Creatures of Habit

Tweet by Chris Ciovacco

I tend to reflect on the idea of habits pretty often.

Last week, I came across a tweet by Chris Ciovacco, Founder & CEO Ciovacco Capital Management, that touched on the idea of bad habits. With behavioral economics becoming an increasingly popular topic of discussion in the finance world, I’ve found the social chatter on behavioral finance to be quite constructive. Habits are pretty powerful and in most cases a subconscious process in people. Just think, this is why companies want to have consumers form habits with their products/services (increased retention).

We, as humans, have a tendency to use habits as mental shortcuts. While habits can start off as deliberate behavior, through repetition they become automatic. In understanding the power of habits through my interest in consumer psychology, I’ve come to consciously form some good ones - whether that’s going to the gym, tracking my personal expenses, and taking time out of my week to write on here. That’s not to say I don’t have bad habits. At the end of the day, I’m aware that I’m a creature of habits - both good and bad.

How Do Habits Work?

According to Britannica.com, a habit is “any regularly repeated behaviour that requires little or no thought and is learned rather than innate”.

habit-loop.jpg

The habit loop is a cyclical process in which behaviors become automatic. In the first step of the habit loop, we have a trigger that serves as a reminder of our routine. Triggers can be external, in which the information for what to do next is within the trigger itself, or internal, in which we decide what do to next through internally stored information formed through associations in our memory. For example, some internal triggers could be associating 6pm with dinner time or your personal office as a productive work space.

Following the trigger is the physical, mental, emotional behavior that’s part of the routine. Finally, the reward is the feedback that tells you whether the routine is good or bad. Through the associative learning and repetition (conditioning), we create direct links in our memory between a trigger and response and make an association between a particular behavior and a consequence. The more we repeat the process, the stronger the association and more automative the behavior becomes.

A lot of our purchase decisions are based on habits. Heck, just last night I purchased my usual pre-workout supplement off of Amazon because 1) I didn’t want to invest the time to research a new and potentially better supplement and 2) it was after a long day of work and I felt mentally drained. One of the main focuses for a business is to have potential customers try their product/service to have them become repeat buyers. Having customers form habits with your product/service should be the ultimate goal, as it has the potential to benefit the businesses bottom line. Again, pretty power stuff.

The Sunk Cost Effect

This cartoon’s pretty brilliant.

According to WhatIs.com, the sunk cost effect is the tendency for humans to continue investing in something that clearly isn’t working. This tendency is due to time/effort/money already invested in the endeavor at hand. In the cartoon to the right, the sunk cost effect is shown by the dog’s irrational behavior to follow through with further digging even after not finding his bone after digging a bit.

This behavioral quirk is quite popular in the investing field. Instead of cutting losses, investors have an inclination to hold onto shares of a company after the shares fall in value, in hopes that the value would increase. These investors are reluctant to admit that they’ve made a bad investment and would prefer to hold onto those shares instead of reinvesting in another company.

To provide another example: I’ve recently been debating about switching my paid music streaming subscription service from Spotify Premium to Amazon Music Unlimited. Being that I’m an Amazon Prime member, my Amazon Music Unlimited subscription would cost $7.99 per month. In my current Spotify Premium plan, I’m dishing out $9.99 per month. If following rational economic theory, I would switch my subscription over to Amazon because… well, it just makes sense financially! However, in being the “irrational” consumer that I am, I haven’t switched over due to the fact that I keep thinking about all the time I’ve invested in creating my Spotify playlists - a clear case of the sunk cost effect.

Super-Size It

In customary, almost religious fashion, the new generation of iPhones were unveiled this last Wednesday at the annual Apple “Special Event”.

Source:  Reuters

Source: Reuters

Data from social media chatter showed a lack of consumer purchase interest (and, in turn, investor sentiment) for the new models (dubbed the iPhone Xs, iPhone Xs MAX, and iPhone Xr) in comparison to previous iPhone products. While the new models don’t really offer any major breakthrough features, it caught me a little off guard when I heard one of the phones was going to be bigger than the iPhone X.

Yup. Bigger.

For someone who has a 5.5-inch sized iPhone 6 Plus that can barely fit it into the front pocket of my slacks, it was difficult to comprehend why someone would need, much less want a huge phone (the iPhone Xs Max’s 26% larger than the previous largest iPhone display, diagonally measuring 6.5 inches).

The ginormous screen size will play a pivotal role in the Chinese market. Apple has been losing market share to Samsung and their series of Galaxy Note 9 products, and hopes to tap into the larger screen size trend.

