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Episode #221
Eric Johnson

Choice Architecture: How Consultants Make Better Business Decisions

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Summary

How do you make better business decisions? By taking a look at the best information. Michael Zipursky’s guest in this episode is Eric Johnson, the director of the Center for Decision Sciences at Columbia Business School. Eric talks with Michael about how we often choose a decision and we don’t revisit it. For example, if the GPS tells us to go a certain route, we lock ourselves into that choice. What we need to do is go back and reassess the decision. If you were to do more research, will you make the same decision? If you want to know more about making better business decisions, you wouldn’t want to miss this episode. Tune in!

I’m excited to have Eric J. Johnson. Eric, welcome.

Thank you. I’m glad to be here, Michael.

You are a professor at Columbia Business School, where you’re the Director of the Center for the Decision Sciences. Your research examines the interface and connection between behavioral design research economics, decisions made by consumers and managers and the implications for public policy, markets and marketing. Your book, which is called The Elements of Choice: Why the Way We Decide Matters, is a fascinating read.

I’m excited to dive into it. I want to get into how consultants can make better decisions to improve their results in their business and lives and also how they can use this to provide greater value and even more impact for their clients. Before we do that, I would love to go back in time a little bit. How did you get interested in this whole world of decision-making and decision sciences?

I have been pretty lucky throughout my career. I managed to stumble into working with some great people. Several of them have won Nobel Prizes along the way. It’s not that I knew it when I talked my way into working with them but it has worked out well. I grew up in a working-class town in New Jersey. When people were making choices and were in college and high school, they were making different choices even though they were both equally bright.

Someone’s taking the community college and others are applying to Ivy League schools. I wondered what was it that made them make those different kinds of choices. I eventually ended up going to graduate school for psychology and happened to work with someone named Herbert Simon, who was the first psychologist to win a Nobel Prize. He was very much about how the mind and how people made decisions as opposed to how economists think we make them. He was much more of a realist.

You saw people making different decisions and choices. You start wondering about that and study that more. Do you remember that moment or maybe it was one summer but the experience in the environment where you started to become interested in this? Many people become interested in marketing, economics or whatever it might be. It often stems from an experience that they have had, whether good or bad. Was there any experience that you had that led you to become interested more in how people make decisions?

When I was an undergraduate, I started working as a research assistant. The fact that I was working, they thought I had some potential and started giving me some books. One of them was Herbert Simon’s The Sciences of the Artificial and other things like that. They opened up my eyes. The other thing that was remarkable and got me much more interested in applying this knowledge is seeing firsthand how people were making medical choices, both in family and then years later, I am a cancer survivor.

I’m trying to figure out some basic things in my behavior but also it’s what got me interested in one of the most well-known streams of research I’ve done, which is about organ donation. Why do people decide to be a donor either at their death or even more interestingly, while they’re living? That struck me as, “What an incredibly difficult and important decision that is.”

When I was reading your book, even in the first few pages, I had this lightbulb moment. It all seemed to make so much sense like, “It is so true. We all make multiple decisions on any given day. Yet very often, we pay little attention to the decisions that we’re making.” Sometimes it almost seems like it’s a subconscious choice.

 

Could you offer a couple of examples of decisions that people make that might be everyday decisions or basic decisions and how these could be important? Some people who might be reading are like, “What does this all have to do with the world of consulting?” To put this into a bit of a bit more context, what are a few examples of those basic yet critical decisions that we all make?

Let me add one other critical point, which is as we make decisions, we don’t think much about the person who’s presenting those decisions to us. What gets called the choice architect, I call it designer. For your readers, you might call it consultants, which are people who are deciding how to pose options and describe the options. We don’t think about that, so making decisions is often automatic. Also, what we don’t pay attention to is how that was presented.

I was lucky enough to be at a foundation and talk to the foundation president about this. He had a daughter. He said, “I know what you’re talking about. I used to have a terrible fight every evening when I said, ‘Do you want to go to bed?’ to my daughter. I changed the way the decision was posed to being, ‘Do you want to fly into bed or bounce into bed?’ There were no more fights.” Even in everyday life, that’s not exactly an expensive consulting engagement. It is an important decision. We are choice architects or designers. The daughter sitting there was saying, “I have a choice here.” She’s not thinking, “Daddy’s tricking me.” That’s a good and common example.

That resonates with me. I have two young daughters. That example did resonate. It made me laugh and smile. What is so true for me as I went through your book, it became apparent that we have an opportunity to mold our architecture and design how we present information in every aspect of our lives. Often, we’re not even paying attention to that yet, how we pose, display, communicate and present that information can lead to different types of results. You talk about the influences that we all have in our life that make some choices more appealing than others. Can you talk a little bit about what those influences are that can make one choice seem appealing and make another one seem not appealing at all?

