A deep dive into variable rewards

8 minute read

This is a continuation of my previous post on variable rewards here.

In our earlier post, we had discovered that variable rewards are a key ingredient in most of the habit forming products.

Generally we tend to equate rewards with money. But however we found from our earlier examples that there are other rewards such as information, social approval etc which can be used to create habits.

So this begets the question:

What are the “rewards”  which when varied can lead to habit formation?

According to the behavior design expert, Nir Eyal, variable rewards come in three types and involve the persistent pursuit of:

  1. Rewards of the tribe 
  2. Rewards of the hunt 
  3. Rewards of the self

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What the F*%&??

I completely get it. But please hang on. I promise to simplify and will be well worth your time.

1.Rewards of the Tribe (read as social rewards)

Cut the crap version: People deep down want to feel connected to others

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All of us are social creatures. We crave for a sense of belonging, attention, approval and appreciation from others.

“We are social beasts and still judge one another on a daily basis”
– Rust Cohle ( a fictional character in the television series True Detective)

This can be explained by our evolutionary roots. Throughout our long history, communities were our lifelines. It was extremely difficult to survive the harsh weather conditions and the constant hunt for food as an isolated individual or family.So as a part of evolution, the need for being a part of community became ingrained in us.

In fact scientists have found out that humans have specially adapted neurons in their brain (called mirror neurons) that help us feel what others feel, providing evidence that we survive through our empathy for others.

Thus our brains typically crave for rewards that make us feel accepted, attractive, important and included in a community.

In a nutshell, it is about social rewards

A few examples:

Facebook, Twitter, Linkedin, Instagram and several other social media apps:
They collectively provide powerful social rewards on a variable basis to billions of people around the world. With every post, tweet, share or comment, users anticipate social validation. Rewards of the tribe keep users coming back and wanting more.

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2.Rewards of the hunt: 

Cut the crap version: We love to search for resources (money, food, information, deals  etc)

We are excited by the thrill of the hunt.

Hunt  for  variable  material  rewards

What several centuries back used to be a hunt for food, animals, shelter has now translated into a hunt for things like money, fancy objects, information and deals.

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Some examples,

  • Hunt for money — think slot machines
  • Hunt for deals — The Great Indian Sale on Amazon, discount sales in retail stores
  • Hunt for information — scrolling across your twitter feed, google search etc

3.Rewards of the self

Cut the crap version : We pursue self-achievement

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These are rewards that satisfy our intrinsic need for personal excellence and a sense of competence. Basically our brains are always on the look out for new challenges to overcome. The more success we have, the happier we are.

Some examples,

  1. Video games
  2. Playing a sport

In fact there is a new concept called Gamification which involves applying game mechanics and game design techniques to engage and motivate people to achieve their goals. This is extensively used in most of the apps.

 “In every job that must be done there is an element of fun.
   Find the fun and snap!
   The job’s a game.”
                                              – Mary Poppins, the 1964 American musical fantasy comedy film


Most of the habit forming apps combine the three types of variable rewards, thereby increasing their effectiveness in creating user habits.

As I had mentioned earlier, there are few other steps which the app designers combine along with variable rewards to get the habit formation in place. I will talk about that in my next post.


If you like the content, it would be awesome if you could drop in your comments and also consider subscribing to the blog (all posts shall be delivered directly to your inbox), because your valuable comments and subscription are my variable rewards 🙂 

If you have survived me till here, thanks a ton for reading and happy investing.


A pigeon from the 1950s has the answer to your facebook addiction

12 minute read

It is estimated that the average person checks his mobile 150 times a day!

8 out of 10 smartphone owners check their device within 15 minutes of waking up every morning!

1/3rd of Americans say they would rather give up sex than lose their cell phones!

But, why in the world are we so addicted?

Is this a simple harmless habit formed by chance or is there a lot more than what-meets-the-eye that go behind these apps to make us addicted by design?

While there are a combination of factors which go behind our app addiction, today let us delve into what I believe is the most important contributor.

To understand this better let me press the rewind button and take you back to the 1950s.

Dr Skinner and his pigeons


Dr Skinner, a famous American psychologist conducted a weird experiment. He created a small box (which later on came to be known as the Skinner box) in which there is a small button which can be pecked by a pigeon and another opening below the button where the pigeon gets rewarded with food.

