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We’ve written previously about Predictably Irrational, and the larger phenomenon of behavioral finance.  Generally, I think the field has added a great deal to our understanding of human behavior and the limits of intuition.  However, on bad days I think the field can step over the line and into the realm of “Gotcha” research - stuff that deliberately confuses its respondents into irrational behavior that they are unable to display in more realistic situations.

A recent example of such “Gotcha” research comes from Rick Larrick and Jack Sole on The MPG Illusion.  I’ll let Rick and Jack explain the research:

Many people consider fuel efficiency when purchasing a car, hoping to reduce gas consumption and carbon emissions. However, an accurate understanding of fuel efficiency is critical to making an informed decision. We will show that there is a systematic misperception in judging fuel efficiency when it is expressed as miles per gallon (MPG), which is the measure used in the U.S.A. People falsely believe that the amount of gas consumed by an automobile decreases as a linear function of a car’s MPG. The actual relationship is curvilinear. Consequently, people underestimate the value of removing the most fuel-inefficient vehicles.

The paper was published in Science Mag, and dutifully reported on by none other than our favorite blogger, Dan Ariely of Predictably Irrational.  Ariely sums up the research so well, that I’ll let him tell it:

You need both types of cars and for now you can replace only one of them.  What should you replace?
Option 1: Replace the 5 MPG van with a 10 MPG van
Option 2 Replace the 20 MPG sedan with a 50 MPG sedan

What would you select?

As a new paper by Rick Larrick and Jack Soll shows many people select option 2, where in fact option 1 would be better for them (also see this story about the research).

Does this sound odd?  Lets look at it more carefully:  Lets assume that people drive 100 miles a month.  This means that the 5 MPG van uses 20 gallons a month while the 20 MPG sedan uses 5 gallons a month. Now what if we change them?  If we change the van we would change from using 20 gallons a month to using 10 gallons a month (saving 10 gallons a month). If we change the sedan we would change from using 5 gallons a month to using 2 gallons a month (saving 3 gallons a month).  Now it is clear that changing the van is a much better move.

The payoff is this: consumers, when presented with mpg information, make the incorrect decision about which car to replace.  But the obvious question is: is this how consumers actually think about their own cars?  I would argue not.  Most of us think about fuel efficiency when standing at the pump, watching those little numbers scroll forward.  We therefore are likely to mentally account for our fuel efficiency as a weekly fuel cost.  And weekly fuel cost is exactly the sort of metric that will lead us to make the correct decision - i.e. to replace the inefficient van, not the relatively more efficient sedan.

I would argue that this paper succeeds only in fooling its respondents because they pose the question in a framework that is unfamiliar to the vast majority of drivers.  Are consumers actually choosing to replace their sedans, while keeping their bulky SUVs?  If we are to believe the latest industry trends, SUV (and Hummer!) sales are way down, while sales of the more fuel-efficient crossover vehicles are way up (16% in 2007).  In other words, people are choosing rational option 1, not irrational option 2.

Irrational human behavior is so prevalent - is there really a need to invent it where none exists?

I should be thinking about hierarchically nanostructured materials, but instead I’m thinking about ways to make our world a little better.  The following post might be a little unstructured, but I wanted to put it out there for your thoughts.

Erik and I started the umbrella movement a few years back as an experiment in social good.  The concept was straightforward: we bought a ton of umbrellas, labeled them with a sticker that read “you’ve got the movement, pass it on”, and handed out these umbrellas in the pouring Boston rain.  Our working thesis was that everyone appreciates a little good will, especially when a sudden unexpected turn for the worse arrives, and that this good will could be passed on with a multiplicative effect.  Sort of like “Pay it forward” the movie, but not Haley Joel Osment.  In addition to encouraging good will we were curious to see the network effect and how far these umbrellas would be distributed.

It didn’t work very well.  The umbrellas tended to fall apart and extra ones were cumbersome to carry around.   Maybe our optimism was misplaced and people really thought “Hey sweet free umbrella.  Now I don’t have to spend $10 for a $1.95 umbrella that the guy on the corner is selling them for.”  I don’t think this is true.  I believe people are generally altruistic and desire to aid their fellows.

So what was the problem?  There were too many obstacles in the way; high friction slowing down the network of good will.  That and maybe the umbrella recipients weren’t primed to be altruistic.  Maybe they had to be home for dinner.

Thinking about twitter recently, I’m increasingly buying into the fact that as a platform, it has a serious potential to change the way we communicate.  It’s social, viral, and it addresses our decreasing attention spans.  I think buried within the network is an enormous opportunity to create social good and I’m trying to think of the best way to exploit this.

