Behavioral Economics with Mark Murphy
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Mark Murphy is a top-ranked leadership trainer, author, and speaker. He is the Chairman and CEO of Leadership IQ, provides webinars, e-learning, live trainings, speaking, and assessments to help large organizations radically improve their performance of today's business leaders.
He is the New York Times Best-Selling Author of three leadership books: Hundred Percenters, Hiring for Attitude, and HARD Goals. He is a sought-after speaker on leadership and has lectured at hundreds of organizations including The United Nations, Harvard Business School, Microsoft, The Clinton Foundation, and Mastercard.
Mark is a Forbes contributor and his award-winning research has been featured in The Wall Street Journal, Fortune, Forbes, Bloomberg Businessweek, and The Washington Post. His media appearances include CBS News Sunday Morning, ABC’s 20/20, Fox Business News, CNN and NPR.
Here’s a glimpse of what you’ll learn:
Mark Murphy explains how behavioral economics and psychology work together
How can understanding behavioral economics improve your fundraising returns?
Why you have an intuitive understanding of the value in the transparency effect
Mark shares the impact of the anchoring effect and how we view numbers
The multiple effects experimenting with behavioral economics can have on a group of people
What is the mental phenomenon when choosing between too many and too few options?
Mark talks about the versatility of the trivialization effect
The idea of mental ownership for greater returns
Mark describes the mental reasoning why letting go of investments is so difficult
In this episode…
Are you struggling to “nudge” consumers into making more efficient decisions? What if you could drive up the value of your fundraising campaign and improve your strategies for a more profitable outcome?
Behavioral economics examines the model of human behavior to create and deliver new ways to engage with consumers. Mark Murphy prefers to think of behavioral economics as understanding the human condition — or what makes people tick — and communicating more effectively. By leveraging the anchoring, trivialization, endowment, and many other theories in your nonprofit fundraising, you can increase giving and create better ways to engage with prospective donors. Do you want to know how to translate the value of your emotional, social, and economic fundraising impacts to consumers to generate more donations?
In this episode of Greater Returns: A Fundraising Podcast, Dennis Hoffman sits down with Mark Murphy, Chairman and CEO of Leadership IQ, to discuss increasing fundraising efficiency by using theories of behavioral economics. Mark talks about the human desire to give, why a heartfelt message is more powerful than a gift, and understanding the research and factors that drive human behavior.
Resources mentioned in this episode:
Sponsor for this episode...
This episode is brought to you by Engage USA.
At Engage USA, we maximize direct mail fundraising efforts for nonprofit and charitable organizations by streamlining processes, providing obsessively accurate data, and delivering personalized and transparent expert caging and commercial lockbox services.
We pride ourselves on being quick to respond to customers. Our systems capture, verify, and balance data in real-time, allowing us to provide our clients with obsessively accurate data and deposits within 24 hours. At Engage USA, we help nonprofits, charities, and political campaigns run more successful fundraising efforts.
So what are you waiting for?
Visit engageusa.com to learn more about our work or contact us today!
Episode Transcript
Intro 0:00
Welcome to the Greater Returns Podcast, where we talk about nonprofit fundraising analytics and how to get better every day. Now, let's get started with the show.
Dennis Hoffman 0:16
Dennis Hoffman here, I'm the host of Greater Returns: A Fundraising Podcast where I talk with top nonprofit leaders about marketing, direct mail and analytics. I have Mark Murphy with me from Leadership IQ work as a leadership guru and a New York Times bestselling author. I'm both proud and embarrassed to admit that Mark has told a story about me and one of his books with my permission. And then I'm quoted on the back cover of another one. Mark is an old friend and one of the smartest people I've ever met. This episode is brought to you by Engage USA at Engage USA we provide caging and lockbox services to help nonprofit organizations meet their their unique fundraising needs. Our proprietary systems capture, verify and balance data in real time, allowing us to provide our clients with obsessively accurate data and deposits within 24 hours. State and National charities, advocacy organizations and political and political candidates count on Engage USA to help their fundraising campaigns become more successful. So what are you waiting for? Visit engageusa.com or email info@engageusa.com to learn more. Before introduce today's guest I want to give a big thank you to Alba Aleman and Dan Turner, who introduced Mark to me almost 20 years ago. We will all members of the Washington DC Chapter The Entrepreneurs Organization. Alba, Dan and Mark and the other people I've met through EO have helped me to become a stronger leader, a more successful entrepreneur. And I like and I like to believe a better dad and husband, Mark Murphy, the founder of Leadership IQ, and you're a new he's also a New York Times bestselling author and a contributor to Forbes and CNBC. Mark has lectured at the United Nations, the Harvard Business School, Microsoft, IBM, MasterCard, and Mark and a whole bunch of other amazing places. Mark's books are must reach for HR professionals, business owners, and anyone who leads a team. His leadership techniques and research has been featured in The Wall Street Journal, Harvard Business Review, Inc, magazine, CNBC, CBS MarketWatch, fortune, Forbes BusinessWeek, check, keep going. Mark has appeared on ABC 2020, CBS News, Fox Business News, see CNN and NPR. Mark, thanks for being here.