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Basically Mr Skinner was trying to find out, if he could create a habit (in this case the pecking of the button) in the pigeon by using appropriate rewards.

In the first set of experiments, he rewarded the pigeon every time they pecked. So basically whenever the pigeon was hungry, it used to peck the button and would be regularly rewarded with food.

Now he decided to do a small tweak. This time he rewarded the pigeons randomly both on the quantity of food rewarded and frequency at which they were rewarded. So instead of the regular 1 peck and immediate food, this time he made it variable i.e say 2 pecks- food-5 pecks-food-3pecks-food and so on in a random pattern.

To his surprise, he noticed something unbelievable. Unlike the pigeons that received the same food at regular intervals, the pigeons that received variable rewards went berserk.

They started to continuously peck at the button compulsively.

In fact, one pigeon hit the button 2.5 times per second for 16 hours!

Another tapped a whopping 87,000 times over the course of 14 hours,while it got the reward only less than 1 per cent of the time!

To Skinner’s surprise, similar experiments conducted on rats also showed the same phenomenon!

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So what would you have concluded if you were Skinner?

Simple. Animals can be persuaded to perform an activity more often, simply by giving a variable reward instead of promising a fixed reward.

But wait a minute..Holy shit..What if the same thing works on humans?

Brace yourself.

It just works the same with humans!

This weird rewarding system which helps create addictive behaviors is referred to as “intermittent variable rewards”

But is this stuff for real? Can you think of something that works on this concept?

The Gambling industry!

The entire gambling industry runs on this simple concept. Gamblers on the slot machines have no way of knowing how many times they have to play before they win. There is always the possibility that the next coin they put in will be the winning one. The gamblers just like Skinner’s pigeons, get addicted to the variable rewards and continue to obsessively play the slot machines.

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In fact it is so addictive that, gamblers have started wearing diapers to play longer at the machines. You can read more here.

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And just in case you are still skeptical, here is a stat that will blow you away..

The slot machines make more money in the United States than baseball, movies, and theme parks put together!!

Another example is the gaming industry..

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Check this video to understand how games are designed using Dr Skinner’s principles:

And to give you a shocking perspective of how addictive these can become, read the below news

A 17 year old gamer died after playing it for 22 days in a row (link)

A 20 year old Xbox addict died due to blood clot after 12-hour gaming sessions (link)

Welcome to the scary world of “intermittent variable rewards”

But, why the heck, do we get addicted to variable rewards??

The answer lies in a small part of our brain called the “nucleus accumbens” or sometimes informally referred to as the “brain’s pleasure center”.

This is that same region which gets activated by sex, luxury goods, delicious food, drugs, cigarettes, alcohol etc

In several experiments conducted, it was found that whenever this region of the brain was triggered it created significant addiction type behavior.

Sample this:

When a set of people were allowed to press a button in a machine which in turn sent electric impulses to their “nucleus accumben region”, the subjects wanted to do nothing but continuously press the brain stimulating button. The addiction was to such an extent, that the researchers had to forcibly take the devices from subjects who refused to give it back.

Unfortunately, this is exactly the same region which gets triggered whenever there is a variable reward in offer.

Now you can understand as to what goes behind the strange addictive power of variable rewards.

So “as we get the reward, our nucleus accumbens get activated and hence eventually we will get addicted to the habit ” – goes my naive conclusion.

But hang on. This is where it gets even more interesting.

Contradictory to what I concluded, the nucleus accumben was less active when the reward was actually received!

It actually becomes most active in anticipation or craving of the reward!!

…  and  calms  when  
 we  get  what  we  want. Source:  Knutson  et  al  2001   That’s  the  ITCH we  seek  to  SCRATCH.


So that essentially means it is not actually the reward that really matters as we normally would have thought. But rather the anticipation for that reward.

From an evolutionary point of view this is critical. This system kept us motivated to move around, learn, and survive. The rewards are not just restricted to food, drugs, sex, but also includes our search for information.

How many times have you searched for something on google, found the answer, and yet realized half an hour later that you are still online looking for more information?

