Kahneman

  • April 11, 2012
  • Thanks for the overwhelming response to last week’s post, “Why CRM Works.”  It was surprising and gratifying that so many people read and tweeted about it given its length — almost double my usual contribution.  Since it was based on Daniel Kahneman’s groundbreaking work, I give all the credit to him and his great career in trying to understand how we think.

    One comment came in that I thought would make a good jumping off point for this week.  Barry Dalton wrote:

    “I’m confused as to how the Sales VP involvement metric is a System 1 decision point. If it is based on quantifiable evidence, derived through an analytical method, wouldn’t that be a system 2 decision? Or, is it the fact that, once the analytics proves the assumption to be true, it no longer requires analysis at each decision point, so therefore moves from system 2 to system 1 because you’re now accepting it as fact without additional analysis?”

    Dalton answered his own question in his second interpretation.  Once the thinking has already occurred, the result is a real metric that with use becomes a KPI or key performance indicator.  In my response to him I said that the great thing about KPIs is that they cross over from System 2 into System 1 land.  Everyone doesn’t have to do the same thinking and re-discovery, they only need to use the KPI as a valid new measure.

    The best analogy I can come up with for KPIs like this is of an enzyme, a biological catalyst that makes reactions happen faster or require less energy than the reaction would require under un-catalyzed conditions.  Ultimately that’s what we all want — ways to do the right thing without having to cogitate over it incessantly.

    System 1 and System 2 are really just the beginning of the story though and the value of understanding Kahneman’s work is that it helps us identify when we might be slipping into System 1 thinking even when our limited System 1’s might be out of their depth.  According to Kahneman, System 2 is powerful but “lazy” in that our brains would prefer to rely on a more or less automatic System 1 response than engage System 2.

    You can see this in real life.  System 1 is rarely stumped for an answer and often when confronted by a System 2 problem we might simply opt to change the subject.  So, for instance, you might find yourself or someone you are speaking with answering the question they wish they’d been asked rather than the one they don’t have an adequate answer for.  This happens all the time.  No wonder we can sometimes seem to be talking at cross-purposes!

    There is a practical CRM application here too and I’ve been waiting for weeks to set it up.  So much of conventional sales and marketing is mired in System 1 activity.  Customers have short attention spans and we have relatively small windows to try to get a new idea (our products and services) into them.  If an idea seems the least bit foreign there is a good chance it will be rejected by System 1.

    The solution is to attempt to reach a customer’s System 2 thinking apparatus.  That’s what we do in a conventional sales process in which a sales person builds up credibility and trust with a customer so that he or she can educate the customer through System 2.  It’s often said in sales that people make logical decisions (System 2) for emotional reasons (System 1) and this is my interpretation of how and why.

    But how do you achieve this today?  Companies trying to cut costs put products into other channels, for example or they develop freemium models that enable customers to educate themselves.  Unfortunately, the revenue potential of a freemium is often bupkus.  That’s where social media is so valuable.

    If we believe the research, then people have greater trust in “someone like me” when it comes to understanding a product or service.  Social networks and communities are places where people feel secure enough to expose the System 2 side of their thinking and to receive other people’s ideas.  And that’s why social media is so important to the future of business.  If you can use social techniques to reach System 2 you can catalyze your business processes.  But there’s a cost associated with this.

    The new role of the enterprise is to ensure that in its social space people are respected for their ideas and that only truth is allowed to be broadcast.  That’s also why potentially embarrassing or negative information about the vendor is allowed to circulate.  Nobody’s perfect and trying to suppress truth is how to engender dis-trust.

    This is all very interesting to me and another question worth exploring is how social media can really succeed inside the enterprise.  Consider this: if social media has the potential to make us work or work harder and our brains love to be in System 1 mode, how do we use social constructs to get people to willingly engage their System 2’s inside the enterprise?

    That’s not an idle question as many organizations are attempting to cross a chasm right now from old style thinking (and business) to become new and modern social enterprises.  Let’s tackle that one next time.

    Published: 6 years ago


    I have great admiration for the work of Daniel Kahneman.  He’s an Israeli psychologist whose work with the late Amos Tversky won the Nobel Prize in Economics in 2002 even though neither was obviously an economist.  The pair built the foundation for behavioral economics and did early work on framing, or how we perceive issues based on what other information surrounds them.

    Kahneman’s work — the part I am most fascinated with — focuses on how we think and his new book Thinking Fast and Slow summarizes his work and that of others in the field and it has significant implications for our daily lives as well as many applications within CRM.

    Kahneman postulates two systems, or ways of thinking, which he calls System 1 and System 2.  The systems are really metaphors for how the brain works — they don’t show up on an MRI.  System 1 supports thinking quickly, reflexively and in the moment.  It is the snap judgment or gut instinct that evolved to keep us safe from hungry lions and we rely on it still.  System 2 is what many people would call “real” thinking.  It supports the number crunching we do to get quantitative answers, and other deliberate work we do whether or not it involves algebra.