Mark Murphy 2:37
Thanks for having me.
Dennis Hoffman 2:40
I really need to come you come back on this podcast another time to talk about leadership because nonprofits can always use your amazing ideas. But today I want to talk with you about behavioral economics. Can you explain behavioral economics?
Mark Murphy 2:55
Yeah, so behavioral economics is very simply the idea that people are not perfectly rational. So for 200 years, economics, operated under the idea that people are perfectly rational, if you give them a particular product at a particular price, they will choose the best mix of quality and cause then they will make these calculations in their head, just like a computer. What behavioral economics does though, is it blends psychology into that. And it basically says, Listen, people are not perfectly rational. If you position a big number before a small number, is actually going to significantly impact which one you choose. If you give a high price before you give a low price, that's going to have an effect. And those are not things that we would typically think of as rational. But they are predictable. And that's the big thing that when I talk to folks about behavioral economics is don't think don't get hung up on the idea that people aren't rational. They're, they're not and we should know this. But people are somewhat at least more than we usually think predictable. And that's really what behavioral economics says it says basically don't think of people as perfectly rational on except that they're a little quirky. But if you can understand the courts of why people do what they do, you can still have a great impact.
Dennis Hoffman 4:26
It's pretty amazing. So you gave me a list of 46 biases, but what are biases.
Mark Murphy 4:31
So, biases are essentially the they can be a couple of things. One is they can be the predispositions that we bring into decision making all of our histories, our pre judgments, prejudices, but biases can also be flaws, again, compared to rational thinking. They can be flaws in our thinking. So if we have a preference. For example, if you offer us a choice to pick a number in a lottery, and we see that the choice we're picking from comes from, like, you know, a raffle, for example, if you were doing some kind of a fundraiser, you have a raffle, and you see a big ball, a big bowl of balls versus a small bowl of balls. If you see the big bowl of balls, you're going to want to bet on that one and buy the raffle ticket from that one, just because people tend to like things that are in bigger groups. That's a bias. It's, it's weird. And it's not, not every bias is something you can take advantage of in all situations. But again, if you can understand at least some of the bigger biases that people have, you can understand why people will or will not donate more, why they will or will not donate multiple times, there are ways we can understand sort of the human psychology by knowing these biases that give us some insight into how people operate. And how can we use behavioral economics and funders. So there's a lot of different ways. So let's take a step back for one second. So I sent you a list of some of the big cognitive biases and some of the big behavioral economics effects. But they're all over the place. And what I would venture to guess is that your podcast listeners know quite a few of these, even at an intuitive level. So for example, in fundraising, we all kind of intuitively know that if you talk about specific people, and how your charity or your organization can benefit, a specific person that is going to generate great, far better returns than just talking about bland numbers, you can take this from the dark side, you know the quote attributed to Joseph Stalin, which is that one death is a tragedy, a million deaths is a statistic, you can take the happier version of that, which is the Mother Teresa version, which is if I see the mass, I won't act, if I see the one, I will. And when you look at organizations that experiment, for example, with, okay, if you donate X dollars, you will be able to save 10,000 Starving Children and wherever. But compare that to a picture of a little girl, here's a little girl rockier, your donation is going to have a significant impact on her quality of life, there was a bad this is a specific example. It was a study out of Wharton, that took a look at this exact test case. And what they found was that the donations that came in from showing the picture of the little girl rockier, a little girl in Mali, pulled almost 200% more donations, then talking about how many people are suffering food insecurity in Mali right now. And so you know, that's an example. It's a simple example. But it's an example of a behavioral economic effect, a bias that most people in the nonprofit world kind of get. Now, you can, of course, find organizations that mess that up on a regular basis, but it is still one that is, you know, understood pretty well, at an intuitive level, and you don't need a ton of the scientific literature to know that it just works better. So that'd be one example of, of how behavioral economics can improve, or essentially improve our ability to do good. And that's one of the things that sometimes people will look at behavioral economics and say, Well, you know, this is we're manipulating people's irrationality, we're taking advantage of the fact that people aren't perfectly rational, and we're exploiting their biases. Well, I prefer to frame it slightly differently. I prefer to think of it as the more you understand about the human condition, and what makes people tick, the more effective that you can be. And especially if your goal is ultimately No, mean, what's what's pure of heart? Is that taking fewer donations, because we don't want to take advantage of the fact that there's a pictorial superiority effect and people like pictures, that they are more likely to focus on individuals than they are big statistics. Is that bad? Well, I'd rather have the more money to save starving children that I would to have less money to save starving children. So you know, it's there's, you can frame it in a lot of different ways, but I also Lee I, I prefer to view it as understanding why people do what they do. And then using that to help people be better to save more for retirement to live healthier lives to donate more to charity, I, I think those are all worthy, worthy causes.
