Dealers continue to rely far too often on gut instinct to make critical operational decisions.
With recent advances in analytics, why hasn’t the industry better enabled dealers to make data-driven decisions?
Applying Behavioral Economics
Behavioral economics is a branch of psychology that studies the effects of psychological and emotional factors on the economic decisions of individuals. In other words, it reveals the weaknesses in the way humans are wired that leads to consistently bad decision making.
There are three prevalent themes in behavioral finances:
Heuristics: Humans make 95% of their decisions using mental shortcuts or rules of thumb.
Framing: The collection of anecdotes and stereotypes that make up the mental filters we rely on to understand and respond to daily events.
Market inefficiencies: These include mispricing and non-rational decision making.
Weaknesses in Judgement
In addition to the three major themes above, Behavioral Economics further documents that humans fairly consistently fall victim to weaknesses in judgement in a number of different areas:
Overconfidence means that we have too much faith in our decision making ability.
Status Quo Bias means that we default back to what we know and are comfortable with, rather than trying new data-driven decisions.
The Herding Instinct (sometimes called “the power of crowds”) explains the phenomenon of large numbers of people acting in the same way at the same time, which includes stock market bubbles.
Confirmation bias is the tendency to seek out opinions and facts that support our own beliefs and hypotheses.
Selective recall is the habit of remembering only facts and experiences that reinforce our assumptions.
Behavioral Economics and the Car Dealer
Looking over the list above brings to mind weakness in decision making at car dealerships; whether employees that get too emotionally attached to one specific car, having too much confidence in our ability to price, acquire or order the right car, and the use of common industry software tools that drive all of the dealers in the same market to pursue (and bid up) the exact same cars in the auction lanes.
The good news is that forced discipline and the following of structured process has been proven to counter and eliminate much of the bad decision making hardwiring in our brains. Following these rules enable dealers to fight their worst, counter-productive instincts; discipline, data and software tools can help counter these innate biases.
The Direction Forward
As an industry, we all need to be thoughtful and deliberate to engineer better decision making for all of our employees.
Applying process safeguards and alerts to help understand when an individual employee’s operations are moving from green to red (into the danger zone), and identifying the steps that they need to take to get them back into the healthy zone should be hard-coded into every employee's day to day operations and systems.
VINFactor is a free product that helps prevent dealership employees from ever making a bad decision again.
VINFactor is revolutionizing the way that dealers think about vehicle acquisition and pricing. Distilling data from over 20K dealerships, 5M live pieces of vehicle inventory per day and 45M vehicles sold per year, VINFactor offers 24/7 protection against a dealer ever making an inventory or pricing mistake again.
VINFactor is free for car dealership employees. Download VIN-Factor free today at www.VINFactor.com