There are two basic things that I think about when I’m talking to somebody about their decision-making process and what the decision is like. The first is a plausible path. How do they decide how to decide? In most decisions, they’re going to look at a small subset of information. To make a good decision, we have to look at the best information. We don’t always do that. What is the path we take through the information? Paths can be clicking through a website and getting the right information.

The analogy that struck me was walking. We choose where we’re going and we don’t revisit it. I was driving down to New York. I hit the GPS and it said, “You should go this way.” I was locked into that path. That’s how we often make decisions. We decide what information to look at early on and don’t revisit that. That’s one thing. The other thing is the fact that much of what we think about as our preferences are things we’re assembling on the spot.

They’re thinking about instances from memory. We’re recalling things. I’m going to think about a decision like where I’m going to go to school or what meal I’m going to have. I’m instantly thinking about other experiences I’ve had with schools like this or with people who have told me that school is like this. It’s that process of retrieving things from memory or assembled preferences. That’s very important.

To make a good decision, we have to look at the best information. Click To Tweet

We’ll take the independent consultant to the small consulting firm owner. You also have done consulting for many organizations over the years. How have you seen this concept of decision-making and decision architecture play into the role or the business for a consultant?

For a consultant, on their forehead should be written designer because what they’re doing is designing. They’re both designing it for the client, which is very important. They’re also recommending designs often for the client to use with customers. For example, one thing I talk about, which is relevant here, is how many options you present to somebody. One possibility is you would say, “I’m going to present you every option there is that’s available.” One of my favorite examples is I ended up talking to people in New York City. It’s high school choices. Kids in New York get to choose high schools with their parents’ help.

How many high schools should you present to somebody? It turns out the city of New York presents 769 high schools in a book the size of an old-school telephone directory. What happens is the telephone directory ends up sitting in the bottom of the locker and kids talk about it but that information isn’t used. By analogy, if you’re a consultant, you’re talking about courses of action. You have a very powerful tool, which has how many courses of action you present to the client. You don’t want to present 769, 69 or even a small subset. You want to think about those carefully because, in most cases, the client is going to pick from the set you present.

How do you think about that? Let’s take this example. This has happened with a client who used to develop a very in-depth report. It was 100-plus pages long and this would be the output that they would give to the client or the deliverable. The client would look at this and often not take action on it because there’s so much information in it. What they shifted to and helped them to develop was something that was 25 pages long. There’s a lot less information but a lot more specific recommendations.

When you think about this in terms of distilling, taking a lot of information and boiling it down into less information that can create a better outcome or result, how would you recommend the people think about that when they have a lot of options, experience, expertise and things that they could recommend? What’s the thought process that you would go through in trying to arrive at something more optimal?

It’s interesting because that’s true of every designer. They have to decide on what to present. You will hear some people say, “More choice is always worse.” It’s true that as you add more options like what you’re suggesting, it gets overwhelming. At the same time, you’re adding variety. You don’t want to present a client with just one option.

Particularly, if you don’t know everything about their business and what they should be doing, you want them to bring their knowledge. There’s the analogy to a high school kid. You don’t want to give the high school kid one choice because they know what they’re looking at and often, you don’t, so you’re going to want to give them.

 

There’s a balancing act between having enough choices so you can explore the possible spaces and giving them a chance to think about different options. At the same time, it’s not overwhelming them. There’s an increasing force, which is you want to give them more options and a decreasing force, which is you want to limit the number of options because you don’t want to overwhelm them. You’re going to end up, depending on the situation, coming up with a number that’s perfect for that particular decision. There’s no, “I can’t say.” It would be a terrible consulting business, so I said five. Nobody would want to hire me. They would just read the book and be done.

I would love to hear your perspective on the accepted best practice in the world of consulting for a full engagement with a client when you’re talking about options and pricing is to provide three options. You have good, better and best. You have the low entry point, the ideal or best value that most people would go for in the middle and the higher-priced option.

To make it simple, you might have something that is $25,000 at the low end, then $45,000 and $85,000. The gap between option 2 and option 3 is significantly greater than the gap between option 1 and option 2. When you think about that layout of pricing, where does your mind go? Does that make sense? Is something big missing there? How do you interpret that?

That’s a good example of how people who are designers might be making decisions or spreading the options that are in a haphazard way. We know something basic from research and that is people tend to get the middle option. It’s called the compromise effect. Think about it. You still aren’t done when you say the middle because you have to decide how far up should the high option be and how low should be the low option be. There’s still a lot of design to be done.

