Predictably Irrational
Page 24
The sad answer was yes. When we suggested that, say, the Democratic Party had issued the statement that “the sun is yellow,” our participants were more likely to question it. (“Sure it’s yellow, but it also has red spots on the surface and sometimes it looks white, so is it really just yellow?”) If the Republican Party or P&G issued the statement that “a camel is bigger than a dog,” the participants again were less certain and hedged their bets. (“What if the dog is a bull mastiff and the camel is a newborn . . . ?”) By starting from a highly suspicious point of view, owing to the origin of the statement, the level of distrust was so high that it even influenced our participants’ ability to identify obviously correct statements.*
IN OUR NEXT experiment, we wondered whether this kind of mistrust could change the actual experience someone was having with a product. To look into this question, we invited University of Chicago students to our lab to evaluate the quality of some stereo equipment, asking them to listen to an “Azur” model stereo made by Cambridge Audio.
Before being set loose on the woofers and tweeters, all the participants read a brochure describing and reviewing all the different features of the stereo equipment. Some of the participants read a brochure said to be from Cambridge Audio, and others read the same exact brochure, but this one indicated that it came from Consumer Reports. Then, all of the participants took half an hour to listen to a composition by J. S. Bach and evaluate the stereo system. How powerful was the bass? How clear was the treble? Were the controls easy to use? Were there any sound distortions? And finally, how much would they pay for the system?
As it turned out, the participants liked the stereo much more if they were told that the information they read came from an unbiased source such as Consumer Reports. They also said they would pay, on average, about $407 for the system, far more than the $282 offered by those who read the Cambridge Audio brochure. Sadly, it appeared that mistrust in marketing information runs so deeply that it colors our entire perception—even in the face of firsthand, direct experience—causing us to enjoy the experience much less than we otherwise would. (And this happens with relatively trusted brands. Just imagine what would happen with distrusted ones.)
NOW, LET’S RETURN for a moment to my bad experience with the cable company’s bait-and-switch. Ayelet, Stephen, and I decided to run a little study of our own with the ad that promised me one month of free digital cable. We showed it to a few hundred people and asked them how much they thought this free offer would really cost. Being somewhat naïve and gullible myself, I was originally expecting the price to really be free (which, of course, it was not), but it turned out that very few people in our sample were as naïve as I had been; the vast majority expected the offer to cost them somewhere between $10 and $70. It seemed that most people have learned over time that there really is no such thing as a free lunch (or free cable service), and they adjust their expectations accordingly (although they are still annoyed when they find out the real price).
But this is not the end of the bad news. We also split our sample into two groups—one group that had prior experience with that particular cable provider and one that had not—and compared the two groups’ cost estimates for the advertised free service. It turned out that there was a large gap between the two groups: those who’d never done business with the “free cable” company were just as gullible as I was, while those who’d done business with the cable company estimated the real cost to be much higher. What was the cause for this difference? You guessed it: those with past experience had been burned before and, as a consequence, revised their trust in anything that originated from this cable company.
Is There Hope?
I realize all this sounds very pessimistic, but there is a brighter side. After all, human beings are inherently social and trusting animals, and we tend to believe in one another even in the face of clear rational reasons not to do so. Despite the difficulties of overcoming broken trust, I think that it is possible to repair it, given the right amount of investment and direction.
Consider the archetypal example of Johnson & Johnson’s handling of the 1982 Tylenol tampering incident. In September 1982, seven people in the Chicago area died after ingesting Extra Strength Tylenol capsules that a pharma-terrorist had adulterated with cyanide. From the beginning of the crisis, Johnson & Johnson’s managers set the safety of the consumer as their top priority and did everything in their power to contain the tragedy, regardless of where the fault lay. Johnson & Johnson quickly and voluntarily halted Tylenol production, withdrew all Tylenol capsule products from the market, urged the return of all previously purchased Tylenol capsule products, and readily provided replacement tablets.
The company ultimately destroyed millions of bottles of Tylenol at a cost of more than $100 million. Tylenol’s market share, which had accounted for more than a third of U.S. painkiller sales, dropped dramatically, and many experts predicted the demise of the popular brand. However, after a brief period, Johnson & Johnson reintroduced Tylenol in a new tamper-resistant triple safety-sealed container, accompanied by a blitz of advertising and positive media attention. Tylenol’s market share recovered to 30 percent one year later, while Johnson & Johnson’s share price recovered within two months.21
The fact that the Tylenol scare remains the overly cited paradigm of effective crisis management in business is almost depressing. After all, the example is an old one, and few companies since have behaved in such an exemplary manner. Nevertheless, it did set a powerful example of how transparency and sacrifice can serve to restore public trust and help a firm set itself on the right path.