Moreover, according to a Wall Street Journal podcast episode, Apple decided to supersize the iPhone to drive profits. When it comes to consumer behavior, bigger screens means more time on the phone and more time on the phone equates to an increase in the likelihood you’ll end up downloading applications to stream media or play games. The more apps purchased, of course, means more money in Apple’s already sizable pockets.

Source:  Reuters

Source: Reuters

Smart move by Apple. While the company makes the majority of their revenue from the sale of the iPhones (about two-thirds of sales comes from iPhone sales), the company is undoubtedly taking certain steps to relay less on the sales of their hardware products and make their ecosystem even sticker. With Apple making further in roads into film industry with recent film acquisitions and even eyeing a subscription offering for a bundled entertainment service package, it’s clear why analysts are forecasting continued double-digital growth for Apple’s services business arm.

Bullish sentiment much? Yeah. Like most of you guys, I’m not sure what the future holds, but my fundamental analysis of Apple puts them at the center of the consumer tech space. Could this also be why Warren Buffet’s Berkshire Hathaway decided to increase their holdings of Apple shares 5%, making them the 2nd biggest shareholder, earlier this year? Perhaps…

UMG & Marketing in the Music Industry

Mixing Board

I've been completely infatuated by the business of entertainment for some years now. As I reflect on my interest in this industry, I can boil it down to a couple points:

  • The growth of media streaming platforms, their business models, and how the different players within the streaming ecosystems capture value

  • Connected devices causing a shift in consumer behavior as it pertains to media consumption

  • Monetizing intellectual properties as a form of passive income

The entertainment industry is undergoing major changes and it's all pretty exciting. 

In the back of my mind, I knew I was going to end up working in the industry soon or later. Guess it looks like it'll be sooner than later.

I'm proud to announce that I'll be working as an Artist Brand & Insights Strategist at Universal Music Group starting next month.

As I wrap up my grad program and gear up for my new role, I've been studying up on the industry. In doing so, I came across Bobby Owsinski's Inner Circle music podcast - a highly recommended podcast series for anyone interested in the music industry. In the episode below, industry veteran & Music Executive Ted Joseph talks about radio promotion, retail store co-op advertising, and more during his time as Head of Marketing at Warner Music.

"Satisficers"

It's quite fascinating to reflect on how irrational people can be.

And it's perfectly normal to be irrational. We can't be completely rational all the time right? 

This irrationality is part of our bounded rationality. According to Herbert Simon, recipient of the Nobel Prize in Economics in 1975, people have cognitive limitations and because of that, we go about making sub-optimal decisions in our everyday lives. Through this lens, people unconsciously act as "satisficers" in their decision-making, seeking to make a satisfactory decision instead than an optimal one. In order to facilitate the decision-making process, we act on instincts, habits, heuristics, cognitive illusions, and biases - leading us to "satisficing" decisions.

This is innate within all people. During this unconscious part of the decision-making process, we formulate stories - stories that support our beliefs.

Thomas Gilovich, Author and Professor of Psychology at Cornell University who has contributed to the behavioral economics field, describes these stories as a result of "Patternicity", the tendency to create meaning from events. While this evolved trait (think hunter-gatherers hearing rustling in the grass and believing it might be a predator) greatly served our ancestors, "patternicity" leads to irrationality, poor decision-making & bias.

While the topic of ethics relating to behavioral economics makes for another blog post, marketers have been using the underlying biases in "satisficers" to create effective marketing campaigns advantages for decades. From loss aversion to anchoring, there are plenty of biases for marketers to utilize. With that being said, potential consumers can offset this targeting by being "intuitive scientists" - a nice little secret from Thomas in the video above.

Image Credit:  Behavioral Scientist

Image Credit: Behavioral Scientist

Building Trust in a Digital World

I had the chance to attend an American Marketing Association event last night. Leveraging digital tools, Paolo Parigi (Lead Trust Scientist at Uber and Adjunct Professor of Civil and Environmental Engineering at Stanford University) gave a presentation on the topic of trust - an important psychological factor in business, specifically within the sharing economy. His methodology, referred to as an online field experiment (ofe), in assessing how interactions and user experience creates, increases, or decreases trust and how to discover which is happening and what might be causing it, involved the usage of investment games. Below are a few snapshots I managed to capture during the presentation. Parigi addressed certain scenarios when it would be best to use ofe's and, taking into consideration how varied trust can build across different cultures, acknowledged that ofe results would vary across countries. All in all, an insightful presentation.