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Mind of the Market

by Anu

On Friday, we had a lively debate on topics spurred from Michael Shermer's, "The Mind of the Market." Shermer makes a one simple point. Marketplaces are made of up of numerous people and those people are impulsive and emotional, driven by feeling as much as rational thinking.

He points out countless (literally, thousands) studies that show groups of well-educated, thoughtful people making 'poor decisions' because they were driven by emotion. An interesting study focuses on regret aversion. Usually, people will reduce a potential payout if others are equally (or more dramatically) affected. For instance, imagine you purchased a beautifully made latte at your favorite coffee shop. The barista says, "Hey, you ordered the one thousandth latte! Congratulations, you win a free pound of premium coffee. Everyone else in the shop wins the coffee too." Imagine a different outcome. The barista now says, "Hey, you ordered the one thousandth latte! Congratulations, you are the sole winner a free cup of coffee." More than fifty percent prefer the second outcome, even though it's of less value than the first!

Theories like regret aversion and others are helpful in understanding group dynamics. As strategy consultants, so much of our role is to facilitate discussion that leads to innovative change. Before we can influence change, we need to unlock the door to how a group perceives the risk/reward opportunity from innovative changes. Too many times, organizations disable innovation because they view the 'risk' too great. Hopefully, we can bring forward the opportunity for reward as even greater. I believe people that turn Shermer's theories into practice will enable others to view the reward opportunity.