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2016-02-25 11:03:41
Michael LucaOliver Hauser
February 04, 2016
Consider a delinquent taxpayer who receives one of the following two letters in
the mail:
Letter 1: We are writing to inform you that we have still not received your tax
payment of $5,000. It is imperative that you contact us.
Letter 2: We are writing to inform you that we have still not received your tax
payment of $5,000. By now, 9 out of 10 people in your town have paid their
taxes. It is imperative that you contact us.
The UK tax authority, HMRC (or, properly, Her Majesty s Revenue and Customs),
had been sending out a letter that looked a lot like Letter 1 for many years.
They didn t think that it was necessarily the most effective letter. In fact,
they hadn t thought much about the letter at all. After all, it was just a
letter, an administrative necessity.
But in 2010, a newly formed team of behavioral scientists inside the UK
government, known as The Behavioural Insights Team (BIT), set out to test its
effectiveness. Where HMRC saw administrative hassle, BIT saw opportunity, the
opportunity to collect overdue taxes by incorporating insights from behavioral
economics and social psychology into the tax letter.
BIT ran an experiment in which they sent out two letters something like
Letter 1 to a randomly selected group of delinquent taxpayers, and something
like Letter 2 (which incorporates a concept that psychologists refer to as
social norms) to another group. As it turns out, Letter 1 was costing the UK
tens of millions of pounds per year because it was simply less effective than
Letter 2. In response to Letter 2, delinquent taxpayers stepped up their game
and started paying their dues.
We take two lessons from this tax letter. First, we all have intuition about
what s most effective which letter is best, and how much of a difference it
makes. But the best managers have humility about their intuition, which is
sometimes off. Because of this, experimental methods are an important part of
the managerial process and can tell us what works and what doesn t.
Second, situations like the UK tax letter where we just do the same thing
over and over again without asking if it s really effective are very common.
And managers need to recognize these situations for what they are: unnecessary
risks. Why speculate when you can run an experiment to see what works? Just
look around your organization, and you will find opportunities all over the
place.
To see communication experiments in action, consider the following:
One of us (Luca, with coauthors Duncan Gilchrist and Deepak Malhotra) wrote a
paper showing that the impact of higher wages depends on the reference point of
the employee and reference points are often set through communication. More
generally, compensation letters are a great but often wasted opportunity to
engage with employees. For example, should you say, This raise is our token of
appreciation for the hard work that you do for this company or This raise is
our token of appreciation for the hard work that you do for your colleagues ?
Which of these is more effective at encouraging future motivation depends on
the motivations of an employee at a specific job, and can easily be tested
through a randomized controlled trial.
Companies routinely use text messages to reach customers, but not many take
advantage of an experiment to find out what works. Consider an example drawn
from government elections: in 2011, Neil Malhotra found (with coauthors Melissa
Michelson, Todd Rogers, and Ali Adam Valenzuela) that even a well-chosen
cold-text that is, a message sent to people who had not requested to be
texted increased voter turnout in the California elections. In this
situation, one experiment may not be enough. While the text messages saw large
effects, one might expect the effect to be smaller now that texts are such a
common tool.
Experiments can also tell when your intuition would have gotten it wrong. We ve
worked with organizations that were confident their advertising messages were
effective, only to learn through a trial that they had no effect at all.
Every year, there are new ways to communicate with customers and employees
letters, emails, texts, instant messages, chat apps. All of these are
opportunities for organizations to communicate effectively in order to achieve
their corporate objectives. The experimental method enables you to
systematically improve your communication with your customers and to roll out
changes that have proven successful. When done correctly, experiments can drive
success and create a culture of learning and innovation.
Michael Luca is an assistant professor of business administration at Harvard
Business School.
Oliver Hauser is a doctoral student at Harvard University.