    Both systems likely evolved on the savannah.  When confronted by a predator System 1 was most responsible for fleeing the scene.  System 2 would have been more useful for an individual trying to find the best place to cross a river — not too deep and no crocodiles, please.  You get the idea.

    Kahneman shows through experimentation how the systems work and how we may prefer to let System 1 do the heavy lifting even when it is out of its depth because System 2 involves real work and the brain would rather not engage.  Here’s an example.  A bat and a ball cost $1.10 as a set.  Individually the bat costs $1 more than the ball, what does each cost?

    According to Kahneman for most people System 1 springs into action concluding that the bat costs $1 and the ball $0.10.  Did you get this answer?  It happens to be wrong because $1 is only ninety cents more than ten cents.  If the ball costs ten cents then the bat would have to cost $1.10 which would make the set $1.20 not $1.10.  If you do a little algebra you discover that the bat costs $1.05 and the ball can be bought for a nickel thus conforming to both conditions.

    For many situations the difference between an answer of ninety cents and $1.05 is a difference without a distinction.  But a willingness to accept the wrong answer tells a lot about our brains and CRM use too and the propensity some of us still have to blow off CRM as too much work.  How many times have you heard this regarding SFA, “It doesn’t do me any good.  It’s just extra work because I’m just collecting data for my boss.”?

    I hear it often.  In fact some emerging companies use this as a reason that their products are superior to what’s on the market right now.  Their products are easier to use, less invasive they say.  But forecasting results tell a very different story.  These new vendors claim to be better because they, in effect, don’t ask the user to think and in the process they perpetuate wrong answers.  Thus the road to CRM enlightenment is pockmarked with potholes of ignorance.

    Part of each one of us prefers the ignorance of the wrong answer because System 1 took care of it and we didn’t have to engage System 2.  The ninety-cent answer gets us close enough — that is until we go to the store and discover that we don’t have enough money.

    For a long time there’s been anecdotal information about CRM’s benefits, which has been unconvincing to at least some people.  A diminishing number of System 1 types assume it’s too much work while others might see it as the path of least resistance — two valid System 1 responses.  At the same time though, some System 2 types think there isn’t enough proof and want clear ROI numbers, which are hard to get.  Actually the System 2 types are really just engaging System 1 by expecting someone else to do the work.  It can get complicated.

    The advent of analytics as a part of the CRM suite was supposed to shed new light on CRM’s efficacy and some clear information is now coming to the fore.  Last week I spoke with Swayne Hill a founder of Cloud9 Analytics and the SVP, Global Field Operations.  He’s started blogging about his experience using analytics in selling and the findings are very interesting.

    From his writings I can say that one of the knocks against CRM is valid, it is used to capture data for future analysis, but for a long time that analysis was performed by many managers operating in System 1 mode.  They took the forecast and added their gut feel for the data often promoting some deals and de-emphasizing others.  Despite this effort though, our data suggests that most sales forecasts are profoundly unreliable.

    To take a System 2 approach with a sales forecast almost demands analytics because there is simply too much data for a human brain to crunch in a timely way.  So using his own analytics including a new forecasting tool, Hill began analyzing his company’s performance.  He freely admits in one post that the company missed its forecast a couple of months running which got him and his peers very interested in figuring out why.  Indeed, a company that specializes in sales forecasting has to both eat its own dog food and benefit from it.

    In short order Hill discovered that his sales reps were three times more likely to win a deal when the VP of sales for the prospect was involved in the decision.  That sounds like a no-brainer but it isn’t.  Lots of large organizations have sales operations groups and often they can make the purchase decision for a product like this, especially if it can be shown to save money (that’s the emphasis in operations).  That’s basically a System 1 decision.

    But it’s the sales VPs who can drive a decision if they think it really will boost sales.  So while the operations side of the house might not buy if the ROI isn’t great enough, the VP of sales might be more willing to make the purchase if a vendor can show a modest performance improvement over time and that is a System 2 decision.

    Hill’s discovery led to a metric, a sales milestone that is now built into the Cloud9 internal sales process.  If for some reason a deal gets to forecast stage without the customer’s sales VP being involved the forecast it is marked down for that reason.  So ironically, and very interestingly, this new milestone has become a System 1 decision point.

    Hill’s blog is full of observations like this and I think he’s right to focus on ensuring data collection in sales.  I think every sales organization can go through an exercise like Cloud9 and come out the other end with valuable new insights into how and why it is successful.  But that analysis is a System 2 activity that will ultimately drive System 1 activity.  We need to challenge ourselves to not take the easy route of what’s been done before, to fully engage our minds.

