17
Jul 12

Reading notes from The Wall Street Journal Complete Real-Estate Investing Guidebook

  1. Four basic rules for success with real estate investments:
    1. Buy a property for less than you can sell it.
    2. Use other people’s money as much as possible.
    3. Make sure the property pays for itself.
    4. Take maximum advantage of the tax laws.
  2. When looking at appreciation rates, homeowners rarely consider total cost of ownership – replacing roof, furnaces, appliances.
  3. When you consider the total interest payments and home improvement costs, very few homeowners with a 30-year mortgage actually come out ahead.
  4. Who loans the money:
    1. Banks
    2. Partners
    3. Family and friends
    4. Hard money lenders
    5. Sellers
  5. A real-estate license won’t hurt – one needs a network of contacts to acquire properties before they hit the Web listings or newspapers.
  6. Three questions to ask about each property:
    1. Is buying this property the best use of the money?
    2. Will it pay for itself?
    3. Can you add value to the property?
  7. Two ways to raise profits for the property – increase the rent or decrease expenses.
  8. Buy locally – you’re unlikely to be able to add value to the property being on the other side of the country or world, partnerships with remote partners tend not to be hands-on.
  9. By having several properties nearby, you save on your time, and contractor’s or handyman’s time when you plan a major repair job.
  10. Cap rates are lower in desirable neighborhoods and higher in high-risk neighborhoods.
  11. Gross Rent Multiplier – ballpark figure, total price divided by annual gross income produced by the property.
  12. Debt-service ratio – used by lenders, net operating income divided by annual debt payment, should be in the range of 1-1.5.
  13. Return on investment – cap rate inclusive of loan payments.
  14. Before striking a deal, write a note to the tenants introducing yourself, and ask for what could be improved. You can get a good overview of current problems.
  15. The biggest reason people invest in real estate is to use depreciation – fantom losses on the properties count against one’s income. Government has a way, however, to recapture that at the time of sale, when it turns out the property has not depreciated as much as expected.
  16. You have to materially participate in the investment to get the investment income treatment – that means maintenance and being involved with tenants.
  17. 1031 exchange allows an investor to sell an existing property and buy a more expensive property without paying taxes on the sale.
  18. If you bought a house (for yourself) at the peak of the market and are in the hole now, rent it out for a couple of years before selling, and then capture the losses as investment losses.
  19. Each property should be a separate entity, easier to operate and sell.
  20. Home office deduction raises a flag with IRS, usually it’s hardly ever worth bothering.
  21. Types of starter investment properties:
    1. In-law units
    2. Vacation homes
    3. Single family homes
    4. Duplexes and multi-family homes
  22. With in-law units, it’s hard to qualify for material participation rule, therefore the hope is to have the expenses and depreciation be deductible and as a result have the rental income arrive to you tax-free.
  23. Vacation homes are tougher to qualify as investment properties, as you cannot use them for longer than 10% of their total rental availability. However, two weeks of rental income on such properties is tax-free.
  24. Once you pass 4-family units, residential loans no longer apply, for commercial loans it’s typically expected that you cover at least 25% of down payment.

29
Nov 09

Predictably Irrational

Predictably Irrational by Dan Ariely is an exploration of human behavior which diverts from the logic. Consistently. For example, imagine yourself shopping for a brand new suit and, for whatever reason, a new pen, maybe to accompany your suit. You see the $15 pen, but then remember that you saw the same pen in a different store for $7. The store is not that far (15 minute drive) and you decide that it’s totally worth it to postpone the purchase of the pen and drive by another store to save $8. Then you take a look at the suit. It’s $1,000, but then somehow you recall that a similar one. Same story – the store is 15 minutes away, and it’s $992 there, $8 cheaper.

Most people when faced with these two options will definitely purchase the pen at another store, but will forego a 15-minute drive to purchase the $992 suit. Relatively the savings are different: it’s more than a 50% on the pen, and a tiny sub-percentage point discount on the suit. Nevertheless, in a nutshell in both cases you stand to save $8 by driving 15 minutes. As a rational human, once you decide that a 15-minute drive is worth $8 in savings, you should accept that as an absolute rule. Nevertheless humans behave consistently irrational when faced with such choice in psychological studies conducted by Dan Arieli.

So what are other examples of inconsistent behavior from Predictably Irrational?

