A

In today’s hypercompetitive marketplace, companies that successfully introduce new products are more likely to flourish than those that don’t. businesses spend billions of dollars making better “mousetraps” only to find consumers roundly rejecting them. Studies show that new products fail at the stunning rate of between 40% and 90%, depending on the category, and the odds haven’t changed much in the past 25 years. In the U.S. packaged goods industry, for instance, companies introduce 30,000 products every year, but 70% to 90% of them don’t stay on store shelves for more than 12 months. Most innovative products – those that create new product categories or revolutionize old ones – are also unsuccessful. According to one study, 47% of first movers have failed, meaning that approximately half the companies that pioneered new product categories later pulled out of those businesses.

B

After the fact, experts and novices alike tend to dismiss unsuccessful innovations as bad ideas that were destined to fail. Why do consumers fail to buy innovative products even when they offer distinct improvements over existing ones? Why do companies invariably have more faith in new products than is warranted? Few would question the objective advantages of many innovations over existing alternatives, but that’s often not enough for them to succeed. To understand why new products fail to live up to companies’ expectations, we must delve into the psychology of behavior change.

C

New products often require consumers to change their behavior. As companies know, those behavior changes entail costs. Consumers costs, such as the activation fees they have to pay when they switch from one cellular service provider to another. They also bear learning costs, such as when they shift from manual to automatic automobile transmissions. People sustain obsolescence costs, too. For example, when they switch from VCRs to DVD players, their videotape collections become useless. All of these are economic switching costs that most companies routinely anticipate.

D

What businesses don’t take into account, however, are the psychological costs associated with behavior change. Many products fail because of a universal, but largely ignored, psychological bias: People irrationally overvalue benefits they currently possess relative to those they don’t. The bias leads consumers to value the advantages of products they own more than the benefits of new ones. It also leads executives to value the benefits of innovations they’ve developed over the advantages of incumbent products.

E

Companies have long assumed that people will adopt new products that deliver more value or utility than existing ones. Thus, businesses need only to develop innovations that are objectively superior to incumbent products, and consumers will have sufficient incentive to purchase them. In the 1960s, communications scholar Everett Rogers called the concept “relative advantage” and identified it as the most critical driver of new-product adoption. This argument assumes that companies make unbiased assessments of innovations and of consumers, likelihood of adopting them. Although compelling, the theory has one major flaw: It fails to capture the psychological biases that affect decision making.

F

In 2002, psychologist Daniel Kahneman won the Nobel Prize in economics for a body of work that explores why and when individuals deviate from rational economic behavior. One of the cornerstones of that research, developed with psychologist Amos Tversky, is how individuals value prospects, or choices, in the marketplace. Kahneman and Tversky showed, and others have confirmed, that human beings’ responses to the alternatives before they have four distinct characteristics.

G

First, people evaluate the attractiveness of an alternative based not on its objective, or actual, value but on its subjective, or perceived value. Second, consumers evaluate new products or investments relative to a reference point, usually the products they already own or consume. Third, people view any improvements relative to this reference point as gains and treat all shortcomings as losses. Fourth, and most important, losses have a far greater impact on people than similarly sized gains, a phenomenon that Kahneman and Tversky called “loss aversion.” For instance, studies show that most people will not accept a bet in which there is a 50% chance of winning $100 and a 50% chance of losing $100. The gains from the wager must outweigh the losses by a factor of between two and three before most people find such a bet attractive. Similarly, a survey of 1,500 customers of Pacific Gas and Electric revealed that consumers demand three to four times more compensation to endure a power outage – and suffer a loss – than they are willing to pay to avoid the problem, a potential gain. As Kahneman and Tversky wrote, “losses loom larger than gains.”

H

Loss aversion leads people to value products that they already possess – those that are part of their endowment – more than those they don’t have. According to behavioral economist Richard Thaler, consumers value what they own, but many have to give up, much more than they value what they don’t own but could obtain. Thaler called that bias the “endowment effect.”