Dennis Hoffman 10:20
There, you know that, as you said, is a really fine line between understanding people's preferences and working with them where they want to be and being manipulative. And one of the one of the effects that that you told me about the transparency effect, which I kind of think is wonderful, because it helps us stay on the right side of that line. He explained the transparency effect.
Mark Murphy 10:46
Yeah, so the transparency effect is essentially that even when people know what you're doing, they really don't care. It is essentially even if you are using nudges, or you are framing things in a different way. And you tell people, we are giving this to you this pitch this fundraising pitch in this particular order. And we are giving you this big donation before the small donation, and we are using these colors. And we are picking these kinds of pictures that even though people understand that they are being nudged is one way behavioral economists will often talk about this, and you know, just trying to move, I'm not trying to bop you upside the head and lie to you, but I am trying to nudge your behavior a little bit. Even when people know that it's being done to them. It really doesn't matter, it doesn't erode their performance on the behind the scenes that you're taking advantage of. So for example, if you even going into a restaurant, for example, if you presented the menu in a particular way and told people The reason we're presenting this to you is we want you to have more we want you to purchase more, it honestly is not going to freak people out. Everybody in the world knows exactly why McDonald's always asked Do you want fries in a drink with that? That's pretty well established. That is actually by the way, a bias. That is behavioral economics that if you don't kind of nudge somebody to buy the extra thing that once you're already committed, there is a little bit of a sunk cost fallacy taking place that once you've already invested, you've gone through the drive thru, you've already ordered the cheeseburger. Well, now you've made the biggest part of the commitment. Driving to the drive thru was the biggest part of the commitment, you order the cheeseburger second biggest part of the commitment. Now, well, what do you want to undo your lunch and make your lunch less effective? Because you didn't want the fries and the drink? Well, no, of course, you're going to get the fries and the drink. And what McDonald's has found is if you don't ask, you won't get it. But even though every one of us knows, that's why we're being asked this, the transparency effect is found. We don't care. Like I get it. But it is still a value to me. And, you know, to your point, Dennis, it's if what you're doing is for the good. Well, then we have that to kind of fall back on that. We're not most of what we do, even when we think we're being exceptionally clever. The truth is that most people have some level of awareness as to what it is we're doing. We all have some intuitive understanding of why fast food restaurants tend to choose really bright colors. We know that does anybody not know why yellow and red are used in a lot of McDonald's is because it makes people move through faster. Okay, we get that. But it still is effective, it still has an impact. So we're never really lying. Even if we think we're being manipulative. The truth is most people have some understanding of what we're up to.
Dennis Hoffman 14:10
I I doubt that people get very many letters from charities and don't expect to be asked for money.
Mark Murphy 14:17
Exactly. And it's not a mystery. Why when you get a charity that sends you stamps, and you know or address labels, or like you get the tote bag, it's we all understand we may not all even know the name, the norm of reciprocity. But we all understand at an intuitive level, that you now feel an ounce of obligation because they gave you something and now, you feel kind of scuzzy if hit the return if you don't reciprocate. And I don't think there's a lot of people that don't understand What psychological mechanisms are at play when they get those, you know, those briefings from the charity?
Dennis Hoffman 15:09
Sure. So one of the most famous biases is the anchoring effect. After the article you sent me about anchoring, I came up with a whole list of recommendations from my clients for tests, postponed inquiry. So
Mark Murphy 15:25
anchoring is in a nutshell, the first thing you hear so let's say you're dealing with numbers, for example, the first number you read or hear, is going to have a disproportionate impact on every other thought you have for the next few minutes. So a classic example would be I'm if I give you the numbers, if I show you a formula, and I say, what is the product of eight times seven times six times five times four times three times two times one? And then I asked you to guess what do you think is the product of that number, versus if I asked you to guess the product of the numbers, one times two, times three times four, times five times six times seven times eight. Okay, if I ask it, one times two times three times four of that way, the average guess is around 512. If I asked the numbers, eight times seven times six times five times four, etc, the average guess is around 2500. Now, the actual product of those numbers is like 40,320. So everybody's way off. But the people who saw the bigger number first desk roughly five times higher than the people who saw the one, the two, the three, the four. And even though, as we all learned in elementary school, maybe Middle School, that through certain mathematical properties, those are exactly the same, there is no mathematical difference between one time students three through four, and eight times seven times six, and five, they're the same. And yet, if you see the small number pump first, it anchors in your brain and starts to get you thinking about smaller numbers. Whereas if you anchor big, it gets you thinking about bigger numbers. So imagine, for example, you were going to buy a car, let's use a ridiculously simple example. If somebody comes up and says, they see a car in my driveway, and it has a for sale sign on it. And they come up to me and say, How much is that car, and I say, $50,000, even though I'd really willing to sell it for $20,000, it might be too high, and they might walk away, but they're a lot more likely to make a counteroffer that is close to the $50,000. If, however, and so we'll negotiate with a starting point of $50,000. And we're going to end up a lot closer to that $50,000. Then if somebody came up and said to me, I'll give you $10,000 for that car, and I was gonna say 50,000. But now, they've anchored the conversation at 10,000. And I'm like, Oh, now I got a, I'm automatically like dropping the number that I will accept in my head. I'm like, well, there's no way they're going up to 50,000. So I better, you know, counter with, like, 30,000. Whereas when I say 50,000, the guy who walked up to me is probably more likely to counter with, like 35 40,000. So basically, what it amounts to is the number you start with, and it works. It doesn't have to be just numbers, it just numbers are like the easiest example to use. But whatever you start with, that's you're gonna end up a lot closer to it, because it's sort of stuck in your brain, not forever. But you know, for the next result of this conversation, it's probably going to be there. If your conversation if the letter you've written is three pages, if the conversation is 10 minutes, yeah, the anchor effect is, is going to have an impact for the duration of that.