Another promising way for companies to create trust is by proactively addressing consumers’ complaints. This approach is practiced by the cable giant (yes, cable giant) Comcast, which has begun responding to customer complaints even before they reach the customer service department. The director of digital care, Frank Eliason, discovered that by searching the internet for the word Comcast (or sometimes Comcrap), he could locate unhappy customers who were venting to themselves and to their friends. He then took the next step and started corresponding with the complainers about their problems before they became formal complaints. (Other companies—including JetBlue, General Motors, Kodak, Dell, and Domino’s Pizza—also track customers’ comments on Twitter and elsewhere.)
A more extreme version of this idea is for companies to make themselves transparent and vulnerable. By setting up Web sites where consumers can talk freely with the company and one another about products and services, warts and all, companies can expose themselves to large negative consequences if they ever misbehave. This type of transparency is a sort of commitment device that companies can use to force themselves to behave in a trustworthy way, even when they are tempted to do otherwise. And since in such a publicly exposed world it is harder to get away with flagrant misbehavior anyway, why not embrace more positive and trustworthy types of business processes?
Some special companies see trust as a public good (like clean air and water), and customers return the trust. One company in which I personally have a lot of faith is Timberland, the maker of outdoor clothing. I once attended a talk by Jeff Swartz, the CEO, in which he detailed many of the ways that Timberland is trying to reduce CO2 emissions, recycle, use sustainable materials, and treat its employees fairly. At the end of Jeff’s talk, another CEO asked him, “What are the returns on these investments?” Jeff answered that he has been trying to find an economic return for these actions but that he had not yet found it in the data. He further added that it would be nice if being environmentally and socially responsible was also financially rewarding but that he didn’t really feel it was necessary. He simply wanted to make sure that his company followed the moral principles he wanted his kids to live by. After hearing this, I went and bought my first pair of Timberland shoes.
A Moral Tale
Aesop’s tale of “The Boy Who Cried Wolf” is a powerful fable of lost trust. You recall the story: A boy shepherd tending a
town’s livestock one day decides to have a little fun. “Wolf! Wolf!” he cries, and immediately the townsmen come armed, ready to defend their precious animals. They find that they’ve been duped and return to the town. A few days later, the boy again cries, “Wolf! Wolf!” and again the townsmen come, armed, ready to defend the livestock. Again, there is no wolf. Finally, when a wolf really does come, the boy’s desperate cries for help fall on deaf ears. The townsmen no longer trust him and leave him to fend off the wolf on his own. Consequently, the livestock fall prey to the wolf (in some versions of the story, the wolf eats the boy as well).
Let’s think about this tale in terms of markets. There are two morals to the story. The first is that people are willing to forgive a bit of lying. Obviously, many corporations get away with lying in their advertisements and offers, at least temporarily. But when marketers persist in pulling bait-and-switch tactics, mistrust bites back, sinking its sharp teeth not only into the thigh of the perpetrator but also, more generally, into others as well. When market defectors spread false claims, more and more of us increase our level of distrust, and this distrust then gets diffused into everything we hear. We cast obvious truths into doubt, and we suspect everything. The cable company that betrayed my trust stung itself, for sure, but it also hurt its industry by causing consumers like me to mistrust telecommunications companies in general. And that mistrust, like a pebble dropped into a still pond, ripples throughout the telecommunications industry; creating tiny waves that end up affecting business and society as a whole.
But the second, more important moral—one that we are just beginning to understand—is that trust, once eroded, is very hard to restore. One only has to think about the banking crisis of 2008 that left the U.S. economy in tears. The multiple bailouts and new regulations that followed did little to heal the broken trust, and the behavior of Wall Street executives only ground salt into the wounds. I am unsure why trust as an important public resource was ignored, but it is clear to me that its loss will have long-term negative consequences for everyone involved, and that repairing the public trust will take a very long time. Thanks to shortsightedness and individual greed, the public commons (in this case, in the form of financial systems, government, and the economy as a whole) have suffered a great tragedy.
Nevertheless, by coming to understand trust as an important, tangible public resource to be protected and cared for, organizations could do a great deal to restore it. A few are beginning to take great care to create and maintain trust, and do what they can to prevent its possible deteriorations. In the end, I believe that companies that want to be successful will heed the example of Timberland and realize that honesty, transparency, conscientiousness, and fair dealing should be bedrock corporate principles. If we consumers reward their efforts by buying from them more frequently, we might over time be able to rebuild trust—at least in the select firms that really deserve it.
CHAPTER 13
The Context of Our Character, Part I
Why We Are Dishonest, and What
We Can Do about It
In 2004, the total cost of all robberies in the United States was $525 million, and the average loss from a single robbery was about $1,300.22 These amounts are not very high, when we consider how much police, judicial, and corrections muscle is put into the capture and confinement of robbers—let alone the amount of newspaper and television coverage these kinds of crimes elicit. I’m not suggesting that we go easy on career criminals, of course. They are thieves, and we must protect ourselves from their acts.