  1. When faced with the following choices for magazine subscription: $59 for digital edition, $125 for print edition, and $125 for digital+print edition, 84% opted in for the third option. Well, why not, you get digital+print for the same price as print, practically a steal. However, when the middle option is removed, people overwhelmingly (68%) chose the digital subscription. Comparing a $59 digital subscription with $125 print+digital made people wonder whether they reallyneed print subscription at all. Just having a middle option that will never be selected for obvious reasons boosted magazine’s top-of-the-line product. The magazine in question is Economist.
    • Relativity also leads to unexpected results. SEC told public companies that by 1993 they were obliged to disclose the top executives’ pay. Ideally, this would make companies more responsible to shareholders and even out the outrageous executive paychecks. In 1976 a CEO was paid 36 times the average worker pay. Net result? By 1993 the CEO pay was at 131 times average worker pay. Exposing the fat cats did not cause expected shareholder outrage, it encouraged other CEOs to demand higher pay, since now they had hard data telling them they were underpaid.
  2. Having two somewhat similar options together with dissimilar one will make people choose a better deal among similar options. Assuming that you’ve never been to Africa and have no emotional attachment to geographical locations there (choose something neutral to you if you do), what would you rather choose if I gave you a choice of (a) a free trip to Zanzibar that includes a free breakfast, (b) free trip to Zimbabwe without a free breakfast, (c) free trip to Zimbabwe with free breakfast. Most people in psychological studies consistently chose option C. Our brain is wired to compare equals, and comparing A and C without specific knowledge of locations seems like a lost cause. Comparing B and C, however, is a no-brainer – you get a free breakfast or you don’t. C is such an obvious choice, the brain shortcuts, and before long option A is out of the picture.
    • Marketing technique that utilizes this knowledge is called a decoy. Williams-Sonoma accidentally discovered it by adding another, more expensive, product to its breadmaker line. Prior to this breadmakers did not sell very well, being completely new product. When a more expensive machine was added, the original version seemed like a bargain, and also customers felt that since this was a line, not a one-off product, it must be something worth researching. Sales of the original breadmaker nearly doubled.
  3. In one study participants were asked to write down the last 2 digits of their social security number, and then write an estimated price they would pay for a bunch of unrelated items. Box of Belgian chocolates, bottle of wine, a wireless keyboard – the items were intentionally random so that most people would have a vague idea of what they cost in real world. By asking participants to write down their social security digits, researchers were hoping to prime the mind. The technique worked – people whose social security #s ended with 00-20 overall bid significantly less for the items than those with 80-99 as the first number on the list. The point is not that people with high social security numbers pay more, but the fact that making a person think about the number impacts the decision-making process, if this process involves choosing random numbers.
  4. Offering the item for free has a huge impact, even when the alternative is not that expensive. Arieli set up a stand offering two kinds of treats – Lindt truffles for 15c and Hershey kisses for 1c. The price difference was huge, but most people nevertheless seemed to appreciate Swiss chocolates over Pennsylvanian sugar-and-cocoa-butter concoction – 73% chose Lindt truffles. So another test the book author ran was selling Lindt truffles for 14c and giving Hershey’s kisses away at 0c. The relative difference was still 14c, but this time 69% of the customers chose the kiss. It’s not that 1c previously broke their budget, and all of a sudden a 0c kiss offered huge savings to hungry students. Faced with two paid choices, participants were forced to make a judgement, and in this case went for a more expensive, but higher-quality item. Faced with FREE, participants forgot all about the relative taste differences between Lindt and Hershey product, and overwhelmingly acted on instinct.
    • When Amazon was testing free shipping promotion in different countries, Amazon France did not expect any real change. After all, the French site has been charging customers 1 franc if their shopping cart when over a certain amount. It’s a modern-day equivalent of 20c, what difference could it make, if your shopping cart had to be over $25, where Amazon currently allows you to ship for free? However, going from 1 franc to 0 francs was dramatic.
  5. Setting deadlines works, and having external deadlines seems to work better. The author experimented with 3 of the classes he taught. Class A had specific deadlines on when the papers should be submitted – week 4, week 8 and week 12. Class B was free to choose its own deadlines, but it had to be done in writing – each student was asked to commit to submitting a paper by a certain week, even if the commitment involved writing ‘week 12′ for each one of the three papers. The third class had no deadlines at all, except for the fact that by the end of the course the instructor wanted to have a set of all 12 papers. Which of the classes got better final grades? It was just in the order they were listed – A did best on the exam, followed by B, followed by C.
  6. Accessories matter. The researcher has set up a coffee tasting station by giving away free coffee, which could be complemented with a variety of condiments – sugar, cream, nutmeg, cinnamon, etc. The additives were placed in Styrofoam cups with hand-written notes indicating what they were. The students were then asked the rate the quality of the coffee, supposedly for a new coffee shop that was planning to open its doors to MIT students. Second test involved brewing precisely the same coffee, except this time the condiments were placed in glass-and-steel containers on a nice looking tray with pre-printed labels. Students consistently gave the second coffee much better rating, even though the contents of the pot or the variety of condiments did not change.
  7. People have different expectations for products with various prices. Researchers conducted the experiments where a group of participants was exposed to a new pharmaceutical in a very professional environment – lab coats, brochures, and all. The experimental drug, they were told, was a pain reliever, so to conduct practical tests, they would produce an electrical shock of increasing voltage until the participant pressed the button indicating they’ve reached their maximum pain tolerance level. Price for the new drug? $2.50 a pop. To test the efficiency, the researchers first asked the participants to experience pain with no drug intake, and then undergo the same test. 100% of respondents claimed the pain was relieved and hence medication worked. The same drug was then tested on a different group of people, who accidentally (via a brochure on the table) found out the drug was 10c a pop. In this test, only half of those people claimed the pain reliever worked. The drug? In both cases Vitamin C.
  8. People order differently in public and in private. When groups of people were offered a list of beers to choose from, there was inevitably more variety in the orders than when everybody was handed a menu to write on. Hearing choices of others makes people want to express their individuality, and sometimes they tend to order their 2nd or 3rd choices after hearing what people before them have ordered. Whenever asked in private, the individuals were lacking the information on others’ choices and always went for their first choice.

