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To fix an issue, we must understand how it occurred.
To fix an issue, we must understand how it occurred.

Lessons in psychology from Charlie Munger

To fix an issue, we must understand how it occurred. DAVID BROWN explores the psychology behind decision-making.

In November, the world lost one of the great investors. Charlie Munger was just five weeks shy of his 100th birthday - a man who'd learned two lifetimes of lessons in one.

As Warren Buffett's right-hand man, Munger amassed a fortune as a shrewd investor. His understanding of human nature, as something of an amateur psychologist, prepared him well for this process.

Ironically, in the end, he broke one of his own cardinal rules – know where you’re going to die, and make sure you never go there!

Many of Munger’s observations of human nature in investing also apply equally to understanding staff and customer behaviour. Read the following observations closely, and remember them next time you’re managing your business.

Reward and punishment: Human beings are often driven by the prospect of reward or the fear of punishment.

Whether a customer seeks discounts or an employee strives for a promotion, the allure of rewards and the aversion to punishments shape decision-making processes.

Like and love: People tend to overlook faults or favour individuals, products, or actions associated with the things they love.

This bias can influence customer loyalty and employee commitment, as individuals gravitate towards what resonates with their emotions.

The old saying that we ‘buy the people, not the product’ has never been more accurate.

Dislike and hate: Conversely, the dislike and hate tendency drives individuals away from objects or people they harbour negative feelings towards.

This aversion can lead to customer churn or workplace conflicts if not addressed effectively.

Doubt avoidance: The rush to make quick decisions without all the facts stems from a doubt avoidance tendency.

This may lead to impulsive purchases in customer service, while in staff management, it can result in hasty decisions without proper evaluation and consideration.

Inconsistency and avoidance: Human beings are often reluctant to take the actions needed to change or eliminate bad habits.

"Human beings are often reluctant to take the actions needed to change or eliminate bad habits."

This tendency can hinder organisational improvement if employees resist adapting to new processes or technologies. Put simply, this tendency can be attributed to our inherent laziness.

The simpler you make a task, the more likely it is to happen.

Curiosity: Curiosity drives exploration and discovery, influencing customer engagement with new products or services and inspiring staff to seek innovative solutions to challenges.

This can often appear in our desire to ‘see something new’, whether it is more product choices or a new staff training means.

Fairness: The innate desire to do what is suitable for others guides customer service interactions and workplace dynamics, fostering trust and cooperation.

We inherently want to do what's right or what’s just in most circumstances.

Envy and jealousy: Warren Buffett once remarked, "It's not greed that drives the world but envy."

Envy can fuel consumer trends and workplace dynamics, influencing perceptions of fairness and equality. Envy between staff over their perceived equal treatment or customers over getting the same ‘good deal’ as someone else can motivate many adverse reactions.

Reciprocation: The desire to reciprocate favours received influences customer loyalty programs and workplace camaraderie, creating mutually beneficial relationships.

Association: The inclination to believe in social proof affects consumer purchasing decisions and employee perceptions of organisational culture.

This phenomenon explains why ‘likes’ on social media and customer Google reviews have become such critical parts of the purchasing process.

Most people would rather be wrong than go against the accepted group-think!

Understanding these psychological tendencies is crucial for businesses aiming to optimise customer experiences and foster a positive work environment.

By recognising and addressing these influences, organisations can better meet the needs of both customers and staff, ultimately driving success in an ever-evolving marketplace.

Deeper down the rabbit hole

In the intricate web of human behaviour, many psychological traits influence how we interact with each other and the world around us.

From the desire for rewards to avoiding pain, these traits significantly shape customer and staff behaviour within various contexts.

Let's delve further into the intricate nature of psychological tendencies and their impact on human actions.

Pain avoidance denial: The reluctance to accept negative realities can lead to customer dissatisfaction or staff resistance to new initiatives and changes within the business.

As humans, we don't like bad news and will do whatever it takes to avoid receiving it. For customers, this can be as simple as avoiding purchasing frictions, such as not accepting specific payment methods or restricted trading hours.

Excessive self-regard: Overestimating one's abilities can impact customer service interactions and hinder collaboration among staff.

Studies have discovered that 80 per cent of drivers consider themselves above average. That is a statistical impossibility! When dealing with staff performance in particular, it's important to keep this fact in mind.

Over-optimism: Ambition can drive consumer spending and entrepreneurial endeavours; however, unchecked optimism may lead to unrealistic expectations and subsequent disappointments.

Be careful not to overestimate the impact of your work. I once had a client who expected one in three customers to visit their store after receiving a marketing mailout.

Given a healthy result would be one in 20, this was overoptimism at its finest!

Displeasure: People often react more strongly to potential losses than equivalent gains.

This influences consumer risk aversion and employee response to incentives. Even though the outcomes are identical, we will do more to avoid losing $1,000 than we will to gain $1,000.

Social proof: The belief that something is right because others confirm it guides consumer behaviour and organisational decision-making processes.

This is why celebrity endorsement is so successful - despite the celebrity's typical lack of expertise or knowledge of the field in question.

Contrast misreaction: The tendency to emphasise differences disproportionately can influence consumer perceptions of product value and employee performance evaluations.

A $500 savings on a $1,000 item will always be viewed as a better outcome than a $500 savings on a $10,000 item.

Availability: Giving undue importance to recent or easily accessible information can lead to biased decision-making in customer service and staff management.

If the past two days of trading have been quiet, you are more likely to believe you are in a sales slump for the month than if the last two have been strong - even if you had achieved the same level of sales to date over the month.

Use it or lose it: Skills that aren't utilised diminish over time, impacting employee performance and organisational adaptability.

We tend to do better at what we do more often. Therefore, it's essential to ensure your staff stays familiar with all product lines across the business.

Authority: The inclination to follow authority blindly can lead to conformity in consumer behaviour and hinder innovation in the workplace.

Creating a workplace where staff are fearful of questioning the status quo can be detrimental to the business long term.

Respect and reason: Providing clear reasons for actions fosters customer trust and employee engagement, enhancing overall satisfaction and productivity.

Staff, and even customers, will be more accepting of circumstances if they understand their reasoning.

How many of these twenty psychological tendencies are a factor in your business?

What do you notice within your staff, customers, or even yourself? How can you utilise your knowledge of these traits to increase sales or smooth the processes of human interaction with your staff and customers?

The best time to implement an action plan using these insights into human behaviour was yesterday. The second best time is today!

 

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ABOUT THE AUTHOR
David Brown

Contributor • Retail Edge Consultants


David Brown is co-founder and business mentor with Retail Edge Consultants. Learn more: retailedgeconsultants.com

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