But consider this: every year, employees’ theft and fraud at the workplace are estimated at about $600 billion. That figure is dramatically higher than the combined financial cost of robbery, burglary, larceny-theft, and automobile theft (totaling about $16 billion in 2004); it is much more than what all the career criminals in the United States could steal in their lifetimes; and it’s also almost twice the market capitalization of General Electric. But there’s much more. Each year, according to reports by the insurance industry, individuals add a bogus $24 billion to their claims of property losses. The IRS, meanwhile, estimates a loss of $350 billion per year, representing the gap between what the feds think people should pay in taxes and what they do pay. The retail industry has its own headache: it loses $16 billion a year to customers who buy clothes, wear them with the tags tucked in, and return these secondhand clothes for a full refund.
Add to this sundry everyday examples of dishonesty—the congressman accepting golfing junkets from his favorite lobbyist; the physician making kickback deals with the laboratories that he uses; the corporate executive who backdates his stock options to boost his final pay—and you have a huge amount of unsavory economic activity, dramatically larger than that of the standard household crooks.
When the Enron scandal erupted in 2001 (and it became apparent that Enron, as Fortune magazine’s “America’s Most Innovative Company” for six consecutive years, owed much of its success to innovations in accounting), Nina Mazar, On Amir (a professor at the University of California at San Diego), and I found ourselves discussing the subject of dishonesty over lunch. Why are some crimes, particularly white-collar crimes, judged less severely than others, we wondered—especially since their perpetrators can inflict more financial damage between their ten o’clock latte and lunch than a standard-issue burglar might in a lifetime?
After some discussion we decided that there might be two types of dishonesty. One is the type of dishonesty that evokes the image of a pair of crooks circling a gas station. As they cruise by, they consider how much money is in the till, who might be around to stop them, and what punishment they may face if caught (including how much time off they might get for good behavior). On the basis of this cost-benefit calculation, they decide whether to rob the place or not.
Then there is the second type of dishonesty. This is the kind committed by people who generally consider themselves honest—the men and women (please stand) who have “borrowed” a pen from a conference site, taken an extra splash of soda from the soft drink dispenser, exaggerated the cost of their television on their property loss report, or falsely reported a meal with Aunt Enid as a business expense (well, she did inquire about how work was going).
We know that this second kind of dishonesty exists, but how prevalent is it? Furthermore, if we put a group of “honest” people into a scientifically controlled experiment and tempted them to cheat, would they? Would they compromise their integrity? Just how much would they steal? We decided to find out.
THE HARVARD BUSINESS SCHOOL holds a place of distinction in American life. Set on the banks of the River Charles in Boston, Massachusetts; housed in imposing colonial-style architecture; and dripping with endowment money, the school is famous for creating America’s top business leaders. In the Fortune 500 companies, in fact, about 20 percent of the top three positions are held by graduates of the Harvard Business School.* What better place, then, to do a little experiment on the issue of honesty?*
The study would be fairly simple. We would ask a group of Harvard undergraduates and MBA students to take a test consisting of 50 multiple-choice questions. The questions would be similar to those on standardized tests (What is the longest river in the world? Who wrote Moby-Dick? What word describes the average of a series? Who, in Greek mythology, was the goddess of love?). The students would have 15 minutes to answer the questions. At the end of that time, they would be asked to transfer their answers from their worksheet to a scoring sheet (called a bubble sheet), and submit both the worksheet and the bubble sheet to a proctor at the front of the room. For every correct answer, the proctor would hand them 10 cents. Simple enough.
In another setup we asked a new group of students to take the same general test, but with one important change. The students in this section would take the test and transfer their work to their scoring bubble sheet, as the previous group did. But this time the bubble sheet would have the correct answers pre-marked. For each question, the bubble indicatin
g the correct answer was colored gray. If the students indicated on their worksheet that the longest river in the world is the Mississippi, for instance, once they received the bubble sheet, they would clearly see from the markings that the right answer is the Nile. At that point, if the participants chose the wrong answer on their worksheet, they could decide to lie and mark the correct answer on the bubble sheet.
After they transferred their answers, they counted how many questions they had answered correctly, wrote that number at the top of their bubble sheet, and handed both the worksheet and the bubble sheet to the proctor at the front of the room. The proctor looked at the number of questions they claimed to have answered correctly (the summary number they wrote at the top of the bubble sheet) and paid them 10 cents per correct answer.
Would the students cheat—changing their wrong answers to the ones pre-marked on the bubble sheet? We weren’t sure, but in any case, we decided to tempt the next group of students even more. In this condition the students would again take the test and transfer their answers to the pre-marked bubble sheet. But this time we would instruct them to shred their original worksheet, and hand only the bubble sheet to the proctor. In other words, they would destroy all evidence of any possible malfeasance. Would they take the bait? Again, we didn’t know.
In the final condition, we would push the group’s integrity to the limit. This time they would be instructed to destroy not only their original worksheet, but the final pre-marked bubble sheet as well. Moreover, they wouldn’t even have to report their earnings to the experimenter: When they were finished shredding their work and answer sheets, they merely needed to walk up to the front of the room—where we had placed a jar full of coins—withdraw their earnings, and saunter out the door. If one was ever inclined to cheat, this was the opportunity to pull off the perfect crime.