Believe it or not, Predictably Irrational is available at Amazon.


16
May 09

Yes! 50 Scientifically Proven Ways to Be Persuasive

Noah Goldstein’s, Steve Martin’s (no, not that Steve Martin‘s) and Robert Cialdini’s Yes! 50 Scientifically Proven Ways to Be Persuasive is a pop psych book, where a bunch of research in psychology is distilled into one readable volume.

50 scientifically proven ways constitute 50 chapters of the book, longest of which take 7 pages. The authors take the position that persuasion is a science, not art, hence with the right approach anybody can become the master in the skill of persuasion. So, what are the 50 ways?

  1. Inconvenience the audience by creating an impression of product scarcity. It’s the famous change from “Call now, the operators are standing by” to “If the line is busy, call again”, that greatly improved the call volume by creating the impression that everybody else is trying to buy the same product.
  2. Introduce herd effect in highly personalized form. The hotel sign in the bathroom informed the guests that many prior guests chose to be environmentally friendly by recycling their towels. However, when the message mentioned that majority of the guests who stayed in this specific room chose to be more environmentally conscious and reused their towels, towel recycling jumped 33%, even though the message was largely the same.
  3. Ads quoting negative behavior en masse reinforces negative behavior. Petrified Forest National Park A/B tested two versions of a sign imploring people not to steal pieces of petrified forest from the park. One mentioned large amounts of petrified forest taken away on an annual basis, the other one simply asked the visitors not to remove petrified wood. The first one actually tripled the theft ratio as it showed stealing petrified wood as something commonplace. Same effect was observed after airing an ad that implored women to vote, but mentioned that 22 million single women did not vote last year. That kind of information actually portrays not voting as more socially acceptable.
  4. Avoiding magnetic middle. A California survey measured energy usage of a neighborhood on a week-by-week basis. When the average electricity consumption for the neighborhood was calculated, researchers sent thank-you cards to those using the energy conservatively, and a nice reminder to perhaps conserve to those who used electricity liberally. Net effect? While the liberals tried to cut down on unnecessary energy usage, the conservatives, finding out they’re way below average, suddenly became way more liberal with their energy usage, which actually increased the amount of energy used by the neighborhood. Proposed solution that worked? Sending a smiley face card to conservatives with a request to keep doing what they were doing, instead of pointing out they were at the right end of the bell curve.
  5. Too many options necessitate selection, and hence frustration, when brain decides it’s unnecessary work. The example here is given by a company that manages retirement funds for other companies, and hence has access to retirement information of 800,000 employees. When employees were offered a choice of 2 funds, roughly 75% signed up for a retirement program. When the number of funds was increased to 59%, even though qualitatively this was a better deal for employees, only 60% decided to sign up. When Head & Shoulders brand killed off 11 flavors of the shampoo, leaving only 15 on the market, the sales rose 10%.
  6. Giving away the product makes it less desirable. Researchers gave one group of people a picture of a pearl bracelet and asked to evaluate its desirability. Another group of people was given the same task, but prior to that was shown an ad, where the same bracelet was given away for free, if you bought a bottle of expensive liqueur. The second group considered the bracelet much less desirable, since mentally a lot of potential buyers (35% of them to be exact) shuffled the bracelet onto “trinkets they give away for free” shelf in their brain.
  7. A more expensive product makes the old version look like a value buy. An example here is a Williams-Sonoma bread maker. After an introduction of a newer, better, and pricier version, the sales of the old unit actually increased, as couples viewed the new item as “top of the line”, but old product was all of a sudden reasonably-priced, even though a bunch of features were missing.
  8. If a call to action is motivated by fear, people will block it, unless call to action has specific steps. A group of people received a pamphlet describing the dangers of tetanus infection. It didn’t describe much else. The second group of people got a description of tetanus infection, plus a set of instructions on how to get vaccinated. The second group exhibited much higher sign-up rate for tetanus vaccination than the first one, where many participants tried to block out the high-fear message urging that something as rare as tetanus would never happen to them.
  9. A small gift makes people want to reciprocate. People who received a small no-strings-attached gift from a stranger were twice as likely to buy raffle tickets from him than those who were just pitched on raffle tickets.
  10. Hand-written Post-It note improves response rate on inter-office letters. Researchers distributed three sets of questionnaires around the office. The first set included a hand-written Post-It note requesting completion of the survey. The second set got the same survey, with the request to return it hand-written on Page 1. Third group got the same survey with their name mentioned (in type) on page 1 of the survey. Response rates? 75%, 48%, 36%. People appreciated personalized approach, and somehow a Post-It note even highlighted the extra work that someone did before sending out the survey.