Remember, that moment when you start scrolling through your facebook feeds and slowly what was supposed be 10 minutes eventually ends up becoming an hour. And you are still frantically scrolling through your feeds in search of your next reward – what are your friends up to, what’s the latest news, some nice article etc. And the key is, it is “variable”. You have no clue what reward you might find next.

Until now, if you still can’t spot the skinner’s pigeon, relax.
It’s us!

So more than the friend’s update it is the frantic scrolling in search of the next update, that is causing the brain’s pleasure center to activate.  We’re mesmerized by the prospect of another chance to find a reward – an endless search for the satisfaction that is never fully realized.

The variable rewards in social media take the form of new features,likes, feedback/responses, messages from friends, compliments, comments, new content, shares etc.

No wonder most of the popular apps have the “scroll” component (referred to as feeds) in it and work on the same principle of variable rewards.

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Other examples of variable rewards in the app world

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E-Commerce sites – the thrill of searching for a new product at an awesome discount

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Oops. Even our addiction to watching sports has the “variable rewards” angle to it!

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If interested, you can read more about sports addiction here

And do you have this experience of switching channels in the remote of your TV without actually stopping to watching any programme..

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Phew. This “variable reward” phenomenon is all around us. *Deep breathe*

Wait a minute. If this principle is used for creating negative habits, can’t it also be used for positive habits. Are there people out there doing this?

A few years back, I was trying to reduce weight and had joined a gym. It was a struggle for me to be regular and my attendance levels were extremely pathetic thanks to my low levels of discipline and will power. But astonishingly, in the last two years I have been reasonable consistent and work out 3 days per week with a fitness group called The Quad (read more about them here ). And making my job even more difficult, their classes are at 6 am in the morning which essentially means I wake up at around 5 am, three times a week!

How in the world did this miracle happen?

The key difference versus a normal gym was that workouts here are never repeated. Each and every class you go, you have no clue on what the workout is going to be.

It is the “Variable Rewards” yet again.

Confirming my suspicion, here is something that suddenly caught my attention from one of their testimonials,


And just when I thought, maybe I am taking it too far, I suddenly get reminded on the usual “What-happened-in-class-today?” messages from people who miss the class.

download1  download2

The variability factor definitely seems to be working.

Great. Some good news finally.Variable rewards work equally well for creating good habits!


Variable rewards play a significant role in habit creation and addiction.

While the power of variable rewards can be used both for good and bad addictions, unfortunately most of them lean towards the latter.

Product designers know the power of variable rewards and are applying it across various products to get us addicted. These are guys paid in millions to crack the code to our brains and get us addicted to their apps or products.

All this makes it a one sided fight and the simple truth is that we need to brace ourselves for an environment where everyone out there is coming after our most precious thingtime.

While the fight to protect our time is going to be a long drawn one, the first simple step is to acknowledge and start consciously watching out for this variable reward created cravings in our day to day lives.

Now to start addressing the problem, we also need to know about the additional techniques which complete the loop of habit forming products.

In our next post we shall learn about the entire loop, the various types of rewards and figure out some ways to have some control in the way we use these products.

If you like the content, it would be awesome if you could drop in your comments and also don’t forget to subscribe to the blog (all posts shall be delivered directly to your inbox), because your valuable comments and subscription are my variable rewards 🙂 

If you have survived me till here, thanks a ton for reading and happy investing.

The secret war on your savings has already begun!!

10 minute read

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With all due respect to Mr Buffet, let’s be honest.

Do you seriously think that we really don’t get the fact that we have to save more and spend less.

The whole point is “most of us” get it. But to put it into action is where the difficulty lies.


The complex explanation..
Saving money is very hard, as we compare something that we can get right now to something abstract that we might be able get in the future. And for this we need to forgo the purchase and save the money instead.

The no nonsense explanation..
In a world of instant gratification, it is all about today..
The future is a problem for another day.
Desire first. Discipline later.
We want everything now. Period!

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And all this means one simple thing,
Saving money is going to be far more difficult in the future if it isn’t already!

Along with that, our dreams of that “someday when we have enough money and courage to go out and do things that really matter to us” also becomes a lot more distant.

If you haven’t realized it yet, the war against “our savings” and “our future dreams” has already begun and we have a group of very strong and intelligent enemies to fight against!

