The Product Manager’s Guide to Behavioral Economics

As a product manager, understanding the psychology of people—what makes them tick—may be your most important asset.

To get your ideas off the ground, you need to get other people to believe in them. To ship them, you need to be able to run a team and manage conflicting priorities. And to make them successful, you need to tap into your users' psychology and fulfill a real need or desire.

The nuances of the human mind, its irrationalities and quibbles, define much of your success and failure as a product manager.

Understand psychology, and you will understand a lot about how to bring a great product to market. To help, we'll delve into the theories of Daniel Pink, Daniel Kahneman, Dan Ariely, Richard Thaler and Cass Sunstein.

The Pitch — Daniel Pink

The first part of any new initiative is pitching.

Product managers rarely have many direct reports. More often, they must galvanize support from across different teams—none of which are mandated to help them—to get their ideas turned into real products. That means being able to convince others that your ideas are interesting, doable, and could have a significant impact upon the business.

In other words, it's sales.

“Selling, I've grown to understand, is more urgent, more important, and, in its own sweet way, more beautiful than we realize,” writes Daniel Pink in his book To Sell is Human.

Pink got his JD from Yale Law School in 1991 before entering government, where he worked as Al Gore's chief speechwriter before quitting his job and dedicating himself to writing full-time. His most recent book, To Sell is Human, argues that we're all always, to some extent, selling.

Selling, I've grown to understand, is more urgent, more important, and, in its own sweet way, more beautiful than we realize

Product managers do more selling than most. They must sell their various features and improvements to engineers and designers who are usually not their direct reports. They have to sell them to VPs and team leads who always have other projects in mind. And they have to sell them to support reps and sales teams who wonder how they will help support and sell all these new ideas.

The product manager is, in other words, a salesperson whose customers are her fellow employees.

Pink, in To Sell is Human, offers some invaluable advice for product managers looking to improve their internal-sales game and become better at getting their ideas into motion.

First, he asks us to forget the old ABCs of sales—”Always Be Closing”—and embrace a new set: “Attunement, Buoyancy, and Clarity.”

No more of that.

These ABCs are the three pillars of Pink's theory:

• Attunement: Understanding the buyer, their thoughts, and their perspective. This is as much a function of your ability to empathize with the other person's inner life as it is about extroversion.
• Buoyancy: Remaining optimistic. Asking questions like “Can I succeed?” in order to drum up intrinsic motivation and convincing yourself that setbacks are extrinsic, the result of external circumstances you cannot control.
• Clarity: Being clear about what your idea/product/service offers the other person.

Sales is not about pushing someone into accepting your idea, or trying to will them into wanting it—it's about making yourself into a kind of consultant.

It's about understanding first what your buyer's main kind of concerns and thoughts are. For a PM, this means a variety of things based on the stakeholder in question:

• Engineers: Will this project fit into my workload? What is the opportunity cost, e.g. of other projects that I am not working on if I take this on? Will this PM offer clear constraints for the project and be responsive to feedback, will they micromanage me at every turn?
• Sales: Does this project make sense given the way we're currently framing our solution for customers? Is this something that customers have been asking for? Is it something that will help them?
• VPs: If this project is successful, is it going to produce a measurable positive change to the metrics we care about in our OKRs this quarter?

Attunement means addressing all of these concerns when you pitch your idea.

Despite all your best efforts, of course, most pitches fail. Sales is a “sea of rejections”—hence, Pink advises, remain buoyant. His most insightful tip here is not to “pump yourself up” by telling yourself you're the best. Instead, motivate yourself by asking yourself probing questions like “Can I do this?” or “Am I able to pull off this kind of product?”

When you ask yourself a question like this, your brain will force itself to come up with internally-generated reasons why you can, and are able—shown in studies to be a more effective motivator than simply telling yourself that you're awesome.

The Problem with The Inside View — Daniel Kahneman

In his book Thinking, Fast and Slow, the Israeli Nobel laureate Daniel Kahneman relates a story of project estimation that will likely ring (a little too) true for every product manager reading this.

Kahneman was part of a team writing the curriculum for a high school class on judgment and decision-making. After about a year of work, he asked everyone to write down how long they expected it to take to finish the project.

Estimates came in within a range of one and a half to two and a half years. Then Kahneman asked another colleague with actual experience writing curricula what he thought. This colleague, after a little prodding, confessed that he had never heard of a team finishing a curriculum like this in any less than seven years, and most took closer to ten.

It was an “embarrassing episode” which Kahneman would remember as “one of the most instructive experiences of my professional life,” and it led directly to Kahneman's conceptualizing of the inside vs. the outside view:

• Inside view: The perspective that you have about your project, your experience, your beliefs, and your mood
• Outside view: The perspective that others looking at your project have

This distinction between the inside and outside view is everywhere in product management.