  11. How restaurant mints are a personalized affair. Let’s a say a restaurant provides mints for its customers on the way out. If the amount of tips per week is the baseline for that restaurant, let’s make the waiters include a mint as they give the check to the customer. The tips go up by 3.3%. However, when the waiters offer the mints themselves, prior to signing the check, the tipping amount went up by 14.1%. In yet another experiment, the waiter would present the patrons with 1 mint per guest, then give them the check, then turning around to leave, then, as if remembering something sudden, turning around and giving them yet another mint per guest. Result? 23% increase in tips, as this signaled high amount of personalization.
  12. Attaching no strings increases response to the message. Using the same hotel as the one mentioned in Chapter 2, researchers tried out two different versions of the sign. The first one: if you reuse the towels, a donation will be made to a nonprofit environmental organization.  The second version: the donation has already been made, since the hotel trusted you’d reuse the towels anyways. Recipients of the second message reused their towels 45% more than the recipients of the first one.
  13. As time goes by, the value of a favor increases in the eyes of the favor-giver, and decreases in the eyes of the favor-receiver. Researchers asked a group of people in the random office environment to exchange favors and then rate the value of the given/received favor in their eyes. A few weeks later the same employees were reminded of the favor, and asked to evaluate the favor again. Favor-givers consistently assigned higher value to a given favor, while as the time passed by, favor-receivers tended to assign lower value to the received favor.
  14. Asking for small favors changes self-perception, introducing ways for big favors. Researchers asked a group of homeowners to place a large “Drive Carefully” sign on their front lawn. Only 17% agreed. With the second group of homeowners, 76% of people were ok with road traffic people maintaining the sign on their beautiful lawns. What was the difference between two groups? A few weeks earlier group B was asked to display a small non-intrusive window sign asking drivers to slow down. This mental foot-in-the-door technique made homeowners from the group B view themselves as socially responsible and safety-aware, hence a request for a larger favor few weeks later didn’t startle them.
  15. Labeling people into a social group tends to increase their participation ratio. A group of people was interviewed regarding their voting patterns. Half of them were told that based on their response criteria, they were very likely to vote, since they were deemed to be more politically active. Later on the election day that specific half did indeed turn up a participation rate that was 15% higher than participation of the control group.
  16. Asking people to substantiate their decision will lead to higher commitment rate on that decision. Researchers called a group of people asking them how likely they were to vote in an upcoming election. Those who responded positively were either asked nothing, or asked why they felt they would vote. Any reason would suffice, but when the election day came, the turnout for the control group (who all responded “Yes” to the question of whether they were going to vote) was 61.5%. Turnout for the group that actually gave a reason (any reason)? 86.7%. A restaurant stopped telling customers “Please call to cancel your reservation” and started asking “Will you call and let us know if you need to cancel?” Net result? Number of reservation no-shows dropped from 30% to 10%.
  17. Writing things down improves commitment. Group A was asked to volunteer on AIDS awareness program at local schools, and was asked to commit verbally. Group B was asked for the same kind of volunteer project, but was given a simple form to fill in. 17% of volunteers from Group A actually showed up to their assigned local school. From Group B 49% of volunteers showed up.
  18. The fact that circumstances changed allows people to change their viewpoints without being viewed as inconsistent. People are generally not thrilled to change their viewpoints on something, as they fear they will display lack of consistency and be called a flip-flopper. Convincing people that their old decision (to stick with the old product) was completely 100% correct under old circumstances allows them to be more responsive to the messages that imply a new product/idea is better because the circumstances radically changed since then.
  19. Sometimes asking people for help makes them more open. Group A was given some bogus research that included a sum of prize money. After the experiment, the researcher approached them and asked whether it wouldn’t be inconvenient if they had to give the money back, since the researcher was using his own money. Group B was not approached with such request after their portion of bogus experiment was done, and was allowed to keep the money. After this both groups were asked to rate their impression of the researcher. Even though it was the first group who didn’t get to keep any money, all of them consistently rated the researcher higher on likability scale.
  20. Asking for little goes a long way. Researchers went door-to-door asking for American Cancer Society donations. Group A just asked for a donation, group B ended their spiel with “even a penny would help”. Results? 28.6% response rate for Group A vs. 50% response for Group B.
  21. Lower starting prices attract higher bids. This is a reference to a study of eBay items where people consistently bid items with a lower starting price higher. The explanation seems to focus on the fact that people invest more time into updating bids for a lower-priced item to let it go.
