Wednesday, December 26, 2012

Fooled by Percentages

I am reading Dan Ariely's Predictably Irrational, and he talks about the economic logic behind a choice between a Lindt truffle and a Hershey's kiss. He notes that the subjects of the experiment behave "irrationally" by choosing a free Kiss over a deeply discounted Lindt. The Lindt would give them considerably more "pleasure units" net of any cost, or "displeasure units". His point is that free is powerful.

I won't argue against his free-is-irrational thesis, nor will I dwell on the fact that he assumes Lindt's bramd marketing has sufficiently convinced everyone that their taste is vastly superior to Hershey's (I know many people who are not "foodies" that would DISLIKE the Lindt vs. the Kiss at any price, including FREE, since they were raised on Kisses and find dark, rich chocolate too intense.)

I will note another phenomenon  - percentages. A price sensitive consumer may do the math that, in his experiment, a 100% decrease in price (1 cent to free for the Kiss) is preferable to a ~7% discount on the Lindt. Why? My assumption is that chocolate eaters, like most consumers, software engineers, CEOs, etc., think in terms of an experience in terms of  absolute "pleasure" or utility/value but also the comparative percentages.

I see Founders act this way - wait too long for funding because they don't want a smaller percentage ownership. Or fund too soon - trying to get a huge percentage of a still ambiguous market.

Consumers act this way - buying a deeply discounted hotel vs. a Fairly priced one without a discount.

As a software manager, would you hire (all things equal) someone who claimed success increasing performance or scalability 100% or someone who made no such claim? Would you bother to ask about absolute performance numbers and consider that the engineer without the increase may have written the code right the first time?

I am sure I have been fooled by percentages before....have you?