A simple concept is the idea of “doing a good twit daily” (borrowed from the Scout’s phrase “Do a good turn daily”).  Needy groups or people could send twits to a twit-bot requesting volunteer help, some extra food, etc. and indicating location and time.   Recipients of the twit could then reply indicating how they can help.  It’s simple, it primes people for altruism, and it leverages a huge network.  You could build a bunch of add-ons: AI to allow for twits which are local or within a certain type of volunteering or a database to help groups manage their volunteers.

I’ve been messing around with twitter for the past couple of months.  My network is relatively small, keeping small updates on my brother and twit-stalking a few of the VC guys that are big believers in this stuff.  So for me, I use it relatively infrequently.  For others though it’s huge, completely viral, and informative.

Fred Wilson, a VC at Union Square Ventures, has been a big proponent of twit-bots.   For example you can create a twit-bot on wine recommendation (@winetweets) .   This allows everyone interested in wine recommendations to post to the twit-bot and the bot published the recommendation to everyone who follows the twit-bot.  There is some real power of the masses at work here: if you get enough people, surely the wisdom of crowds should allow you to find the cream of the crop recommendations based on number of recommendations alone.  However there is oversaturation of information here as well: what happens when you get 1000, 10000, 1 million recommendations a month from the twitbot?  There is just no way of handling this information.

This leads me to the idea of ‘data-mining’ information from twitter (I’m sure someone is working on this already) . Because of the format, twits are limited to 140 characters, necessitating brevity.  In a comparison with yelp.com, there is no opportunity to supply context for the recommendation that a full review on yelp can provide.  Thus I think it will take some sweet statistical analysis along with some meta-data (some metric for how ‘good’ the recommender is) to really extract some value from this.

Venture hacks always supplies gems for the entrepreneur.  This post is excellent, reading and listening for anyone who wants to get a startup done.

Even more important, Mike Cassidy talks about conflict resolution within a company and how to achieve work-life balance.  Plus the dude plays ultimate which is a super plus in my book.

All this from a guy who sold hundred million dollar companies twice after only a couple years of launch.

Umair Haque at Bubblegeneration and the Harvard Business Blog has been talking about the instillation of corporate DNA for years.  It seems that with the increasing media coverage of society’s malcontents, such as global climate and environmental concerns, exploitation of labor, and lack of wealth parity, there has been a shift afoot, among management gurus, towards encouragement of benevolent values in corporate culture.  Google says “do no evil.”  Umair talks about how competitive advantage erodes value.

I don’t think this is new to us.  After all, looking out for your neighbor, while they look out for you, is a fundamental tenet of society, keeping both homes safe while one or the other might be away.  We appreciate these communal values and they are the root of an altruistic, efficient society.  But these traits are somewhat new to corporate functions, as they have thrived under profit maximization, cost cutting, competitive advantage, and crushing competition.  Accordingly, the adoption of a corporate vision, more aligned with basic human values, might be extremely challenging to implement.  What needs to happen?  When Google says our motto is “do no evil,” they don’t just say that this is our magna carta, they explain how to do no evil.  It’s the implementation of Google.org, the famous 70-20-10 rule, the contract with employees that they will provide an environment where one can be healthy, fed, and content (through free food, exercise, laundry).  They establish a framework to achieve this while developing mechanisms for feedback and evaluation.

Corporate DNA has to be bred through a concrete framework with measurables.  It seems that too often small business owners take too much of a touchy-feely approach to it and that’s going to cause confusion.  You need everyone on the same page.  While the themes and values should be touchy-feely and shared, the implementation should be rigorous.

Yikes.  It’s been > 10 days since a last 26.2 post.  Heading to a friend’s destination wedding will clearly do that to you.  That and preparing grants for Federal funding.

Which leads me to this Harvard Business Blog Post.  Since we are fond of both working and marathons, this discussion is apt.  Not much really to say here except make sure to treat yourself to some well deserved time off.  Anyone who has run a marathon knows that rest days during training and the taper prior to your race are CRUCIAL to peak performance during race day.  Fellow marathoner and venture capitalist Brad Feld, takes an off-grid vacation seemingly every other day (which in reality is once quarterly) where he doesn’t answer email, check stock quotes, etc.  It seems to have gotten him to a good place in his life.

Take your break.  Spend some time with family, read a book, or head out for a walk.  And do it while clearing your head from some work.