  22. How to impress a potential customer with credentials without being labeled as a show-off? Public speakers have someone else introduce them, a real estate company made a slight improvements to their phone service by directing people to “Jane, who has 10 years of experience with houses in upper price range”, and physicians display their diplomas on the walls.
  23. The danger of being the smartest person in the room. The expert card frequently trumps any other card in the room. The example here is that the scientists who discovered the double-helix of the DNA were never prime DNA experts, which made them “hungrier” for new discoveries, and made them question established rules.
  24. Devil’s advocate example works with large organizations. Leaders who consistently seek out dissenting opinions earn more respect, and generally have better agreement with people in the room than those who rule by laying down the law and persecuting dissenters.
  25. Negative examples are memorized better than positive examples. When one group of firefighters went through the list of real-life mistakes other firefighters have made, and another group just went through the list of positive things to do, the first group demonstrated better judgment when faced with real-life tests. Our brain seems to discount the best practices, but single out bad examples of someone else making a mistake.
  26. Admitting negatives up-front might lead to better communication. When Progressive says that they will compare your rate against their competitors’, and when original VW Bug was introduced in the US, both companies pursued a strategy of highlighting the negative stuff only to open conversation about the true values their product has to offer.
  27. Spinning negative facts as positive allows customers to make a mental link towards the positive. Among the viewers who viewed an ad advertising restaurant’s cozy atmosphere, an ad advertising the restaurant and lack of parking spaces, and an ad mentioning both, the third group made a connection between cozy atmosphere and bad parking situation. The restaurant was so cozy, the customers reasoned, that they didn’t even have enough parking spots, which made them even cozier in the eyes of a customer.
  28. Admitting you’re wrong makes people trust you more. Company A published an investors relations report, contributing slump in sales to overall economic climate. Company B said slump of sales was relevant to a few bad decisions by top management. Net result? Investors viewed company B more positively. You’d think that they’d be viewed as a bunch of screw-ups, but admission of a mistake made investors more confident the situation was under control, while company A investors got the uneasy feeling of the ship floating in the waters with captain losing control.
  29. Similarities raise the response rate. A person named Cindy Johnson received a survey request by mail from someone named Cynthia Johannson. Someone named John Smith received a survey from Gregory Jordan. The name similarity in the first case (note that it’s just phonetic similarity, none of the names are the same) brought up the response rate to 56% vs. regular 30%.
  30. People like the sound of their name, and that defines their vocation. There are three times as many dentists named Dennis as any other names. Number of Florences living in Florida is disproportionately high, same goes for Louises living in Louisiana.
  31. Verbalization helps interaction. Waiters who repeat customers’ order to them make 70% more in tips than waiters who just say “Okay”. Our mind subconsciously appreciates the effort taken to ensure the things are perfectly right.
  32. Just smiling makes for a poorer customer service. Group A was exposed to a hotel clerk smiling, while peppering the customer with questions regarding their preferences and ways to improve their hotel stay. Group B had just a smiling clerk performing her duties. Group B was more likely to rate the smile as fake.
  33. People pay more for the stuff that’s about to disappear. Oldsmobile sales rose after GM announced the end of life for the line. Australian beef purchases rose after customers learned this year’s supply would be severely diminished because of the weather conditions. Concorde sales took off right after British Airways announced the hyper-speed flights would be shut down.
  34. When people feel something is about to go away, they will stick to perception of the product being better than the new one. In majority of blind tests customers chose New Coke over Classic Coke. Yet when New Coke was introduced, massive protests were staged. When the same drink was packaged into Classic Coke and New Coke bottles, customers still claimed they preferred the Classic Coke and could taste the difference, even though labeling was the only thing that differed two drinks.
  35. “Because” makes any explanation rational. In a line to Kinko’s copy machine a researcher asked to jump the line by presenting a reason “Can I jump the line, because I am in a rush?” 94% of people complied. Good reason, right? Okay, let’s change the reason. “Can I jump the line because I need to make copies?” Excuse me? That’s why everybody is in the line to begin with. Yet 93% of people complied. A request without “because” in it (“Can I jump the line, please?”) generated 24% compliance.
  36. Asking people to choose reasons themselves might backfire. Two groups were given an ad by BMW. Group A saw an ad saying “So many reasons to buy a BMW. Can you name 10?” Group B saw an ad saying “So many reasons to buy a BMW. Can you name 1?” After the ad both groups were asked to evaluate their likelihood of buying a BMW. Similar to what’s described in Chapter 5, people who had to name 10 reasons actually named Mercedes-Benz, a competitive brand, as their probable choice, while Group B named BMW as their likely next vehicle, compared to Mercedes-Benz.
