Consumer Psychology 101: An Interview with Professor Baba Shiv

Baba Shiv is the Sanwa Bank, Ltd., Professor of Marketing at the Stanford Graduate School of Business. His research expertise is in the area of neuroeconomics, with specific emphasis on the role of neural structures related to emotion and motivation in shaping decisions and experiences. He frequently consults with and is on the advisory boards of several start-ups.

Your recent work examines the interplay of the brain’s “liking” and “wanting” systems and its implications for marketing, innovation, leadership and decision making. Can you elaborate on that?

Sure. Basically, the human brain has got two separate instinctual systems that guide our preferences and behaviors. The liking system codes for pleasure in real time – for instance I’m chatting with you right now, and I’m enjoying myself, and I have a liking system that is coding for that pleasure. This liking system registers what we call the reward value associated with something. The wanting system records the reward value indicated by the liking system, and then tends to shape my subsequent experiences.

For example, the next time I meet up with you, that interaction is going to be different than the first time I met you, because the wanting system has registered the reward value of the first interaction. The next time we chat, depending upon what the reward value that has been coded, I’ll either be more engaged with you or less engaged with you, at a very instinctual level.

In general, of course, we like what we want and we want what we like. The liking system dictates the reward value, and the wanting system registers it, and the two together drive future interactions with a particular person, flavor, film, product, etc. But it’s not always the case.

For instance, I frequently ask senior executives if they like reading their emails. They all say no. But then I ask, but when you receive an email notification, do you check your emails? They all say yes. It’s a classic case where you don’t like a particular interaction but you do in fact want it. It’s the same basic principle at play in substance addiction.

The brain is constantly assessing reward values. It’s an evolutionary trait. If I’m in prehistoric times, and I notice a fruit that looks delicious, and then I taste it and it’s in fact repulsive, then my liking system conveys the negative reward value to my wanting system. As a result, in the future, the negative value registered by my wanting system will go so far as to make me avoid any other fruit that shares characteristics with the fruit I tasted earlier.

More recently, there was a classic study done by a cognitive scientist named Paul Lewicki. Imagine that you were one of the test subjects in the study and were treated quite rudely by a blonde greeter (the test itself, of course, was completely irrelevant). Later you were asked to submit their answers at a computer terminal which features four seats. Two are occupied – one by a brunette, one by a blonde. Now, who are you going to instinctively prefer sit next to? You guessed it, the brunette.

So what does this all mean for your business? It means at a fundamental level you need to have both systems in place when you go to market. When people try out your product, their liking system needs to register a positive reward value, and store that value in their brain’s wanting system.

As consumers, what other factors influence our decision making process?

Well, one very important factor is a person’s cognitive load. By that I mean how much of your rational, cognitive mind is currently occupied. Because once you’re completely pre-occupied with a thought or a series of thoughts, then your subconscious system starts making decisions for you.

That’s why people frequently fall prey to temptation when they’re fatigued. It’s late, I’m tired, I’ll go ahead and do x, y or z. Fatigue is just another form of cognitive loading. It probably explains a lot of late-night Amazon purchases.

I once conducted a study where I told a group of test subjects that I was studying the effects of a change in environment on their capacity to memorize information. I asked them to memorize either seven-digit or a two-digit number in one room, and then walk to another room to recall the number.

Again, this was all a disguise, not the real purpose of the study. Before they memorized their number, I also mentioned that as a favor for coming in and taking the test I was offering them the choice of two snacks – fruit salad and chocolate cake – and they simply had to grab a ticket for the snack they wanted and hand it over to the experimenter.

Guess which snack was more popular with the two-digit memorizers? The fruit salad. And the seven-digit group? The cake. They were cognitively loaded. Instinctively, the cake has a higher reward value, right? It’s delicious! And the rational, slow-thinking system, which is currently trying to remember seven digits, has no time to come in and say, no, let’s go for the healthier option.

This has huge implications in today’s world where, I believe, were are living in a more and more distracted society. But as I mentioned before, the reward value has to be set first before the unconscious system starts influencing decisions.

It’s also definitely the case that as we get older we’re not as good at encoding new information. People who are older tend to take a longer period of time to switch from an older technology to a new one, or an old way of doing things to a new one. They tend to do that simply because it’s much more difficult for them.

Do the same rules apply to B2B purchase decisions?

Absolutely. Even more so, because in B2B decisions, we’re talking about multiple people, so all these factors get multiplied.

