.
Often the reference points in our decision frames are circumstantial. We don’t choose them. They’re just there, bequeathed to us. But that’s the same as a problem statement handed down. Instead of making it the gold standard, it pays to turn it over and question it. Is there a better, higher bar?
Conclusion
For decision-makers in organizations, the ability to run a process that will have their teams consistently pick winning frames is key to their impact.
Our chosen decision frame determines the solutions visible to us. When the frame is narrow, our options are limited. Even the best solution in a narrow frame may fall woefully short because it only addresses a symptom of the root problem.
This case study pulled from the first ebook in my Decision Decoder series illustrates the perils of narrow framing:
In 2012 online travel company Expedia received 20 million customer calls. The main reason: to ask for a copy of the itinerary.
Imagine you are heading the customer service team. What would you do? Request your boss to staff up to handle the call load and ensure customers have a good experience.
The customer calls have been shooting up for years. But would you ask, Why are so many customers calling for an itinerary? Say you ask. What do you find?
You find that customers are mistyping their email address. Or itineraries are languishing in spam. Or they are being accidentally deleted and there’s no way for customers to retrieve a copy from anywhere.
Once you find this, you have to pick a frame. You can pick a safe reference point—say the percentage of customers satisfied with the resolution will stay above X%—and ask superiors for funds to staff up suitably. Or you can question the frame itself.
And that’s what Expedia did. Instead of adding customer support folks, they added an option to their IVR system for the itinerary, built a self-service tool for customers to download the itinerary themselves; and so on. Customers calling for support dropped from 58% to 15%.
This solution would have remained hidden in any other frame. The power of this solution was the power of its frame. Despite the built-in potential of decision-framing, it is barely acknowledged in corporate training and L&D efforts.
Decision-framing is a leverage point in the decision-making process. Because it arrives early on, it sets the tone for the rest of the way. You can gather the best information, come to the right conclusion but if you’ve picked the wrong frame, you’ve missed an opportunity to achieve the best outcome possible.
Hello to all the new subscribers! I run a mailing list for those who like bite-sized wisdom in their inboxes every other day. If you’re interested, let me know at satyajit@satyajitrout.com and I’ll add you.
Thank you all for your attention. If something in this piece resonated with you, I invite you to let know. Drop a comment, like the piece, share it. Until next week…