Dennis Hoffman 19:17
So it's kind of interesting, because when the effects you spoke about a few minutes ago, said that if that that people are more likely to want to help one than many that, but this affects kind of the opposite. Because you're saying that a big a big ask. A big price point is better than a small price point. So let's think about so my kids, my kids go to a small squeak Quaker school called Friends Meeting school. And they're let's say they're raising money for a basketball court, which they're really doing right now. An outdoor basketball court. So, the effect that says that I'm going to give a bigger donation based on a bigger price. would say that I want to say this is the cost of, of clearing the ground of paving it of putting in the goalposts of painting it, I want to put every single thing I can think of into that price to make it as high as possible. So you'll give more, or with the other effect, the better where I say this is the cost of of a goal of a hoop that will you pay for the hoop? Will you pay for the this is the cost to clear the ground? And they're really up kind of an opposite way of going about it. Which way which, which of those, and you may not know, but which of those effects would be supreme in that sense. So
Mark Murphy 20:39
three answers to super quick one, is that a lot of the time, because we're because behavioral economics is still new ish. You know, the first Nobel Prize for this really was that 20 ish years ago. So it's, it's new in the grand scheme of sciences to is that, oftentimes you have to test and experiment to see for your unique group of people that you're trying to encourage to donate, people are gonna respond differently. That is one of the insights of behavioral economics is as much as these effects are shown, they are proven, we sometimes don't know exactly why they work. The other thing is, you can absolutely play with multiple effects, especially when you're testing this stuff. So for example, rather than saying, we need whatever $30,000 for the basketball court, and then showing a picture of the basketball court and how awesome it's going to be showing, we need the $30,000. But here's why. Because here's little Bobby, and little Jane, and little Kelly, little Sally and little Frankie, and playing sports has taken them from a life of drugs and crimes to now having a healthy childhood. And you can help little Frankie once you help little Frankie. So donate to the basketball court. We need your sport, whatever. And you can kind of play with it where and again, this is just ultimately, you'd have to experiment because you will come up with situations in real life for which there is no research, right? So much of the thing about when we're doing scientific experiments. Ultimately, the goal of most of these experiments is to try and distill down the one effect. What we're less good at is saying, Okay, well, let's distill down the one effect. Now let's add it two or three other effects, and see what happens simultaneously. And that's, that's the tricky one. So what I usually will tell folks is when you're doing behavioral economics, try and think about it as an experiment, use it as a jumping off point, like for example, you can say, Well, okay, yeah, the anchoring effect is a thing. But if I go and ask somebody for $10,000, and the most this, anybody in this donation list has ever given is like $700? Well, yeah, notwithstanding the anchoring effect, I may have implemented it. So it's such an extreme that I've been done any good I would do and what we don't know. Now people like you in what you do for your clients, you do start to figure out based on the previous giving rates of certain lists and organizations, you can start to take some really educated guesses as to where some of the fringes of these numbers might be. But there is no hard and fast rule that if I asked you for $1,000, that's always better than asking for 500 and asking for 10,000. Because ultimately, we just send out a letter knowing we need $10 million from an audience that maybe has never given more than $30 in their entire lives. So that's a long answer to your question, except to say that, really it's about experimenting and finding where those lines are for your people.
