In a previous post, we discussed how companies take advantage of the many psychological loopholes in our thinking. We explored how our brain latches onto the first impression, and how brands use familiarity to bridge our trust. This post will focus on two biases that distort the way we judge a brand and how we predict future outcomes.
Representativeness: The Trap of Familiar Patterns
If it looks like a duck, and quacks like a duck, it must be a duck.
– You, probably
This is when something is one thing, but our brain assumes it is another thing because of its presentation.
It’s a shortcut our brain takes where it tries to judge a book by its cover, even though the contents of the book don’t match the cover. It’s useful most of the time, but in financial decisions, it can get us into trouble, and companies know that.
Here are some examples:
- When we see a company that looks successful with a big office, celebrity endorsements, we automatically think this must be a serious and profitable investment.
- We see a serious-looking financial product, so we think it must look legit because it has a nice user interface, dashboards, charts, and graphs in it. We think, “this must be a serious tech product”.
- Packaging that mimics luxury branding tricks people into believing that the product is high quality.
- For Forex or Crypto gurus who sell courses but show off sports cars, designer clothes, and flashy lifestyles, whether or not the lifestyle is rented, fake, or real, our brain fills in the gap in the story. We think they must have money and know what they are doing. If they are making money, we think it must be from forex or crypto, and maybe we can learn from them too and buy their course. We judge them based on how much they resemble your idea of a successful person, not based on evidence or numbers.
- Elizabeth Holmes of Theranos fame used to dress like Steve Jobs (in a black turtle neck) to portray the image of a young, ambitious founder, and people bought the act, yet she was a fraud all along.
- This is why a lot of companies use words like AI, machine learning, or powered by blockchain all over their marketing copy. Even if what they are selling has little to no relevance to the words. They are trying to portray themselves as innovative, advanced, and futuristic.
- Addy FX, now known as Addy Finance, became bankrupt when it defaulted on investment returns for investors. When they first launched, they tried to get an SEC license, but they were met with one of many blockages where they had to remove FX from their name because the government didn’t recognize any Forex trading company in Nigeria. Addy FX wanted FX in their name because they wanted the halo of a forex company on them. They wanted FX to trigger a mental shortcut in Nigerians’ minds, like, “Ah, this must be a trading company, let me give them my money“. In Nigeria, we’ve seen companies add forex to their name to sound legitimate. It’s a trick that makes them seem like they are part of this global financial world, when in reality, they are just Ponzi schemes with good branding.
- Indomie runs ads in the media, mostly focused on portraying the product as the choice breakfast for children by loving moms. Milo ads also featured kids being strong, athletic, energetic, and smart in school, all because they drank Milo at home before leaving for school. Our brain immediately classified these products as healthy or beneficial for children. However, a look at the package information on these products shows that they contain high sugar, refined carbs, high sodium, and MSG. That doesn’t match the representation of these products in their ads.
- I once saw a relative taking a particular honey & ginger tea. She invited me to come drink it, telling me it’s sugar-free. When I tasted it, it was sweet, and I wondered how the drink might have been sugar-free. I checked the ingredient list on the packet and saw: fructose, lactose, maltose, and honey. That was so funny. The drink claimed “no sugar added”, yet it tasted sweet. They might not have added classic white granulated sugars, but it was full of naturally occurring or alternative sugars. I was doubly surprised to find out that brands are legally allowed to claim “no sugar added” on their products as long as they don’t add actual raw sugar. So people assume the label on the packets means exactly what it tells them.
Now that we’ve seen how appearances deceive us, let’s look at how our own optimism can, too.
Optimism and Overconfidence: Future Blindness
Future me will handle it.
– Also You, probably
This is the tendency for people to overestimate the likelihood of positive outcomes and underestimate the likelihood of negative outcomes. It tricks us into thinking the future will be hunky-dory exactly as we hope, and companies know how to exploit that hope.
For example:
- A chronic borrower thinks, “I’ll definitely get that promotion this year, so it’s okay to buy now and pay later”, or “my uncle promised to send me money so I can borrow from Palmpay”.
- A chronic gambler watches ads from the betting company where they showcase a winner who won ₦100 million carrying a big cheque. The gambler then concludes that that could totally be them. They believe they have a unique method or a “hot hand,” leading them to bet their rent money on a risky accumulator. Their overconfidence in their own ability blinds them to the tiny probability of winning.
- A self-taught investor might believe they can consistently predict good cryptocurrency fluctuations, and so they put a large portion of their savings into a high-risk investment.
Our optimism, when left unchecked, makes us underestimate the cost of something or how much effort is needed to complete a project. This makes us underestimate our discipline and willpower over time. For instance, during the New Year’s resolutions, a lot of people sign up for the gym. Someone with no prior gym habits decides to pay for a full-year membership upfront instead of testing their commitment from month to month first. After two months, they quit, leaving the membership unused.
Other examples:
- People buy expensive hobby equipment or business domain online courses before knowing if they will stick with the activity till the end. People believe they will definitely follow through, so it’s fine to invest upfront. But a lot of times, they don’t follow through.
- Free trial traps where you put down your card and sign up for a 14-day trial, thinking, “I will cancel before they charge me“, then you forget. Companies take advantage of this by making it compulsory to put down your card before starting a trial. They also intentionally hide the cancel subscription button, and may require you to call or email them in order to cancel. They are banking on the fact that you will forget/get lazy, give up trying to cancel it, and let them charge you for that first subscription.
- When you subscribe to a product, you don’t use it as much as you thought you would, and then you forget about it. A few months later, you’ve forgotten that you’re still paying for something you didn’t use.
Summary
As Nigerians, we believe so much in “packaging”. We say things like “fake it till you make it“, but guess what? Brands use this to make us pay for what we believe is the real deal. Also, our brain deceives us into overpaying for more than we need. And we overestimate how much time and energy we will have for tasks in the future.
The lesson here is to always look beyond the representation a business gives you, and to be measured in your predictions while taking out ego when planning purchases or making decisions that overlap into the future.