  37. People like stocks with more pronounceable names. Research of stock tickers between 1999 and 2004 looked at the relationship between the phonetic fluency of the stock and its rise through IPO, then 12 months later, then throughout its lifetime. The result? Stocks with more pronounceable names produced higher returns, even though nobody yells out the tickers on the exchange floor anymore.
  38. Rhyming makes the phrases more convincing. People were asked to evaluate the practical value of parables “Caution and measure will win you treasure” and “Caution and measure will win you riches”. In general proverb A was considered to be more practical and insightful than proverb B.
  39. Amount of information is context-dependent. A group of people was given an ad for department store A, extolling in great detail the 6 departments that A had. Another group was given a short blurb on store A, presenting mainly abstract information. After that store B was presented to both groups with information on 3 departments given to both groups. The first group thought they preferred A, since A volunteered more information and B seemed shadier in comparison. The second group did exactly the opposite and preferred store B, which volunteered detailed info on 3 departments, while A’s message was an abstract blurb.
  40. Incentive programs need a good start. A car-wash place gave one group of customers a free car wash after 8 washes, and everybody got their first stamp after their visit. Group B got a free car wash after 10 car washes, with 3 stamps on the card. Both groups needed to make 7 more trips to get a free wash. 19% of the Group A returned, while 34% of the Group B did.
  41. Abstract names allow the customers to come up with reasoning. Crayola found out that naming colors Cornflower Yellow and Kermit Green worked better than no adjectives attached to colors. The more abstract the connection, the better it seemed to work, as people spent mental time working out the connection between the abstraction and the product in their mind.
  42. Ad campaigns that do not incorporate brands tend to not be remembered. A good portion of people when asked which company was represented by a bunny and the phrase “going, going, and going” named Duracell as the advertiser. Duracell sales increased with the launch of Energizer Bunny campaign.
  43. Mirrors make people more self-conscious. A group of trick-or-treating kids was told to pick up one candy from the jar in the living room, while the adult was in a different room on some pretense. Group A had a large mirror placed by the candy jar, group B did not have the mirror. 8.9% of kids with the mirror in the room and 33.7% of the kids with no mirror treated themselves to extra candy. Another group of people was brought in for what was advertised as gel research, and was given a hand paper towel to wipe the gel off while heading for the exit. With the mirror in the hallway, 24% of participants littered, dropping the towel on their way out, with no mirror, 46% threw the paper towel on the floor without bothering to find a trash can.
  44. Negative emotions make people pay more. Group A was exposed to an emotional movie about the death of someone close to the main character. Group B saw no such movie. Both groups were asked then to name a fair price at which they’d buy the object presented to them. Group A tended to give prices 30% above Group B’s.
  45. Tired people tend to be more receptive to arguments. No wonder those magic bullet infomercials run so late at night. Both groups were presented to product demo, and then asked to evaluate the possibility of buying it. Group A was tired and a bit sleep-deprived, group B was in good physical condition. Group A was much more prone to buy.
  46. Caffeine increases the argumentativeness of a strong argument. Group A drank regular orange juice, group B drank orange juice infused with caffeine. Both groups were then presented with a statement on controversial issue. Except one statement then made weak and hasty arguments, while the second statement made a strong case. Both groups equally dismissed the weak argument case. As far as strongly argumentative case, group B was 30% more receptive. A faster-working brain under the influence of caffeine seems to appreciate good arguments.
  47. Face time still beats e-mail time. Group A was given time to get to know one another in person, then resolve a conflict via e-mail. Group B got a similar task, except no face-to-face communications. 6% of the Group As failed to come up at a good resolution, while 29% of Group Bs arrived at impasse.
  48. Individualism is perceived differently in many countries. In US and Western Europe a chewing gum campaign that accentuated “you, only better” seemed to get more success, than a similar campaign in Eastern Europe and Asia, with much more collectivism built into the culture. In those countries, emphasizing that chewing gum was much more tolerable for other people who can smell your breath, was perceived better.
  49. Notion of commitment among various cultures differ. A group of American students was asked to complete a short marketing survey. A few weeks later they got invited for the second survey, which was going to take twice as long. No pay for either survey. The same experiment was conducted among Asian students. The response rates among American students was 22%, response rate among Asian students was 10%. Research suggests that while American students relied only on their own experience, Asian students found out that few of their peers responded to the first request to complete the survey, which triggered their negative response.
  50. Response to voice mail differs among Americans and Japanese. When faced with a voicemail message, 50% of Americans, and 85% of Japanese hang up. Respondents from Japanese test group pointed out the personal touch of the conversation (intonation, pauses, volume) was important to them and impossible to reproduce over voicemail.