Dennis Hoffman 24:42
When when I was 20 years ago, I received a letter from Operation Smile personally. And Operation Smile had one of the most amazing asks that I'd ever seen and they had told me the name of a tile to needed They have cleft palate surgery, they sent me a picture of the child they sent me in, you know, they sent me all the information about this boy. And said, it was it was going to cost an I can't remember what the amount was, there was an amount, there was a lot of money to me at the time, it's $14,000 or something. And he wasn't gonna get the surgery if I didn't give. And I was going to figure out how to give God the response device. And it said, and if he's his surgery is already been done, it will help somebody else, which freed me from that, that need, but when it was a single person, I the fact that, you know, it, it made I felt very obligated, I felt like I could not I had to change that change that boy's life. Um,
Mark Murphy 25:51
and that that is one thing that that happens too, with the real life implementation of this stuff is that sometimes you can you go down this path, and you're like, Okay, we want to try anchoring, we want to try that focus on the one, you know, be focusing on one rather the masses rather than the masses. And sometimes, because the person in charge of the mailing or the marketing gets kind of cold feet, or they're getting pressure from the executive director, well, that sounds a little, that sounds a little harsh, that one's a little risky to go with. And then we end up adding these tiny little phrases somewhere in the mailing somewhere in the pitch that essentially undoes what we were trying to do with these effects. And that's one other thing is that when we look at the research on this, and again, this goes back to the idea that most of the research on this is pretty pure, meaning we don't really have to deal with a lot of, well, the CEO told me, I had to say, and if and if we can't give the surgery to, you know, Frankie, we'll give it to Johnny. Well, now we just done did the whole thing. But I can't, you know, the CEO told me I have to stick that sentence in there was like, Well, you know, are we truly doing a test of this phenomenon? Or are we gonna have testing it? And that's some, and that's why I encourage people to really think about testing, because sometimes, you're better off doing smaller tasks for doing it pure than you are doing this kind of, you know, implementing it, like tiny little bits at a time, especially if it's a, if it's a tricky one.
Dennis Hoffman 27:41
So, you know, the interesting thing is, if that, that money would have funded another title searcher, and if then they you going back to the transparency effect, there's probably a way they could have, they could have described it, and they could have been transparent and, and honest about the fact that Frankie already had his surgery with and still got, and still kept the obligation for me to my sense of obligation to give. Mm hmm. Um, so one of the most famous biases is called the anchoring of actually just I've already asked your crew for tonight. I'm curious for the category category size bias. It seems like to be good at some good applications for fundraising. Can you explain it to me?
Mark Murphy 28:31
Yeah, so that the categories size bias, it has huge applications in things like gambling, but not just gambling, like even raffles, things like that. So I'll give you a classic example. Take a 26 sided die. And there are if you tell people for exempt so there's a 26 sided die, let's pretend it's letters, not numbers, right. So one side is a so this is like a old old school, like Dungeons and Dragons, kind of, you know, these crazy die dice. And so you roll the thing. And now it's a 26 If there's one letter on each of these, so you have an equal probability of picking an a, or, as opposed to a T, or a P, or an M, or a Z, whatever, they all have the one out of 26 the exact same probability. Now here's kind of the weird part. If you tell people that, listen, you're going to roll the dice, you're going to pay dollar have a chance to get the right letter. Now if you guess, one of the consonants there are what are their 721 consonants I guess? Because there's five vowels right? So it has to be 21. So there's five vowels a E, I O, and you now how much do you want but do you want to bet on Pulling in a, or do you want to bet pulling a consonant because there's 21 consonants, but you pick an exact letter, so you're still betting on picking the letter t versus picking the letter A, they still have the same exact probability. But because the letter T comes out of a much bigger group of consonants, you're going to spend twice as much money betting on getting a tee simply because there's this weird thing in our brain that if you see something being selected from a really big group, it generally means more, it generally is more valuable. So if you were doing a fundraiser or a raffle and saying, Okay, you could win a prize from this list. All things being equal, if this list is bigger than this list, well, you're going to spend more to win something from the big list, then you are the little list. Now, there is a weird, again, kind of related and almost opposite phenomenon, which is called the choice paradox. And the choice paradox basically says when people have too many options, it starts to short circuit their brain, and they end up choosing nothing. Think of the classic case of you go to a supermarket, and there's 24 types of jelly on the shelf, that will sell considerably less jelly, then when there's four or five types of jelly on the shelf, we can get overwhelmed. So this is another one where you, you would have to be a little tricky about it in that you're really only asking the person to choose between two groups, you're just making one group cuter than the other. But you could not turn around and say, We want you to pick from 20 different price lists and donate and you know, the raffle you could pick from any of the 20 lists because then it's more likely that people are going to kind of short circuit and go okay, that's too much I can I can think about it.