Let’s use your example. Should it be $25,000 and $60,000 and halfway in between? Maybe it should be $80,000 and $30,000 and put something in between there. You are a designer when you’re making those choices and you need to think hard about how that goes on. Three is good but you could always add a fourth, which may make the third option more appealing. That design is a lot more complicated than always the rule of three.

What do you go through in your mind? Do you have a framework for the steps that you go through when you’re making these decisions? What would you recommend to somebody? How would you guide somebody if they were to go through the process of making better decisions and designing a better path to decision-making? Are there certain steps that people should go through or best practices?

Your 100-plus page report is a good example of not doing this. You want to make it fluent and easy at the beginning for people to make choices. Once they’re engaged, then they don’t change. You want it to be easy in a way that gets them to look at the right information. Let me give you a concrete example. In many cases, when we design places where people make choices and when we’re designers, we tend to give them too much information in general, not just about options. We don’t tend to make it easy for them to process.

I’m sitting here and if I had looked out my window in 2011, I would have seen US Airways flight 1549 coming down the Hudson, which landed. As you might remember, that was famously Chesley Sullenberger or as Sully as what he was known, landing this flight. He and the whole crew are heroes but the thing that made it important is there was a gauge. It was so important he turned this gauge on as soon as they hit the keys. He had 208 seconds between that moment and when he landed. He had to choose between three options. It’s trying to go back to LaGuardia, trying to go over to a small airport called Peterborough or landing somewhere else.

Load shed is to not think about unimportant things and think about important things. Click To Tweet

This gauge let him think very quickly. It did some math for him and said, “If we fly at this angle, you will go as far as possible.” That gave him the ability to load shed, which is to not think about unimportant things and think about the important things. The analogy, to finish the point, is that he talked about this utilities. When you have a power plant that’s not doing well, they cut the power to the factories and not to the hospitals. When you’re in a stressful situation, you want to think about the important stuff. The hospitals don’t worry as much about the factories. That effort is the important thing.

It also sounds like that gauge having a way to measure or almost create a bit of a benchmark is critical to this whole process. What other examples are there of gauges in the world of professional services and accounting? You have done work in loans and other types of finance in the financial world. Could you share a couple of more examples of gauges that you have seen that people use in this process?

Let me give you one, which I find interesting and that is interest rates. It’s the essential part of either borrowing and lending money or investing. One of the things I take all my Columbia MBAs through is I give them a task and say, “You can’t use your calculator. Why don’t you use your head? Imagine you had a $10,000 gift that you could invest for at 10% real interest from now until you retire.” Let’s say they’re 25 and they’re retiring at 65. How much would that be worth? We think interest rates are important and they are an important yardstick or a gauge in how much it costs to borrow or what are the benefits of savings.

When I asked them this, they ended up usually saying about $200,000. The real number is $750,000 or close to that. Interest rates aren’t a good gauge when you have compounding. That’s one example. I did some work at the Consumer Financial Protection Bureau. We thought a lot about what the right gauge to give consumers, both to encourage savings and make them more responsible borrowers. Frankly, interest rates aren’t the only thing you want to present to somebody. You want to present them the total cost of borrowing or the total return they could expect when they retire whenever they meet their savings goal.

When you look at your MBA students, clients that you have worked with around the world or different research products that you have been part of, what are 1 or 2 of the most common mistakes that you see people making when it comes to the decision-making process?

The first thing is they don’t realize they’re choice architects and designers. They’re doing things the way they have always been done. That’s a big mistake because essentially, you have a very powerful tool. You must think of it as a superpower that you don’t know you have. You can do an awful lot to influence that choice that you’re unaware of.

The important thing is just because you’re unaware of it doesn’t mean it doesn’t have an effect. The number two thing is you’re not doing okay. Every choice has its architecture and design. One of the very powerful tools and I talk about many of them, is the default. What happens if somebody doesn’t make a decision? People take that as a given.

Let’s go back to savings. One of the ways to get people to save money is to change the default. For years in the United States until about 1996, the default in savings was always 0. That was the most common amount people would save. It’s not the amount they wanted to save. They didn’t like making decisions, so that’s what happened. Department of Labor allowed companies to change that default to 3%.

 

Most companies went to 3%. You could set it to the larger figures. The most common amount saved was 3%. That’s not because 3% is the right amount. It’s because that’s what companies thought people would be willing to do. It turns out they should be saving more than that. As a result, setting the wrong default is hurting their employees and not helping them as much as they could.