    Finally — and I know I’ve said this before — as important as data is, it is useless without analytics to turn it into real information.  Hill had plenty of data about the importance of the VP of sales but sitting in the database it was diffuse and useless.  When it was organized by analytics it became information, which was, in turn, converted into knowledge that future System 1 types can leverage.

    CRM works and it is worth doing because it gives us the tools to engage in System 2 work to make ourselves more productive.  If we’re simply relying on data capture and System 1 cogitation, our results will be mediocre.  But there’s nothing wrong with using a System 1 shortcut once you know it’s based on knowledge.

    Systems 1 and 2 play into social CRM strategies as well and I will be writing more on the subject soon.

    Published: 6 years ago


    The contrast of stories on today’s New York Times front page cannot be more stark.

    This story discusses the unemployment situation in the Euro Zone, which can not be more serious.  One set of facts will represent the whole — unemployment in Spain is 24 percent, in Germany 5.7 percent.  The second story discusses Obama’s attack on the G.O.P. budget, which he calls radical.  What’s going on?

    The two stories are closely related because they each reference macroeconomics.  The Europeans decided to attack the recession and deficits with austerity despite the fact that economists from many corners of the world (ok, Paul Krugman and some others) called it a non-starter.  What they got was shrinking economies and rising unemployment, no surprise to the Nobel winning Dr. Krugman.

    Republicans in Congress recently passed a draft budget ladled with draconian cuts that would accomplish the same things that the Europeans have.  The U.S. recovery, such as it is, owes its existence to the stimulus program put in place in 2009.  At the time there were calls for more not less stimulus from Democrats and at the same time less from the Republicans.  What we got was almost enough to give us a glimmer of hope in the election year.  Will it last?

    It hardly makes a difference that the Americans and Europeans have now run a controlled social experiment — which is very hard to do — and that the evidence clearly favors stimulus.  In this election year, I don’t expect much to change but if I was Obama I’d make sure the country knows about that little experiment.

    This does give me an idea though.  Stimulus means spending money you borrow at the bottom of an economic cycle in order to rev the economy.  But for many, probably most, people, deficit spending is counter-intuitive.  It doesn’t make sense.

    This may be because we are thinking about economics with the automatic part of our brains.  In a piece I will publish tomorrow, I discuss Nobel Prize winner, Daniel Kahneman’s book “Thinking Fast and Slow” which analyzes what he called System 1 (fast) and System 2 (slow) thought processes.

    It turns out that System 1 is what we operate with most of the time.  It’s the autopilot that lets us drive while on the phone and almost never have an accident.  System 2 is the process you use to do algebra and, well, understand Economics.  The irony is that System 1 doesn’t know anything about Economics or math in general, but people never seem to be troubled when they use System 1 thinking on tough subjects.  Just look at the Euros and the G.O.P.

    We need more System 2 thinking in this world but politicians are increasingly trying to satisfy their fringe elements, a long tail to be sure, rather than the big middle.  How can we get everyone back to the center?  Take a look at Thomas Friedman’s recent piece from down under.

    Bye for now.

    Published: 6 years ago


    Gary Lemke over at CRM Advocate  does some nice work.  Every day he asks a thought provoking question related to CRM and asks readers for their “take” on the issue.  Over the years he’s exposed me to a lot of good thinking and I encourage you to take a look at his blog.

    A few days ago the subject was Daniel Kahneman, a psychologist who won a Nobel prize — in economics.  Kahneman and his colleague Amos Tversky laid the foundation for behavioral economics and challenged us with the idea that, while economics studies the rational behavior of individuals in the marketplace, we are not always very rational.  That means at least some of the time we are doing logical things for emotional reasons out there in the good old market.  Without fingering any single behavior this idea nonetheless explains a lot.

    So with Kahenman as the basis, Lemke asks how often we do things in the marketplace that are emotional vs. rational.  He says,

    “Now, let’s use to 80/20 rule and suggest that most customers in search of service (for example, calling the call center) lead with emotion. And let’s use the same 80/20 rule to suggest that business objectives and business processes drive primarily rational behaviors understanding that individual employees still possess emotional attributes.

    The startling conclusion (and graphic) is that only about 16% of the time are both sides dealing in a rational/rational manner.  The big winner at 64% is “rationally dealing with the emotional” i.e. rational vendor dealing with emotional customer.

    Yikes!  This doesn’t make any attempt to grade emotion from under control to crazy but it’s still valuable.

    I don’t know if the 80/20 rule obtains here, but as I told Gary, it sure feels right.  If that assumption is even close (and I bet it is) then it is the best explanation I’ve seen for a focus on the customer experience.  Forget the rules, the metrics for call handling time and all the rest.  More likely than not you are dealing with an emotionally driven customer who needs some TLC.  Dispensing TLC all day is a hard job and perhaps this is one of the silent reasons driving people to social networks to solve problems.  What better place to find someone who empathizes with you?

    Published: 7 years ago