Dennis Hoffman 32:02
You spoke a few minutes ago about premiums, you were talking about address labels. You know, people send out no cards, umbrellas, all sorts of things there. There are both front end and back end premiums. And one of the one of the effects that would that makes it a lot of sense that it would go along with foods is the trivialization effect. What can you tell us about that? So
Mark Murphy 32:33
the trivialization effect is essentially that when you give somebody so let me back up. If you were comparing a heartfelt thank you to a really small token of appreciation, generally speaking, people will prefer the heartfelt thank you to the small token of appreciation. So if you made a donation, so think of it like this, if you made a donation, and then say I donated $100, to whatever, and then you turned around, and you sent me a set of address labels. It's possible, again, depending on the audience, it's possible, I would look at that and say, Okay, give me $100. And I get address labels like that doesn't that's exam, I'm kind of chintzy, whatever. But if you then had a handwritten note sent to me, by you know, put somebody's name on it like this, the VP of fundraising operations, whatever, saying, Thank you, Mark, this donation really means a lot. And it's going to enable us to move forward on blah, blah, blah, program. Well, that if it feels heartfelt, even if somebody called me and left me a voicemail and said, Hey, this is so Ansel, from the XYZ Foundation, thank you that what you did really means a lot. The heartfelt thanks is, generally speaking, considered more valuable than a small gift. So the small gift ends up feeling trivial. Now, of course, here's the thing. Again, this what the line is for trivial matters, right? So is if I give you $1,000 donation, and you send me address labels, that okay, we are very much out of sync in the scale of what you're giving me as a thank you. But there was a study done 20 years ago that so it was waitresses in Vermont so the waitress would go to the table and give the check at the end right? So fine, just normal. You're at a restaurant pretty badass. Imagine you're meeting face to face. Waitress brings you the check inlays. Okay, so tips were like 14% 15%, then the waitress. In a separate study, the waitress would come up with two minutes, one minute for each guest at the table. So if there are four people sitting at the table, the waitress bring four minutes in right and say, hey, here brought you some men's, here's the chat tips went up to like 17%. Then they did another version of this, where the waitress would bring two minutes for every person at the table. Tips went up and say like, here's two minutes for each of you, here's the check. Tips went up to like 23%. And then in the final variation, the waitress would bring the check with one minute for person per person, bring it down, so four minutes if there's four people, but then as she was walking away, she would stop and turn and say, You know what, here's a few more for you reach into the apron. So was that a kind of like a diner, and so they had the waitresses were wearing like those apron things, so that she would reach into the apron, pull out a few extra, so it was kind of like surprising. It was like, oh, you know what, I think you all are kind of special tips went up to like 28%. Now, the lesson here is sort of, you know, several fold, even though this teeters on it, you could look at the mints and say, well, that's runs the risk of the trivialization effect, the scale of your bill at a diner is different than the scale of your bill. Or, you know, your the amount of money you're spending if you're donating $1,000 to a major charity. That's one. The second issue though, is they found that even though giving this little extra thing, you know, giving the minutes with the checks, did increase tips, the biggest increase in tips came when they added that, oh, here have a few more this is for you, you all are awesome. Like now you're sort of combining the power of you know, the small token, well, those again, immense aren't that small relative to a $15 bill in a diner. And this is again, this is 20 years ago, so you know, food was less. But the scales different, but they added in the Thank you. So that's the thing to think about the trivialization is are you running the risk, and it's very different when the charity for example, sends out those address labels beforehand. That's not a thank you for the gift that is a here we hope you donate, we hope you feel obligated, which is a very different mental state than Oh, thank you for giving us $100. Now, here's the address labels. So, you know, that's the that's the risk we run when we're saying thank you sometimes. The heartfelt thank you. Ironically, it's often harder, but it is oftentimes more meaningful.
Dennis Hoffman 38:07
Makes sense. So I think most funders is using the endowment effect, not necessarily knowing why tell us about the endowment effect. So the
Mark Murphy 38:17
endowment effect is probably my favorite of all of the effects. So the classic discovery of the endowment effect occurred at pizza shops, both in Italy and in the US. So when you go into a pizza shop normally right you see a cheese pizza, like there's always a picture of a cheese pizza. And then you see the list of toppings next to it right like so add your toppings do you want pepperoni, sausage, mushrooms, onions, whatever. What they did is they compared pizza shops and they said all right, on the one hand, we're going to run an experiment where we show you the normal thing. Pizza now you add your toppings. On the other test subjects, we're what we're going to do is we're going to show you a picture of a fully loaded pizza a pizza that instead of costing $6 costs like $13 because it has every single topping we own loaded on this thing. All you have to do is subtract the toppings that you don't want to like I hate mushrooms. So I would take off mushrooms I don't like sausage great so I would take off sausage until I get down to a pizza that seems appealing to me. Now the fascinating part about this is that when they compared the price spent per pizza on the what they call the adding condition which is take the blank pizza and add to it. People ended up spending like $7.20 when they took the subtracting condition, so fully loaded pizza and now you have to remove toppings from it. People ended up spending like nine dollars in change, which is a, again for the price of a pizza, that's, you know, almost a 20% increase in revenue, simply by how you frame the pizza. And this, interestingly was true both in the US and in Italy. So lest anybody say, Well, this is only for all Americans eat pizza, no turns out is the exact same for the Italians, as it is for the Americans. But it obviously goes far beyond pizza. The idea is simply that once you take mental ownership of something, if you can see it, go to a car dealer, they do not want you to test drive the car that doesn't have a radio, or air conditioning, or vibrating seeds with a self driving feature. They want you to drive the fully loaded version of the car. Because then when they say, Now, here's the base model. Here's what you drove. Now, if you want, you can remove the