That’s such a powerful idea when I think about how that could be transitioned or positioned for interaction with your clients by setting a gauge or a conservative limit as you’re making a recommendation. It’s almost like you’re providing a guardrail. If you’re telling them that it should be between 10% and 30%, then even if they’re going to be conservative, they will be at 10%.

Maybe they won’t be in the 30% where you want them to be but they will still be within the range as opposed to not even putting that guardrail in there. That’s a powerful idea. For those who have teams, if we want every member of our team to be able to make better decisions, how would you recommend that a founder, CEO or leader could support their team members to be able to make better decisions?

The team leader is a designer, so they can be presenting options. When I have people working for me, I try to be very aware of the choices I’m giving them. Do you want assignment A, B or C? Maybe don’t mention assignment D where they wouldn’t fit. Leaders are choice architects. They do design. Everything else, I believe you can do. For example, how would you describe the options? I could be talking about assignments in terms of the upside, downside, potential length and amount of travel that’s involved if we start traveling again.

All those things are things that I, as a leader, control and they’re going to influence the choices that my employees and team members are going to make. That’s the first thing. It’s presenting choices in a way that they’re going to make the choice that’s right for them and you. That’s a great case. If they made the choice that’s best for them and you, you’re usually both better off.

We take this from the opposite perspective that people are marketing to us. They want us to take action on something and move toward the direction that is beneficial for them. If we want to try and become better at analyzing that to understand and make sure that the choice that we’re making is the right choice for us and not just for them, how should we approach that? Are there certain things that you tend to look for? When you are being presented with an offer, whether it’s for insurance, travel or whatever it might be, how does your mind start breaking that down to think about the different perspectives or options that are being presented within that choice?

The first thing is I want to make some of your readers feel better because they may be thinking, “I never do that.” The simple fact of the matter is most of us don’t. We’re too busy making choices and decisions. It’s like the GPS analogy, “I’m too busy driving to be tapping on the GPS to see if there’s a better route there.” The other thing that’s quite surprising is if you ask people about whether the design influences their choice. We know this mostly from default. Let’s make it concrete. I say, “We’re going to have chicken for dinner tonight unless you want something else.”

You ask people, “Did that default influence your choice?” They say no. It’s very hard to see past the choice architecture to see that. Hopefully, after hearing us and reading the book, you know what the tools are and you can be aware, so we can say, “Why am I only being presented three options? Why those three options?” To use another example, “Why are you using interest rates instead of dollars?” Once you know the vocabulary of the designer, you can help understand what they’re doing a little bit but it’s not easy. It’s very hard.

Present choices in a way your listener will make the right choice. Click To Tweet

You have been studying this area for many years. You have written a great book on it. It provides tools and a lot of detailed and in-depth information. How has this knowledge, perspective and experience that you have accumulated over the years impacted your personal life? I can only imagine that as you are being presented with all kinds of information, your mind is subconsciously analyzing and viewing it in a different way than it likely did before you started down this path of research and all that. Is there anything that you look at that you can’t believe how you didn’t use to look at it like that in the past? I’m interested in your journey around this and how you observe and analyze all the choices and options of life around you.

I realized I had done this without knowing it. When I set up a meeting, I set a default time. I’m flexible but I present a time like 10:30 on Thursday. More times rather than not, that default gets selected. That’s great because I can schedule my meetings back-to-back with fifteen-minute breaks or whatever I want to do. I’m not coercing anybody. I’m saying I’m flexible and I will be responsive. That’s a case where I can become much more efficient simply by having a default. There are lots of those.

My wife is in the same profession and she has read the book. You can imagine that some of our conversations about where we’re going to dinner or what movie or play we’re going to see gets to be a little bit like The Princess Bride, “I know that you know that I know and we know each other’s tricks.” I once was teaching a bunch of MBAs that she had taught negotiation to and they’re trying to delay the exam. I said, “That’s interesting. You’re trying to negotiate the exam with me. Who do you think taught you negotiation?”

Your book is a thick good read. It is packed with deep and valuable information. It’s also different than a typical book on behavioral economics or things of that nature. It’s not a dry read. It’s very enjoyable. There are a lot of great stories and illustrations. What went into writing this book? How did you think about writing it and structuring it? Are there any best practices? Are there any things that you feel made the book what it became to be for those who might be thinking about writing their 1st, 2nd or 3rd book?

I had written academic books before. Sit down and type what you’re thinking. You might think about structuring things in different ways but this was different because I worked hard and it was fun to explore examples. How often does an academic get to read reports about how the US Airways 1549 crashed and what Sully looked at and read transcripts of his testimony? How often do you get to read about and interview people who have designed the New York City school choice system?

