1. The Theory That Won a Nobel Prize

What you have in front of you is a condensed and succinct summary of decades of research in the fields of psychology and behavioural economics. Specifically, it is based on Daniel Kahneman and Amos Tversky’s Prospect Theory of decision making. The theory has been so insightful and influential in the domain of decision making that Kahneman was awarded the 2002 Nobel Memorial Prize in Economics for his work on prospect theory.

Despite the theory’s value and application to the field of sales and marketing, it has largely remained confined to the world of academia. In places where it has entered the world of business it has been limited to big business, as only those with large budgets can afford to spend tens and thousands of dollars in hiring experts knowledgeable and trained in the application of the principles. 90% of marketers have never even heard of, let alone studied, any of the principles of Prospect Theory. Many have accidentally stumbled upon them through trial and error but very few understand why these effects actually exist or how to maximize their power.

Accordingly, this ebook seeks to reveal and apply those principles to the world of sales and marketing. The lessons contained in this ebook are applicable to every business. Regardless of the industry you are in or the demographics of your market, these principles apply to your business as they apply to all human decision making across cultures, genders and age groups. All you require is the imagination to apply them in your business.

If you have the patience to learn these principles and the motivation to apply them in your business, you will gain an instant competitive edge over your competitors.

2 – The Negative-Positive Asymmetry Effect

What Vince Vaughn, Bill Clinton and Gordon Ramsay Can Teach You About Marketing

In September 2005, Vince Vaughn, the famous Hollywood actor who starred in the hit movies Wedding Crashers and Anchorman, decided to take a group of four comedians on a thirty day comedy tour aroundAmerica. They were to travel some 6000 miles through the heartland ofAmericavisiting thirty cities in thirty days. The idea was to bring an A-grade comedy show to the remote parts ofAmerica.

“It seems like you have to go toNew Yorkor Vegas orCaliforniaorLos Angelesto see a show like this”, explained Vaughn in a radio interview. “I really want to bring a great live comedy show to people’s backyards and give them a chance to see it in their own town.”

Moreover , it was a chance to showcase the next generation of comics and help them obtain some visibility and experience. “I hope that they come out of this stronger in who they are, more knowing of themselves. That’s the biggest thing with entertaining, is to know yourself and be honest about who you are” said Vaughn. Another commentator added, “Thirty days from today, these people will be different people when they finish.”

Indeed, they were different. The comics endured a great deal over the non-stop 30 day tour, cut their teeth on some tough audiences, and learnt some key lessons that would serve them for years to come. In the process of learning these lessons they also left some for us to learn. In particular there is one lesson that is quite relevant to students of the human psyche.

Several nights into the tour, John Caparulo, one of the featured comics, is on stage performing his set when something unexpected happens. As part of his set he asks the audience a question.

“Anybody ever work in a fast food place?”

An audience member yells out a response. Although it is not clear what that person has said, Caparulo is clearly upset by the comment. He suddenly slips into a bad mood. He gets defensive and verbally attacks the unidentified audience member.

“Is there some shit you need to work out dog? What the f***? Who is this drunk at 9?”

Yet, even after venting his frustration, he is unable to shake off the negative remark. So frustrated, in fact, that he abandons his set and walks off the stage.

As he storms out backstage, shaking his head and swearing to himself, one of his fellow comics inquires about the situation. Carapulo tries to explain what happened, but is so frustrated by the situation that he is unable to articulate the problem.

“What the f*** man? I was just doing my thing and some guy in the back is just, got his f******”.”

His colleague tries again to elicit some information.

“What’s he doing?” asks the fellow comic.

Eventually Carapulo gathers himself and explains that, when he asked the question, one of the audience members yelled out “f*** me”, as if to say this is a boring show. The remark upset Carapulo and put him off his game. And however hard he tried, he could not see past it.

Later he discusses the fiasco with Vaughn who, as well as being the manager for the tour, is also a mentor to these young comics. Vaughn reassures Carapulo and offers him advice on how to deal with such situations. It is illuminating to see what Vaughn advises Carapulo for it shows Vaughn’s lack of understanding of the root of the problem.

“When people want to engage you when they’re coming from an angry place, it usually has more to do with them than anything to do with you, especially in a set when you have everyone in the audience applauding and laughing and all that stuff. Why listen to that one voice? Why not listen to all the other voices?”