I

In a 1990 paper, Thaler and his colleagues describe a series of experiments they conducted to measure the magnitude of the endowment effect. In one such experiment, they gave coffee mugs to a group of people, the Sellers, and asked at what price point – from 25 cents to $9.25 – the Sellers would be willing to part with those mugs. They asked another group – the Choosers – to whom they didn’t give coffee mugs, to indicate whether they would choose the mug or the money at each price point. In objective terms, all the Sellers and Choosers were in the same situation: They were choosing between a mug and a sum of money. In one trial of this experiment, the Sellers priced the mug at $7.12, on average, but the Choosers were willing to pay only $3.12. In another trial, the Sellers and the Choosers valued the mug at $7.00 and $3.50, respectively. Overall, the Sellers always demanded at least twice as much to give up the mugs as the Choosers would pay to obtain them.

J

Kahneman and Tversky’s research also explains why people tend to stick with what they have even if a better alternative exists. In a 1989 paper, economist Jack Knetsch provided a compelling demonstration of what economists William Samuelson and Richard Zeckhauser called the “status quo bias.” Knetsch asked one group of students to choose between an attractive coffee mug and a large bar of Swiss chocolate. He gave a second group of students the coffee mugs but a short time later allowed each student to exchange his or her mug for a chocolate bar. Finally, Knetsch gave chocolate bars to a third group of students but much later allowed each student to exchange his or her bar for a mug. Of the students given a choice at the outset, 56% chose the mug, and 44% chose the chocolate bar, indicating a near even split in preferences between the two products. Logically, therefore, about half of the students to whom Knetsch gave the coffee mug should have traded for the chocolate bar and vice versa. That didn’t happen. Only 11% of the students who had been given the mugs and 10% of those who had been given the chocolate bars wanted to exchange their products. To approximately 90% of the students, giving up what they already had seemed like a painful loss and shrank their desire to trade.

K

Interestingly, most people seem oblivious to the existence of the behaviors implicit in the endowment effect and the status quo bias. In study after study, when researchers presented people with evidence that they had irrationally overvalued the status quo, they were shocked, skeptical, and more than a bit defensive. These behavioral tendencies are universal, but awareness of them is not.

Try this memory test: Study each face and compose a vivid image for the person’s first and last name. Rose Leo, for example, could be a rosebud and a lion. Fill in the blanks on the next page. The Examinations School at Oxford University is an austere building of oak-paneled rooms, large Gothic windows, and looming portraits of eminent dukes and earls. It is where generations of Oxford students have tested their memory on final exams, and it is where, last August, 34 contestants gathered at the World Memory Championships to be examined in an entirely different manner.

A

In timed trials, contestants were challenged to look at and then recite a two-page poem, memorize rows of 40-digit numbers, recall the names of 110 people after looking at their photographs, and perform seven other feats of extraordinary retention. Some tests took just a few minutes; others lasted hours. In the 14 years since the World Memory Championships was founded, no one has memorized the order of a shuffled deck of playing cards in less than 30 seconds. That nice round number has become the four-minute mile of competitive memory, a benchmark that the world’s best “mental athletes,” as some of them like to be called, is closing in on. Most contestants claim to have just average memories, and scientific testing confirms that they’re not just being modest. Their feats are based on tricks that capitalize on how the human brain encodes information. Anyone can learn them.

B

Psychologists Elizabeth Valentine and John Wilding, authors of the monograph Superior Memory, recently teamed up with Eleanor Maguire, a neuroscientist at University College London to study eight people, including Karsten, who had finished near the top of the World Memory Championships. They wondered if the contestants’ brains were different in some way. The researchers put the competitors and a group of control subjects into an MRI machine and asked them to perform several different memory tests while their brains were being scanned. When it came to memorizing sequences of three-digit numbers, the difference between the memory contestant and the control subjects was, as expected, immense. However, when they were shown photographs of magnified snowflakes, images that the competitors had never tried to memorize before, the champions did no better than the control group. When the researchers analyzed the brain scans, they found that the memory champs were activating some brain regions that were different from those the control subjects were using. These regions, which included the right posterior hippocampus, are known to be involved in visual memory and spatial navigation.

