Behavioral economics…

Sales sand bagging defined by a Nobel laureate… who knew? 

I recently finished Thinking, Fast and Slow ©.  Amazon.com's summary (my highlights added); "Thinking, Fast and Slow, Daniel Kahneman, world-famous psychologist and winner of the Nobel Prize in Economics, takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think." 

Kahneman's tour was above my mind; but I was able to follow his practical examples on how we make everyday decisions.  One of his topics pertained to "prospect theory".  According to Behavioral Economics Outlines, prospect theory, "suggests that people view the outcomes of risky decisions not in overall terms, but as gains or losses relative to their reference point."

Risky decision making - now we're cooking.  I've never been comfortable making risky decisions.  My life has evolved as much from coincidence as it has from carefully thought through, decision making.  Nonetheless, things have turned out pretty darn good.  I might be a poster child for the saying from our Unknown Sage: 

            It's better to be lucky than good. 

Even so, I enjoyed the treatment of prospect theory though I need a better understanding of how "reference points" are established.  That's for another day.  Today I was able to follow their example of how we think and how we perform as related to a golf reference point: 

     Every stroke counts in golf, and in professional golf every stroke counts a lot.  According to prospect theory, however, some strokes count more than others.  Failing to make par is a loss, but missing a birdie putt is a foregone gain, not a loss.  Pope and Schweitzer reasoned from loss aversion that players would try a little harder when putting for par (to avoid a bogey) than when putting for a birdie.  They analyzed more than 2.5 million putts in exquisite detail to test that prediction.

     They were right.  Whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for a birdie...

     If in his best years Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke and his earnings by almost $1 million per year. 

                        Daniel Kahneman 

Making decisions and the outcomes of how we perform based on loss aversion vs. foregone gains is powerful, yes?  $1 million annually powerful for Tiger. 

Prospect theory applies to the sales profession, too.  Early in my career when someone asked, "How are you doing?" I coined this response:

            Nothing a deal or two wouldn’t solve. 

Now I chuckle every time I observe a behavioral economics based compensation plan that flies in the face of prospect theory.  On the one hand there are higher commission percentages for every deal turned in after achieving monthly, quarterly and/or annual quota levels.  On the other hand?  

It's not called loss aversion in sales; it's called "sand bagging."  That's when a sales rep trades foregone gains from higher, current commissions by waiting until next month, quarter and/or year to turn in a sales order (or two).  

I understand why the "What have you done for me lately" phenomena in sales can cause salespeople to sandbag to avoid winding up under quota in the future.  More powerful than the foregone gain of a few extra dollars in their comp plan.  Yep in sales, loss aversion screws up behavioral economics. 

                                                            GAP 

When life gets tough we could get a helmet… or… we could leverage the peace and share the power of a positive perspective.