In general, the brain is looking for one of two things. It’s either looking for an escape from stress, fear, and anxiety towards comfort, or it’s looking for an escape from boredom into novelty or variety. In business settings, it’s usually the former instinct applying itself. Those people are afraid of failure, not missed opportunities. Their decisions will have a broad implications on their entire organization.

That’s why the commercial emphasis should be on comfort. Schedule your meetings early in the day, when serotonin levels are higher. Your pitch needs to have comfort embedded into the value proposition – quality customer referrals, for example, are essential. There’s a reason why IBM ran a very successful ad campaign targeted towards IT professionals that said “No one gets fired for buying an IBM!”

Now, IBM could afford to assert that, because they had this big historic brand. For newer competitors, I would focus on emphasizing trust, rapport, and comfort. And starting that process as early as possible, because we now know that something like 80% of the decision-making process has already occurred prior to a face-to-face meeting, because all the relevant information is readily available.

What do we as consumers seek from our buying experiences? Do you see a pattern here?

Absolutely. At the end of the day, instinctively, what the customers are looking for are a few things. Number one, the customer wants to reduce pain points. Frustration. It could be frustration in the purchase decision. It could be frustration in usage. The customer is looking for an escape from fear, anxiety, and so on.

We’ve all been in this situation: “Man, I have to make this big ticket purchase. I don’t know if this is the right thing for me to do.” Those are all the fears, and what the brain is looking for is this comfort. Huge commercial successes have been built on simply reducing pain points.

A good example is Apple’s recent announcement that for a little over thirty dollars a month you can simply subscribe to your iPhone, and automatically get the new model when it comes out every year. Apple is trying to reduce pain points, because it knows that people aren’t upgrading their phones as a result of carrier contracts and their own rational concerns eg. should I be spending that kind of money every year? What Apple has done is, almost through a substitution model, dramatically reduced that pain point. “It’s only $33 a month. That’s a small amount.”

Another one is Netflix. Before Reed Hastings started Netflix, there was no option but to go the local Blockbuster and rent your videos. Outside of the hassle of driving to the store, you had two frequent pain points: you go to the store intending to rent a specific movie and that movie is unavailable, and also getting charged for late fees.

The consumers lived with that. I lived with that! Then Reed Hastings came along and said, we’ll always have the movie you want, and you can keep the DVD as long as you want. He discovered those pain points, and he solved for them.

What about some of the more positive aspects of purchase decisions? Can those be influenced?

Of course. Consumers are also looking for three types of rewards in general. They’re looking for excitement. They’re looking for novelty, variety. Sometimes I call those as the rewards of the hunt. Women especially, we know, and also men in growing numbers go into retail stores simply to explore. That’s the thrill of the hunt.

Secondly, they’re looking for the reward of the tribe. Social recognition and status become very important. I want to catch up with my neighbor, who has recently bought a new car. That is social. That’s a status kind of thing. That’s a tribal instinct that kicks in.

Thirdly, there are the rewards of the self. Rewards of the self are more about self-actualization, learning. I want to discover. I want to travel to new countries. I want to acquire a new skill set. All those are rewards of the self.

So on the positive side, ideally your product or service should try to incorporate elements of all three rewards: rewards of the hunt, the tribe and the self.

What do you think explains the recent popularity in subscriptions? What elements of the consumer psyche do they appeal to?

I think the primary appeal, and it’s a very important one, is the removal of the last remaining pain point: “I don’t want to keep having to make those decisions. It’s a boring thing. It’s just bath soap. I’m never going to change my bath soap.” Etc.

The bigger challenge for subscription companies, I think, is incorporating that sense of delight and variety into their service. Birchbox is an excellent example of this. It’s Christmas every month. You don’t know what you’re going to get.

It’s curated by experts, but at the same time, the subscriber can set certain preferences, and choose to pursue certain product categories that appeal to them. So they balance comfort with novelty. I’m working with another company that’s working on a similar model in the fashion space: when you want to try something new, we’ll donate your old clothes to charity, and send you the new one.

I always wondered why people are not doing this in the automobile space. One of the most painful experiences that anyone goes through in buying a car is that final step where you’re getting to the finance office. That is a horrible experience: “Oh my god, I don’t know if the guy’s going to rip me off.”

All they have to do is to say, listen. You pay $400 a month. Every 18 months, you have the option of upgrading the car. If you choose it, the car will be delivered to your house. It’s great for the automobile company. It’ll remove one big friction point out there for the consumers themselves.

Similarly, if you asked Adobe consumers to go back to the old days of $500 CD-ROMS, they would probably revolt. Companies are moving to subscriptions because it’s all OPEX right now. It’s not CAPEX anymore. I don’t have to go for these big investments. It’s all there.