C

It might seem odd that the memory contestants would use visual imagery and spatial navigation to remember numbers, but the activity makes sense when their techniques are revealed. Cooke, a 23-year-old cognitive-science graduate student with a shoulder-length mop of curly hair, is a grand master of brain storage. He can memorize the order of 10 decks of playing cards in less than an hour or one deck of cards in less than a minute. He is closing in on the 30-second deck. In the Lamb and Flag, Cooke pulled out a deck of cards and shuffled it. He held up three cards – the 7 of spades, the queen of clubs, and the 10 of spades. He pointed at a fireplace and said, “Destiny’s Child is whacking Franz Schubert with handbags.” The next three cards were the king of hearts, the king of spades, and the jack of clubs.

D

How did he do it? Cooke has already memorized a specific person, verb, and object that he associates with each card in the deck. For example, for the 7 of spades, the person (or, in this case, persons) is always the singing group Destiny’s Child, the action is surviving a storm, and the image is a dinghy. The queen of clubs is always his friend Henrietta, the action is thwacking with a handbag, and the image is of wardrobes filled with designer clothes. When Cooke commits a deck to memory, he does it three cards at a time. Every three-card group forms a single image of a person doing something to an object. The first card in the triplet becomes the person, the second the verb, the third the object. He then places those images along a specific familiar route, such as the one he took through the Lamb and Flag. In competitions, he uses an imaginary route that he has designed to be as smooth and downhill as possible. When it comes time to recall, Cooke takes a mental walk along his route and translates the images into cards. That’s why the MRIs of the memory contestants showed activation in the brain areas associated with visual imagery and spatial navigation.

E

The more resonant the images are, the more difficult they are to forget. But even meaningful information is hard to remember when there’s a lot of it. That’s why competitive memorizers place their images along an imaginary route. That technique, known as the loci method, reportedly originated in 477 B.C. with the Greek poet Simonides of Ceos. Simonides was the sole survivor of a roof collapse that killed all the other guests at a royal banquet. The bodies were mangled beyond recognition, but Simonides was able to reconstruct the guest list by closing his eyes and recalling each individual around the dinner table. What he had discovered was that our brains are exceptionally good at remembering images and spatial information. Evolutionary psychologists have offered an explanation: Presumably, our ancestors found it important to recall where they found their last meal or the way back to the cave. After Simonides’ discovery, the loci method became popular across ancient Greece as a trick for memorizing speeches and texts. Aristotle wrote about it, and later a number of treatises on the art of memory were published in Rome. Before printed books, the art of memory was considered a staple of classical education, on a par with grammar, logic, and rhetoric.

F

The most famous of the naturals was the Russian journalist S.V. Shereshevski, who could recall long lists of numbers memorized decades earlier, as well as poems, strings of nonsense syllables, and just about anything else he was asked to remember. “The capacity of his memory had no distinct limits,” wrote Alexander Luria, the Russian psychologist who studies Shereshevski also had synesthesia, a rare condition in which the senses become intertwined. For example, every number may be associated with a color or every word with a taste. Synesthetic reactions evoke a response in more areas of the brain, making memory easier.

G

K. Anders Ericsson, a Swedish-born psychologist at Florida State University, thinks anyone can acquire Shereshevski’s skills. He cites an experiment with S. F., an undergraduate who was paid to take a standard test of memory called the digit span for one hour a day, two or three days a week. When he started, he could hold, like most people, only about seven digits in his head at any given time (conveniently, the length of a phone number). Over two years, S. F. completed 250 hours of testing. By then, he had stretched his digit span from 7 to more than 80. The study of S. F. led Ericsson to believe that innately superior memory doesn’t exist at all. When he reviewed original case studies of naturals, he found that exceptional memorizers were using techniques – sometimes without realizing it – and lots of practice. Often, exceptional memory was only for a single type of material, like digits. “If we look at some of these memory tasks, they’re the kind of thing most people don’t even waste one hour practicing, but if they wasted 50 hours, they’d be exceptional at it,” Ericsson says. It would be remarkable, he adds, to find a “person who is exceptional across a number of tasks. I don’t think that there’s any compelling evidence that there are such people.”