Research over the last 50 years has revealed that we’re subject to a bewildering array of psychological biases which often only become obvious when we start dealing with money. Famously, Amos Tversky and Daniel Kahnemann showed that people are risk averse in the presence of a gain and risk seekers in the presence of a loss – which is exactly the wrong thing to do when you’re doing something like trading stocks. It’s an example of a behavioural bias known as the disposition effect, but there are literally dozens, if not hundreds of them as the Big List of Behavioral Biases demonstrates.
Research by Brad Barber and Terry Odean in Are Investors Reluctant to Realize Their Losses went on to show that when people traded stocks the ones they sold went on to outperform the ones they kept. Worse, this effect is exacerbated by the internet because it makes it easier to trade. In fact, the internet and social media exaggerate many of these biases because of network effects where we all follow the same small number of opinion setters.
Although research into this area – behavioural economics as it’s known – has only been around for a few decades the underlying human behaviour has been understood by advertisers and marketers for a lot longer. Repeatedly exposing someone to a message – buy Whizzo washing powder – is more likely to make them buy it: the mere familiarity effect as it’s known. But this type of knowledge has evolved, piecemeal, as people and companies have figured out how to sell stuff by trial and error by exploiting our brains’ primeval logic failures when exposed to the modern world. Banks are no different in this and they’ve developed various ways of confusing people, often by introducing minute differences in products and then charging differently for what are essentially the same services.
Enter the big internet companies and you suddenly get a step change in this approach: they’re not evolving towards selling techniques, they’re designing them into their systems and operations by systematically using the research into behavioural bias. Here’s a doozy – product and service companies will deliberately introduce mid-range offers that make no sense and which won’t ever sell. Why would they do that? Because we are afflicted by a bias that causes us to cost things by comparing features and prices against reference points. And by introducing some truly and obviously stupid mid-range offers we can be induced to go for more expensive options:
There are times when the profitability of a product line can be increased by adding a (dominated) alternative that virtually no one ever chooses. The effect of a dominated alternative is to draw attention to a more profitable item rather than to generate direct sales.
It’s called the decoy effect, and it’s very effective.
So our poor benighted Millennials are being fooled by a bewildering array of marketing ploys designed to appeal to their generation while kidding themselves that they’re somehow different to everyone else. And, in a way, they are, because the brain is plastic under development in those first 24 years and their exposure to mass connectivity has changed the way that they’re wired. But that’s true in every generation – whether it’s my internet connected kids, my own TV exposed youth, my parents’ automobile based upbringing or my grandparents’ horse drawn cart and plough. That’s just programming, under the surface we all run the same operating system and, boy, does it makes DOS look advanced.
Beyond this, of course, is a question: in whom do we trust? And we’re getting idealist answers from technologists, as people hark back to the good old days when everyone knew everyone else and ostracism was the ultimate punishment: go back far enough and ostracism from the group meant death so it’s unsurprising we’re built to regard it as a serious issue. But the idea that we can reinvent this local world using the internet, and that we can rely on word of mouth (or at least Facebook likes) and reviews on websites to determine who we should trust is just plain silly. In a technological world everything can be gamed, and we are being socially engineered on a massive scale. Let’s face it, there was a time when burning witches was socially acceptable; now we out them on Twitter. In neither case can we be sure that the connected crowd is particularly wise, let alone correct.
Trust on the internet can’t be achieved without proof of identity and we have a massive problem as people are giving away their identities on social networking sites for free. To overcome this we get providers like Ashley Madison using credit card details to establish identity, or at least eligibility, and in the process storing a whole range of superfluous information which has now been hacked and distributed for all and sundry to poke around with. And now the witches are burning.
Here, oddly, we come full circle. Because regulation means that banks have to establish identity – and if they establish and manage identity then they can create proxy identities for any variable of the data that they hold by issuing tokens. My credit card can be tokenised to reduce to a value that says I’m over 24 and can be trusted to have an opinion – and my bank can authorise this token just as it authorises a tokenised credit card payment. I can’t do this with a social identity, I need to establish my real identity with my bank.
Banks are fusty old anachronisms in a world which is rapidly changing. They’re protected by regulation from the worst effects of competition and they’re not really much good at innovating, at least in the payments arena. But by re-purposing payments to support digital identity through tokenisation banks have an opportunity to establish themselves as guarantors of trust in a post-Millennial world: and, of course, to make themselves relevant to a whole new generation.