At first the advice makes perfect sense. When people are negative in such circumstances it usually has to do with them. The guy probably came drunk to the show with a view to blow off some steam. Hence a rational person would not concentrate on that one voice and would instead listen to all the other, more positive, voices.

Yet the advice is useless because it adds nothing new to Carapulo’s current understanding. Carapulo already acknowledges that his reaction was irrational and illogical. As he himself said, “there are 1301 people in there and 1300 people love what I do. And that one guy is a f****** douche. You know, I for some reason fixate on that one guy.”

Hence the advice doesn’t add anything new or substantial to Carapulo’s understanding of his problem. That’s not to say the advice was futile. It certainly had some value. But it was only effective in so far as the process of listening to Carapulo and consoling him made him feel supported. As for the actual content of the advice, it missed the mark completely. If anything, it probably made Carapulo question his sanity. It certainly makes an outsider question his mental health. Was Carapulo an irrational individual? Was he a weak individual? If other people would react differently, then why couldn’t he control his emotion? Why couldn’t he block out the negative voice? What was wrong with him?

Yet for those who understand the phenomenon behind his absurd reaction, the only thing Carapulo is suffering from is a serious case of being human, a problem we all share. What Carapulo experienced that night was the force of what psychologists call the Positive-Negative Asymmetry Effect. You see, we are far more affected by negative experiences than we are by positive experiences. All else being equal, negative events command greater attention, elicit a deeper emotional reaction, and are more memorable than positive events. Moreover, the principle holds across a wide range of domains, in nonhumans as well as humans, and with only a few noted exceptions.

Classic Experiments on the Positive-Negative Asymmetry Effect

In one survey, researchers asked hundreds of undergraduate psychology students to list the number of heroic acts someone must perform, each at the risk to his or her own life, to be forgiven for murdering one person. The median answer was 25. The damage of the one negative act vastly outweighed the rebuilding effort of the positive acts.

In another experiment participants were asked to imagine either losing or gaining a certain amount of money. What the experimenters wanted to know was whether we experienced gains and losses in the same way. Turned out we didn’t. The researchers found the distress of losing money to be greater than the joy of gaining the amount of money. In other words, losing $100 and finding $100 is not the same thing. The pain of losing $100 far outweighs the hedonistic value of gaining $100. Most people agreed that it would take a gain of $200 to balance out the pain of losing $100.

What the Hindu Caste System and the 1685 ‘Negro Code’ Have in Common

This principle of negativity-bias plays out on a vast social scale for over 800,000,000 Hindus in India everyday, where the caste system still permeates through a significant part of the society. H. N. C. Stevenson, who studied the topic in great depth in the early 1950’s, noted that people of higher caste are easily contaminated and lowered in status through contact with a lower caste person. The contamination can occur as easily as by eating food prepared by a lower caste individual or by sharing a utensil with a lower caste individual. What was most interesting was that the opposite does not apply. When an individual of a lower caste comes in contact with a higher caste individual, he neither purifies nor achieves higher status. Thus it’s easy to pollute and hard to purify.

This is not just an eastern phenomenon. In the 1685 Code Noir, better known as the Negro Code, one drop of black blood was enough to contaminate an individual and render them blemished. Yet no amount of white blood was enough to purify someone, as was evidenced by the fact that no mixed-race individual was naturalised as white. In contrast, where being black has now become beneficial, in situations where affirmative action applies, there is no such thing as the one drop rule. A considerably stronger connection is required to benefit from the privileges.

What Bill Clinton Can Teach You about Human Memory

Similarly, in politics it has been shown that short term economic downturns reduce the support for the incumbent party, whereas short-term economic booms have virtually no impact.

On the subject of politics, consider the famous American president Bill Clinton. During his presidency he managed several significant victories. He took the largest budget deficit and turned it into the largest budget surplus in American history. He reformed welfare and achieved the lowest teen birth rate in 60 years. He reduced the tariffs that prevented free trade and passed strict laws to protect the environment.