If you liked reading review of this book, check out my review of Predictably Irrational, which is written by a psychology professor and explores the topic of human irrationality in our perfectly rational world.


27
Aug 08

Book review: 13 things that don’t make sense by Michael Brooks

13 things that dont make sense 13 things that don’t make sense by Michael Brooks is a pretty interesting look into the world of scientific discoveries, or lack thereof. Because, you see, there are quite a few commonplace things that we take for granted, but cannot quite explain from the scientific point of view. Sure, you’ll say, it must be some extra-hard scientific stuff, a formula understandable only by an army of advanced PhDs who spend their lives figuring out these ultra-complicated tasks.

Well, not quite. It turns out that life itself is quite a mystery from the scientific point of view.

  1. Life. In theory life in the universe appeared when electric currents went through the masses of hydrogen, ammonia, water and methane, therefore creating something animate out of a set of inanimate chemicals. In practice, for a few decades the scientists have been trying to achieve a similar effect on a smaller scale, but so far no one has been able to produce the Holy Grail – turning something lifeless into something that is actually live, such as a single-cell organism. The life itself, it seems, is a scientific anomaly that should not happen in this Universe according to the existing laws of chemistry.
  2. Death. You’ve heard it before: two things you cannot avoid in life are death and taxes. Well, this is a very human-centric view of things, as it turns out there’s a variety of species (most of them vertebrates) that only get better with age. Some turtles, it seems, only get healthier and produce more children with age. Moreover, scientists are aware only of non-natural causes of their deaths – being run over by a truck or attacked by a bird. Are those turtles immortal, or are we observing just a small stage of their lifecycles (which could eclipse ours by generations)?
  3. Dark matter. It’s not embarrassing for scientists to admit they don’t know something. After all, there are plenty of little details that remain unknown in many branches of science. So not knowing what constitutes dark matter would be an acceptable excuse, if it weren’t for the fact that dark matter comprises 96% of the Universe. We know that the Universe keeps expanding, but we cannot quite describe how and what happens to the space that used to be compacted previously. Dark matter is the giant elephant in the room in discussions related to astronomy or physics – we don’t know what it is, we’ve never seen it, and only infer its existence, yet roughly speaking it’s a major ingredient in the Universe we live in.
  4. Varying constants. Physical constants are warm and fuzzy. We don’t know why they have the value they have, but we always substitute them into our equations and formulas, relying on decades of scientific research behind us, and the fact that they are, well, constants. However, there’s a fairly determined group of scientists that is looking into certain scientific constants and finding that their values have changed as the Universe aged. Determined might be an understatement, as anyone willing to travel to Gabon and mess with uranium there is certainly dedicated. What they’re finding is that the constants describing nuclear reactions were different two billion years ago compared to current constants.
  5. Newton’s inverse square law. In 1994 scientists at Los Alamos National Laboratory figured out they had a bug with Pioneer probes. Contrary to the Newton’s inverse square law, the Pioneers were drifting off course. They hired Slava Turyshev out of Jet Propulsion Lab to investigate the small bug, which was most likely to blame on some contamination or error in Pioneer design. 14 years later the bug still stands unresolved. Together with NASA the scientists have gone through heaps of papers figuring out what could go wrong, and the answer is still up in the air. If unresolved, the Pioneer trajectory might become the first evidence that it’s time to rethink Newton’s inverse square law.
  6. Homeopathy. When it works, you hear all about it. Homeopathy is almost like religion, in the sense that it attracts either staunch believers, or extreme sceptics. The idea of diluting a certain ingredient with copious amounts of water doesn’t sit well with the majority of chemists, who point out that such small proportions call for a chance of the entire solution being water. Nevertheless, in Brooks’ book there’s an attempt at the explanation of what might be causing homeopathic effect – changes in molecular structure of water depending on the chemicals that it’s been in contact with, even if the chemicals have been filtered out. However, it’s still an attempt at best, since the scientific experiments that do achieve positive results are generally not reproducible.
  7. Placebo effect. Perhaps related to the previous thing we don’t understand, placebo effect has some interesting features. The patient knowing or suspecting that they might be receiving a placebo behaves differently than those without any knowledge. Are we comforted by the sight of people in white robes and our local pharmacist dealing out the regular dose of medication? Or does body start producing entirely different set of hormones with mind suspecting that the recovery process is near. Placebo, if figured out, might become a huge money saver with the current drug prices, and hence attracts scientific research. The only thing missing? A definitive conclusion on the placebo effect.
  8. Free will. A certain amount of human ideology rests on the idea of free will. So the idea of the body just reacting to some responses outside of the brain is uncomfortable. But picture this. You’re in bed, it’s time to get up, yet you want to spend a few more minutes in bed. Your conscious mind is sending the signals for the body to get vertical, and yet at some point, probably between the thoughts of pending shower and commute to work, you get up. The final decision done by something unconscious, something you don’t really have control over. While your conscious mind can submit an application to this unknown organ and request something happening, the body movements and behavior are triggered by something that is still largely unknown for science.
  9. Cold fusion. It became one of the most ridiculous scientific ideas to get associated with, and no scientist would touch it nowadays with a 40-foot pole, since it brings the stigma. However, as some point out, peer pressure is pathway to missing out on some potential innovations in the field. What’s currently reproducible is the effect of cold fusion on a plastic called CR39. Placed by a piece of depleted uranium, CR39 shows similar patterns of radiation as placed into a cold fusion experiment.
  10. Life on Mars. The Viking probes were declared to contain no evidence of life on Mars. The only person in the room who disagreed with the announcement was a bacteriological researcher, who came up with a clever idea of detecting life (fart reference coming soon). By adding radioactive isotopes to the nutrients fed into the foreign soil, the researchers would get any evidence of carbon-based life to produce gas (there it is), and by the virtue of having the food injected with isotopes, the Geiger counter would go ballistic, and hence you could validate existence of life in the soil, even if other tests came negative.
  11. WOW signal. One would argue that scientists at SETI (Search for Extra-Terrestrial Intelligence) have a pretty monotonous job. They’re waiting for a signal on 1420 MHz frequency. Why 1420? That’s the frequency of hydrogen, the most prevalent element in the Universe, so hopefully those extra-terrestrials will arrive at the same idea when sending the signal. So far no signal has arrived. Except on August 15th, 1977, when the signal came. It was very distinct, and caused Jerry Ehman to write "Wow!" on the margin of the printout. The signal never repeated, and the SETI folks have not heard anything similar since then.
  12. Mimivirus is an interesting virus that does not seem to affect humans, except for the unique cases, when it actually does. It’s the virus that fight cancer cells among others, and hence draws a great deal of research attention.
  13. Sex. If you’ve read this far, here’s a bonus entry. Yes, sex is one of those things that scientists do not quite understand (insert a proper nerd joke here). Looking at overall picture, the animal kingdom provides a great variety of alternative means of reproduction, that are much more efficient as far as number of offspring and the quality of gene preservation. A number of reptiles and fish are all-female or all-unisex species, copying themselves for the purposes of reproduction. Moreover, a number of species, like water fleas, can reproduce either sexually or asexually. You’d think that the species produced through asexual reproduction would be somehow inferior to the ones that appeared as a result of a sexual act, but there’s no solid scientific data to prove that or the opposite. What remains enigmatic is that if asexual reproduction would provide you with 2x the population compared to sexual (and that leaves out the time and energy spent on finding a mate, taking her to dinners and consequent ring shopping), why didn’t the entire animal world switch to asexual, as it’s obviously a more efficient process.