It’s important to get examples that make the point and not just because they’re examples of points you want to make but they also make you think about what you want to say. There are examples of dating services. I’m happily married, so I was reading about dating services and things I wouldn’t normally read and trying to find places where things came to life and worked out well or in other cases where things worked out terribly.

From start to finish with the book, what percentage of your time have you spent on research and collecting these stories and information? What percentage of the time was spent writing and editing the book?

It’s hard to separate it because staring at a blank screen and trying to come up with another example merges into the process of writing and rewriting. I have a great editor who helped a lot. I used to think I was a good writer and then I’m a much better writer. That process takes much longer than anyone thinks about if you’re going to do a good job. There are lots of examples that ended up on the cutting room floor because they didn’t make the point right.

 

You’re an author and professor. You have been consulting as well. In all of this, are there 1 or 2 things that you feel in your day-to-day life that give you more mental clarity or focus and allow you to perform at a higher level? Are there any habits or anything that you do quite consistently that you feel has a big impact on your success?

Particularly in consulting, it’s trying to understand where the client is coming from. You often go in and say, “I know that. I know this. I’m going to use that solution.” Often, there’s something more subtle going on. It’s understanding the pressures the client is feeling and many of which they can’t talk about because they don’t see them. We’re not the only choice architects. Their situation is a choice architect. They have a boss and employees. These people also influence their choice in having an ability to step out of your view of the situation.

I was doing some work with a well-known company, which involved a Nobel Laureate. These were all folks that were like me, working-class kids from New Jersey. Understanding a little bit about that background that they all were achieving more than they ever thought they would and they were happy but not incredibly secure was helpful. That empathy and I hate to use that word help.

Why do you hate to use that word?

I’m a cognitive psychologist. I don’t talk about the touchy-feely stuff and that’s not my expertise.

What would you suggest to those who say, “Eric, that’s great advice. I also would like to learn more and be able to empathize better with my ideal clients and those that I’m looking to serve or am serving?” What suggestions would you offer to them? How can they get better at that?

This isn’t my expertise. It’s taking the perspective of what the client is thinking and what they fear might be happening and understanding what attributes are important to them. A good choice architect does two things. One is they know where the chooser is coming from but also have a good idea of what they should be doing and combining those two. For example, if an attribute is more important for their choice, make the attribute easy to process and first in the list. It would be useful. There are lots of examples that I’ve thought about. Let’s say you care about the environment. You can present that information in lots of different ways.

To give you one example, the US government gives it to people in terms of miles per gallon, which turns out to be misleading. A car that gets 25 miles per gallon is not half as efficient as a car that gets 50 miles per gallon. It’s a much greater portion, so something like 2/3 is efficient. If you change that description into gallons per mile or gallons per thousand miles, we’re not used to it but it is linear. You pay twice as much for the car that saves you the additional gas. It makes it much easier.

Getting out of the engineering head and into the customer’s head and in this case, the client’s head is useful. One other metric example is I can describe calories and many people out there understand calories. When I’m deciding whether to have a nice dessert or not, I’m not thinking of the calories. If you tell me, “That’s the equivalent of walking 2.3 miles,” they have much more impact. It’s translating the attributes of an option into metrics that you can understand, like dollars instead of interest rates and miles walking instead of calories. Those are all good examples of trying to get into the way the client or chooser wants to think about the problem.

Understand what attributes are important to your client. Click To Tweet

Those are great examples. Thanks for sharing them. I’m sure that you are someone who spends time reading books and collecting more information. I would love to know what is one book, fiction or nonfiction, that you have read or listened to that you have enjoyed?

One of the funny things about writing and doing these PR tours is you do a lot less reading than you would like. A lot of what I have been reading are other books in the same space. One good one that is more on the personal front than on a consulting front is How to Change by Katy Milkman. That is quite a good book. Another one that is very much relevant is by Phil Tetlock and Dan Gardner called Superforecasting. It’s quite a good book about how you could make yourself a better forecaster using many of the tools that have come out of cognitive psychology and decision research. It was published in 2013 but it’s quite a good read.

Finally, I would love for people to learn where they should go to learn more about your book, you and your work. Can you guide us on the one place people can go to learn more about your new book The Elements of Choice and everything else you have going on?

Since I know something about marketing, there’s a website called TheElementsOfChoice.com. That would be a good place. All the academic work you can find at Columbia but everything about the book and things I’m doing will be at TheElementsOfChoice.com.

Eric, thanks so much for coming on. I enjoyed our conversation and your book.

Michael, thank you so much for saying that. Thank you for having me and thanks to all your readers.

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