The Big Assumption That Economists Got Wrong – And You?
Home 5 Blogs 5 The Big Assumption That Economists Got Wrong – And You?
The Big Assumption That Economists Got Wrong – And You?
Home 5 Blogs 5 The Big Assumption That Economists Got Wrong – And You?

You know that old saying about what you make of you and me when you assume something? Well, it turns out, that economists made quite an assumption for years: that people were entirely rational in their decision making. However, they were wrong and we know they were because of the scientific method. Best of all, the truth is fairly simple and makes a lot of sense. Remarkably, this truth wasn’t part of how economists evaluated decision making.

Perhaps even more importantly, the truth about how we make decisions will make a huge difference in your Customer Experience. That is, if you choose to toss away your assumptions and consider it with a rational mind.

So, what was this assumption that economists mistakenly made? Traditionally, economist believed wealth drove decision making. If you had a lot of wealth, then you had a lot of options. If you didn’t have a lot of wealth, then, not so much.

However, the “Godfathers of modern decision science,” aka Nobel-prize winning professor Daniel Kahneman and Amos Tversky didn’t buy that line. Instead, they developed Prospect Theory and then went on to change how everyone thought about decision making, even these mistaken economists.

Prospect Theory has three main ideas under its ground-breaking thought umbrella: Reference Points, Diminishing Sensitivity, and Loss Aversion. In our most recent podcast, “How Do Customer Decide If Their Experience is Good or Bad?,” my esteemed colleague Professor Ryan Hamilton and I discuss the first part of prospect theory, Reference Points.

The Extraordinary Influence of a Customer’s Reference Point

Kahneman and Tversky did not think that wealth was the only influence in decision making. Instead, they held many factors influenced how you make decision, not the least of which was where you started, or your reference point. These reference points establish a point from which you can compare things, whether it’s what you want to buy or whether that red color is just too bright for the kitchen walls. Reference points let you know whether that bed is too soft (or too hard, or just right), and whether your paycheck is too low (or too high or just right).

Reference points also help you compare experiences and brands. What I mean by that is a previous experience will help you judge a present experience, and that is true whether you are at the same company or using the same brand or at a different company or trying a new brand. Moreover, it affects your judgement in a couple of different ways.

I have made no secret about my general disdain for cable companies. This disdain, born of repeated poor experiences, will affect how I judge my future experiences with a cable company, any cable company. In other words, I think, “It’s going to be bad because every other bloody one I have had has been.” I start off already in a sour mood based on my reference point.

However, how this reference point affects my judgement is more nuanced than starting me off on a bad note and getting worse from there. My negative reference point for cable companies can influence my judgement of the experience in other ways as well. For instance, I could have a better experience than I expected, which would then be elevated all the more because I had such low expectations for it.

Reference Points Point the Way to CX Success

There are two important concepts that Reference Points tell us about how to create a great Customer Experience. First of all, we need to know what a customer’s reference point is. Many of us assume it’s a competitor’s experience, but that isn’t always true. You could be the first [fill in the blank] experience the customer has had. So, if they have never had a cable tech visit their home, they might compare you to a plumber. Or if they haven’t ever taken an online computer training, they might compare you to YouTube instructional video. Your job is to determine what the reference point is so you know how they are judging your experience.

Once you know the reference point, then the second concept dictates that you need to know how to leverage that baseline experience into an elevated experience that you provide. Your online computer training should be more engaging and interactive than the YouTube instructional video which is one-dimensional. When it comes to at-home visits for cable techs, being on time and knowledgeable are two basic steps to delivering a satisfied customer (although, in my experience, prompt and knowledgeable are characteristics exceedingly rare with this lot).

Economists made wrong assumptions about how we make decisions. The ideas put forth in Kahneman and Tversky’s Prospect Theory changed those assumptions and brought us much closer to the truth about how we make decisions. Reference points are a simple concept that make a lot of sense. But don’t let that fool you, they have a complex and significant influence on the outcome of your Customer Experience. It is your job to determine where your customer’s reference points are and how you can use that wow them with the high point your Customer Experience can provide.

If you enjoyed this post, you might be interested in the following blogs:

How We Make Decisions—Prospect Theory

Why Customers Make Strange Decisions

Colin Shaw is the founder and CEO of Beyond Philosophy, one of the world’s leading Customer experience consultancy & training organizations. Colin is an international author of six bestselling books and an engaging keynote speaker.

Follow Colin Shaw on Twitter @ColinShaw_CX