07
Dec 07

The Black Swan

Black swanI just finished reading Nassim Nicholas Taleb’s The Black Swan: The Impact of the Highly Improbable. I enjoyed Fooled by Randomness by the same author, and Black Swan has a few references to his previous work. In the previous title Taleb discusses a typical human mistake of taking the result of a random outcome for skill or deserved result. In Black Swan, Taleb discusses traditional models for forecasting anything (financial markets, political scenarios, weather), and theory of chaos, which basically says that systems with high entropy cannot provide any degree of predictability.

Political analysts of the late 80s did not predict the collapse of the Soviet Union, financial markets of the 21st century did not predict Russian default with subsequent sweep on Asian markets, and security analysts did not predict two planes flying into the towers of World Trade Center. However, in the retrospect, we tend to exhibit surprising hindsight, stating that all those events were inevitable, due to [insert a variety of geopolitical arguments here].

Taleb insists that the human mind frequenty:

  1. Overestimates the odds of success when applied to oneself. Everybody buying a lottery ticket mentally assumes a much better probability of winning than reality usually presents.
  2. Attributes random events in the past as contributing to success/failure. Survivors of the shipwreck would tell the story of how they all prayed for their lives, and thus got saved. While some religious groups would tend to pick up the story as the proof of whatever agenda they’re pitching, nobody generally listens to the stories of those who prayed, but still drowned. Business journalists (with CBS MarketWatch being the worst) frequently abuse this by pitching headlines like Stocks down after Congress increasing military spending in the morning, and Stocks up as Congress approves larger military budget in the afternoon.
  3. Looks for order and sequence where it doesn’t exist. Business book writers made a cottage industry out of this by surveying the life stories of prominent individuals, and then reselling those as recipes for success. The quirkier the trait, the better it suits the public. Peter Thiel wakes up early and runs in the morning – I see, so that’s a secret recipe for running a successful hedge fund.
  4. Listens to the experts that don’t know any better. There’s a whole bunch of occupations, where expertise is learned, and re-learning it requires significant time investments. Mechanics, doctors, and foreign language interpreters all have such skills. Other kinds of expertise involve looking back at what happened and trying to draw the line of correlation among discordant and random events. Such experts involve financial analysts and government economists.
  5. Hungs up on small things without seeing the big picture. If you have significant money in savings accounts, you’re probably busy looking for a better rate. However, the bigger picture, the Black Swan of the US banking industry, is significant asset consolidation among major banks. If one of them gets hit, all of them get hit significantly. The possibility of over-exposure to subprime loans and possible collapse of the banking industry generally escapes the model that your financial analyst presented.

The book is pretty interesting, but hardly coherent. Nevertheless, it’s full of interesting anecdotes and personal observations, that make the book somewhat witty. After reading it I went around reading some other reviews – NYT seemed to not like it, Fool.com did a pretty comprehensive review of the points presented, Slate reviewer seemed to like it. There’s also author’s interview on Colbert report.