A PM can set a deadline for a project, but that deadline is not something they're solely responsible for meeting—whether or not they will hit it depends upon engineers, designers, contractors, content writers, and many other stakeholders within the team. The PM is the “inside”—all of those other groups make up the “outside.” When it comes to project planning, their view is more important.

The problem is that—unless trained otherwise—we're always optimistic when we make estimates.

It's called “California Agile.” (Source: Gliffy)

That creates three major kinds of mistakes in our attempts at project estimation:

• We forget that more people = more communication overhead. As we add people to projects thinking that they will help get the project done in less time, we forget that the opposite effect is often the case. The more people you add, the more they need to communicate with each other to get the job done, and the longer it takes for your product to get shipped.
• We forget that we are going to run into trouble. We plan for the best-case scenario. We don't build unexpected problems into our plans, and yet these problems always crop up.
• We forget how long testing and debugging take. Most of our attention gets put on to the actual building of product—and it's where we think we'll spend the most of our time. In reality, more time usually gets spent debugging and testing.

Kahneman had another colleague with more experience creating textbook curricula that he could ask for advice regarding his team's estimates. As a PM, you want to do exactly the same kind of thing for your own projects. You want to be able to cultivate an “outside” view of your own project and see the “unknown unknowns” that might get in the way of successful execution.

If you can do that, you can make better estimates and ship more of your projects on time.

The Product Brain — Dan Ariely

Hacking the conscious brain to undertake some new kind of behavior is tricky—and one of the things that Dan Ariely is most interested in studying.

Dan Ariely is a behavioral economist at Duke. His research centers on the concept of decision irrationality—why the choices we make are so “repeatedly and predictably wrong.” While studying why and how humans make the kinds of decisions they do, Ariely has gravitated naturally towards thinking about startups and product adoption.

Ariely also works as a consultant at the Center for Advanced Hindsight's Startup Lab, where he advises entrepreneurs on ways to make their products more engaging. He's associated with the financial startups Qapital and Lemonade, and he's recently co-founded a startup building a “smarter” scale, Shapa.

Shapa is an interesting scale, because it doesn't tell you how much you weigh. It doesn't give you any kind of number at all. Step on Shapa, and what you'll get is a color: one for underweight, one for “about right,” and one for overweight.

This design decision was rooted in two basic observations about people's problems with scales:

• People get confused when their bodyweight goes up and down seemingly at random due to natural fluctuations in the body due to, e.g., eating a salt-rich meal and temporarily retaining more water.
• People anticipate that their scale will very quickly reflect their dietary decisions, e.g. “I just went on a diet today, why hasn't my weight gone down at all?”

Ideally, you would weigh yourself on a scale every morning (since doing so, Ariely points out, generally leads people to make healthier decisions) but actually ignore the “drip” of micro-data about your weight, which can fluctuate according to all kinds of factors—and instead focus on the big picture of whether you're getting closer to your goals.

Shapa was designed to smooth the edges of the cognitive biases that make it hard to do that. You enter your goal weight into Shapa, and then it tells you every day whether or not you're on the right track. It minimizes information—and gives you only what you really need to know.

And while Shapa is just a scale, this basic operation—controlling the flow of information to the user to ease the headache of using a product—could be applied to all kinds of products.

In personal finance, for instance, one of the biggest problems in the United States is the overall savings rate. Between paying off student loans and credit cards, millennials are investing less and less in the stock market and in their own personal savings. Qapital, where Ariely was hired as Chief Behavioral Economist, attacks that problem by uses the same psychology that makes it hard to save, to make it easier to save.

Instead of manually having to route funds monthly or biweekly, Qapital lets you create rules—like “save 50 cents every time I pay for something with my American Express”—that lets you save as imperceptibly as you spend.

The problem—that it's easy to spend, and harder to make yourself save—could be solved simply by redirecting the technology that made it so easy to never save in the first place. And there are many more examples out there of products that affect human psychology in small and subtle ways to enable certain kinds of behavior.

Too often, that truth of product development gets hidden behind a veneer of not just irrationality but quasi-mysticism.

Most people when they think about growth they think it’s this convoluted thing where you're trying to generate these extra normal behaviors in people. When you shroud yourself and all the bullshit veneer, and this is the single biggest problem in the valley today, you will miss the mark. —Chamath Palihapitiya

It's counter-productive to look for ways to make people do things they don't already want to do. There are so many habits and practices that people want to take on that products can help with—it just requires breaking down what the problems are and then figuring out how those problems might be surmounted with technology. When it comes down to it, we're not all that irrational at all.

“Our irrational behaviors are neither random nor senseless—they are systematic,” Ariely writes. “We all make the same types of mistakes over and over.”

The product opportunity lies in helping people not make those mistakes.

The Psychology of the Product Manager

This is by no means a comprehensive account of the different ways that an understanding of human psychology can help elucidate the work of the product manager.

But it should make clear that from every part of the PM's job—pitching all the way to building a product—understanding the work of behavioral economists and psychologists can be invaluable.

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