satellite radio, you can remove the vibrating seats. We as humans start to go but I like the vibrating seats I can I sort of can't imagine myself driving every day on my commute with vibrating seeds. I don't want to give a vibrating seats. Well, okay, then maybe you could get rid of the backup camera. Well, how am I going to do that? I feel myself I can't drive without a backup camera. Okay, and what ends up happening is you're like, Nope, I gotta have the backup. I gotta have satellite radio, I gotta vibrating seats. Whereas if you were test driven, the base model? Never in a million years, would you have thought to yourself, Oh, yes, vibrating seeds will be my number one distinguishing factor on this. So the endowment effect basically says, if you show people the big end, cool version, and you let them take mental ownership of it, like it is a mental ownership just means I can picture myself eating that pizza. Like, you know what, I haven't had onions on a pizza forever. But it does sound kind of good. You know what? Yeah, I want on my pizza. And now once I've kind of even that stupid little decision in my brain, I'm like, well, now I'm not giving up onions. Well, you know, sir, it's 80 cents? Well, yeah, I don't care. No, I want the audience. And that's, that's the endowment effect. So asking people to start at the base and move up. And this is, again, something that fundraising has known. But again, not everybody, because you can find examples where people don't take advantage of this. You can find examples where car dealers don't take advantage of this. But the reason why the smart ones, whether it's fundraising, car dealers, pizza shops, basically anytime you're buying anything with options, or donating at multiple tiers, and getting different gift levels, for example, like well, you're telling me that if I donate 100, I get the coffee mug, but if I donate 150, I get the coffee mug and that tote bag. And that coffee, that tote bag looks really cool. Well, now I kind of want the tote bag. Well, alright, 550 bucks for the tote bag, that cost five cents. But we take ownership of it in our brain, and then we're just hesitant to let it go.
Dennis Hoffman 43:03
So interesting. So Mark, you told me before we started that we were going to go over an hour, and I didn't believe you. But give us a couple more minutes. Sure. Okay. So you sent me a list of 46 biases and but it's really clear that there are a whole lot more than that, are there any that you just think are really interesting that we didn't cover? So
Mark Murphy 43:26
there's a couple that so my two favorites tend to be favorites for multiple reasons, the anchoring in the endowment, the endowment, sort of my favorite, favorite. And then anchoring, partly because they are, they're easy to understand. They're intuitive to kind of get. And they're, I love them as ways to get people to enter the idea of thinking in a behavioral economics kind of way. But there's a couple others that stand out that I think are super useful. One is the sunk cost effect. The sunk cost effect is essentially, once you've invested in something, you are much less likely to give up on it. So if you have spent a let's go back to the basketball court. So you're a basketball court at your kids school. So you're going along, you raise all this money for the basketball court. And then at some point, everybody looks at each other and says, You know what? This is a really stupid idea. All of the kids said we hate basketball, and that we think basketball is causes health problems. And so we're not going to do well. If you haven't broken ground on the basketball court. It's very easy to say, okay, totally cool. We'll take that $30,000 We raised and we'll build a yoga yoga studio. Okay, let's do the office. was fine. But if you've already broken ground, you put $20,000 of that into it, you've laid the pavement, and you haven't painted it or anything, but there's like a hard surface. And it's perfectly level, whatever it takes to build a basketball court. It is really, really hard to give up. What you've already invested in it now, even though you look at it, and you say, we could cut our losses right here, say, alright, that's $20,000. Maybe we can find something useful to do with that flat surface, but probably not. So what are we going to do we have $10,000 left? What's our decision? Can we could build a yoga studio for 10 grand, or we could take that 10 grand and just finish the basketball court because maybe someday kids like basketball again. The sunk cost effect basically says, if you're already partway through this, you are hesitant to let go even if that project people, you anytime you hear somebody say, but we've already spent so much time on this. We've already designed that new mailing. Yeah, but the new mailing is stupid, and it's not going to work. We tested it on some of our donors, and they hate it. Yeah, but we've spent so much time on it already. That's the sunk cost effect. And one of the reasons I like the sunk cost effect is, yeah, you can use it from a fundraising angle. Even in my business, for example, on training leaders, if I were to say to them, you've come so far in your career you've taken, you've learned these three skills. That's great. It's making you an effective people manager, but you're missing the last two, don't give up, don't waste all of the training you've done so far, take those last two, and put the polish on this and really elevate your career. I'm at some level, taking advantage of the sunk cost effect that sunk cost fallacy. But then you can do similar things in fundraising. But it also the reason I like it is that if you can avoid it, you end up saving a ton of money internally, because it makes you much more likely to kill off bad projects, rather than sticking with them forever. In a day, I see a lot of leaders who will stick with a project of marketing campaign investment that just isn't working. You see this with stocks, for example, people are hesitant to to sell the stock that's losing money. Well, I got to hold on to it, it's going to come back. Okay, so here's your choice, you can take $1,000 and take your $1,000 sell the stock. And so essentially, you could keep $1,000 to the stock. Or you could sell the stock, take that $1,000 and invest in a stock that might actually go up. A shocking number of people say no, I can't sell the stock. Now, I'm already in it's gonna come back. But if you say I got a stock, that's probably not going up, do I keep my $1,000? Or do I just sell it, cut my losses, take the $1,000 and invest in a good stock. The smart play is going to be take the $1,000 Invest in good stock, but we don't see that. So this is one it's a big bias. It has huge implications. Not so much. Not just for fundraising, but for really the running the leading of charities not for profit organizations, foundations, all the rest it it's a management thing as much as it is anything else. But I like that one because it can. I've seen it when you can get past it. I've seen it save organizations a lot of money and pain. So that's probably one of my other biggest,
Dennis Hoffman 48:50
so interesting. So Mark, you're gonna list 30 of the 30 most important leadership experts are what's that list?