Even more stunning were his diplomatic and military initiatives, which brought peace toHaiti, the Balkans, and, albeit for a short time, theMiddle East. Not only were his interventions clear cut victories, they were achieved with minimal loss of US personnel. However, despite this impressive list of achievements, the issue for which he is most remembered and recognised is his illicit affair with Monica Lewinsky. His scandalous affair with the young White House employee was far more memorable and salient than any of his other contributions. But why was this the case? Why didn’t people remember his positive contributions? Part of the reason is that negative events are more memorable than positive events.

In a revealing experiment, researchers asked people to recall a recent and important emotional event that they had either told someone about or kept secret. The researchers welcomed both positive and negative experiences. Naturally both were reported. However in a surprising twist, far more bad experiences were reported than good experiences. The recall rate for bad experiences was so high that it exceeded the positive experiences by four to one. The researchers concluded that events involving bad emotions are more memorable than events involving good emotions. In light of these findings, it’s no wonder that the Lewinsky scandal continues to overshadowClinton’s contributions and dominates the public’s mind as the most memorable issue of theClintonera.

The Rationally Irrational Species

An important point to note about the positive-negative asymmetry effect is that this is not a cultural phenomenon. We are not necessarily taught to react this way. Instead we are biologically programmed to feel the power of bad more than the power of good. But why would evolution select such a trait? What is  there to be gained from being excessively fearful of loss? What is the positive to our obsession with the negative? The answer is survival. Evolution selected this trait because it made individuals more adaptable to the challenges of life and aided them in their struggle for survival.

But how does this irrational and illogical bias improve our chances of survival? Well,  as some leading scientists explained in a recent article, Bad Is Stronger Than Good, published in Review of General Psychology: “a person who ignores the possibility of a positive outcome may later experience significant regret at having missed an opportunity for pleasure or advancement, but nothing directly terrible is likely to result. In contrast, a person who ignores danger (the possibility of a bad outcome) even once, may end up maimed or dead. Survival requires urgent attention to possible bad outcomes, but it is less urgent with regard to good ones. Hence, it would be adaptive to be psychologically designed to respond to bad more strongly than good.”

The Final Verdict on Carapulo’s Reaction

Accordingly, Carapulo was neither weak nor irrational, as it may have appeared from a strictly logical and rational perspective. He was just experiencing the emotional impact of the negative-positive asymmetry effect. It was his biological predisposition to notice and dwell on the negative that prevented him from blocking out the negative remark. To put it another way, it wasn’t his fault that he couldn’t help but pay attention to that one negative person, even when there were other positive people present at the same time.

The irony of it all is that the guy who yelled out ‘f*** me’, never even said that. One of Caparulo’s fellow comics who was in the crowd at the time  and witnessed the whole event, later told Caparulo that the guy had actually said ‘f*** Yeh’. Hence Caparulo had lost his cool for no reason. However , the mistake didn’t go to waste. Years later, some thousands of kilometres away in a completely different context, that slight hiccup has helped reveal an important principle of human psychology – that bad experiences are stronger than good experiences.

Lesson Number One

A salesperson once said, ‘If you give bad service, people will tell ten other people. Fortunately the opposite is also true.’

Unfortunately, and with all due respect, it isn’t. A more accurate assessment is, ‘If you give bad service, people will tell ten other people. If you give good service, at best they will tell five’. Why? Because bad news is more buzz worthy than good news. That’s why it’s important to ensure that unhappy customers are attended to and taken care of. Else, it could really damage your business.

This may sound obvious but you’d be surprised how many businesses get it wrong. Take the case of the famous chef and businessman Gordon Ramsay, for example.

Gordon F****** Ramsay

After the success of his first restaurant, Aubergine, Ramsay became dismissive of customer complaints. As he put it, “In the Aubergine days, I had become an arrogant little fucker, and whenever a letter of complaint arrived, it went straight in the bin as an appropriate testimony to the writer’s credentials. When we started atRoyal Hospital Road, the tradition carried on.”

It wasn’t until one of his advisors educated him on the damage unhappy customers can cause that he changed his ways.

“It seemed normal enough, until one day Chris found out and came storming into the restaurant to point out a couple of home truths…he went on about how one stone thrown in the pond causes ripples from the centre to the edges and you can’t stop them, and how important words like humility, feedback, reputation and word of mouth are if we want to be serious restauranteurs.”

“And what pissed me off, of course, was that he was bang on the button.”