Mark Murphy 49:00
Yeah, so it was the was it is the global gurus. So it was the 30 world's leading leadership gurus, that it was, you know, ranked done out of influence. And no, do you write it a big place? And how many books have you sold and all that kind of stuff.
Dennis Hoffman 49:21
And you also was a little more interesting to me anyway, you won an award, the same award that Hillary Clinton won, what was what was that about?
Mark Murphy 49:30
That was so that was earlier in my career. It was a most important people in health care award. And so one of my probably my biggest first really big study, I discovered that if you do downsizing in a hospital the wrong way, which is how most people were doing it at the time, this go and you say okay, we have too many nurses, let's cut nurses, that if you did that mortality, morbidity rates in the hospital actually started to go up. And as simple, stupid as that sounds today, in 1996, literally nobody had ever said, Hey, what happens if we cut nursing staff? Is that going to impact mortality, morbidity rates. And so that was the the thing that got me on the same list, you know, nowhere near as high on that list, as you know, Hillary, but that's what got that.
Dennis Hoffman 50:37
Let's say you're at that award ceremony. And Hillary Clinton just spoke, she just did her thank yous and got her award and walked off the stage. And now they're inviting now it's your turn, you walk up on the stage to get your health care award, who are the people you'd think were the people who have really had a great impact for you, in business, or in leadership, or just in life? So
Mark Murphy 51:05
my first would probably be my wife of 33 years this year. Well, we started dating 33 years ago. So her, my two kids who are 18, and almost 15. And once I got through those three, and they have, you know, been my rocks through everything. I have been very fortunate to have a small group of just insanely close friends over the years. And so you're, for example, at the top of my list. You gave me advice very early on when I had started this, as you know, we're going back 20 years now, in the genesis of Leadership IQ, you gave me some business experience and advice. That was just earth shattering. And, you know, one reason why I've relied on your counsel for two decades, some of our other friends in that same group, Alba, you mentioned, for example, the same, you know, exact 20 years, we currently have a great group of friends that provides a similar level of support and insight. So, truly, I would, it's for me, it's, I tend to go for fewer relationships, but just really, really deep ones. And, and I've also been really fortunate to have some key folks working with me over the years that Leadership IQ, people like Joe Sutherland and Lynn Adler, who've been there through thick and thin. So that would really be my my list. I would also have to tell the Hillary Clinton story, we were in line behind her when my daughter was six months old. We were in line behind her at a muffin store in Reagan airport. And she was Senator at the time and I She's with her secret couple of Secret Service guys. And I just kind of tapped her and we sent have actually done training for the Clinton Foundation. But I could tap and say excuse me, Senator Clinton just wanted to say, hey, van, blah, blah, blah, my father in law still lives in New York State. He's a fan blah, blah, blah. And then she turns around completely ignores me and starts playing with my six month old daughter. It's like, Oh, she's so beautiful. And to this day, my daughter's 18. But we'll tell you if she hears anybody say anything nasty about Hillary Clinton. Oh, heck no, all Hillary Clinton told me I was a beautiful girl. And it was one of these just insanely sweet grandmother kind of moments. And so yeah, so that that would if I were following Hillary, that's what I would have to say.
Dennis Hoffman 54:02
Thanks, Mark. I've been talking with leadership guru and New York Times bestselling author Mark Murphy. Mark is is often a keynote speaker at large conferences and has a suite of webinars, books and classes at leadershipiq.com. Mark, what's the best way for people to get in touch with you?
Mark Murphy 54:20
So you can either just go to our website and click the little talk to us section and we'll somebody will get back to you instantly. You can also follow me on LinkedIn and message me through there. That's often an easy way to get a hold of me too. Thanks.
Outro 54:37
Thanks. Thanks for listening to the Greater Returns Podcast. We'll see you again next time. And be sure to click Subscribe to get future episodes.