To ensure that we are well prepared for this war, let’s take the help of the famous war strategist Sun Tzu.

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So let’s decipher the first part of his advice..

Know Your Enemy:

Our enemies want us to save as little as possible and instead spend as much as possible. And unfortunately we have 4 of them

  1. Social Media 
  2. Digital Money
  3. Banks
  4. Marketers

So the first step is to know our 4 enemies well enough.

1. Social Media

It’s a normal mundane Wednesday evening. I open my Facebook feed. And these are few pics which pop out.

Immediate Reaction: “Whoa. When my friends are doing this, why not me ??”

Now this does two things- one it suddenly plants the temptation of a vacation in me (which wasn’t there earlier) and two it raises my aspirations to an international exotic location. But can I afford it ? Why worry. I have my credit card!!

A similar social pressure hits me every time I see some friend of mine showing off his new sedan, that Royal Enfield Himalayan, that new biker jacket, that awesome party,  that get together at the newly opened pub, that fancy meal at the new restaurant etc.

“Nearly 40% of American adults with social media accounts say that seeing other people’s purchases and vacations on social media have prompted them to look into similar purchases or vacations ” – American Institute of Certified Public Accountants.

So, more often than not we start comparing our lifestyle and spending habits to others via social media and end up spending money to  “keep up with our peers and our increased aspirations

The bad part is that the more number of people we start comparing ourselves to, the harder it becomes to keep up. This can lead to a feeling of financial inadequacy and a desire to spend money we might not have. The fact that many people are purposely projecting a more larger-than-life image on social media only adds to the woes.

Thus given the inherent aspirational nature of social media,  we encounter many budget-breaking temptations with increased time spent in social media and hence remains a strong enemy to “our savings”

Additional reading : 1) How social media sites make you spend more 2) Why social media makes us spend more money

2. Digital Money

Whenever you buy something, have you noticed that paying with cash feels a little different compared to paying with your credit card or debit card. Think about the last time a restaurant didn’t accept card payments and you had to pay in cash.

Did you notice that when you paid by cash instead of a credit or debit card it felt more painful though logically the amount still remains the same.

Welcome to the world of behavioral economics. This is a concept in behavioral economics known as the “pain of paying.”

Simply put, it says that

  • Whenever we part with our money it causes a feeling of agony or psychological “pain.”
  • This “pain” happens irrespective of how big or small the amount of money you are paying
  • This “pain” is higher if you pay in cash instead of credit card or an automatic payment 

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Strange.. Buy why?

  • It’s not exactly about using cash but rather about the transparency and tangibility of the payment
  • The more the transparent (read as visible) and tangible your payment is, the more is the “pain of payment”
  • The transparency of a payment in cash transactions where you can see the money moving out of one pocket and into a hand, increases the amount of pain of paying associated with a payment
  • On the other hand, the pain of paying is significantly reduced by electronic forms of payment (think digital wallet like Paytm, credit card, debit card etc) – which allow us to instantly receive pleasures of consumption while making payments even more invisible and intangible
  • Lower the transparency = Lower the pain = More money spent

“You’re not faced with actually spending that cash and to think about it. It kind of just disappears… It makes it easier to ignore what you’re paying, what your bank account looks like when you’re making that payment… You can avoid bad news easier.”
Queen’s University professor Nicole Robitaille

Key takeaway:

Though the amount is the same, it feels ‘less expensive’ and “less painful” to pay with the card or digital wallets  vis-a-vis cash

More money tends to be spent if you use an electronic payment vis-a-vis cash as the reduced pain of payment can lead us to spending more freely and not taking note of all our expenditures

If interested you can check out the video from the popular behavioral economist Dan Ariely to understand the concept in detail –

Current Scenario in India

  • No of mobile wallet users  > No of mobile banking users
  • No of mobile wallet users  > 3X no of credit card users
  • Total payments through digital instruments  – to increase 10X by 2020
  • Proportion of non-cash transactions is estimated to overtake cash by 2023
    Source: BCG-Google study

So going by the rate of adoption for digital wallets, in a few years from now, majority of our cash transactions would be replaced by digital wallets. The advent of domestic players such as Paytm, Mobikwik, global giants such as Apple Pay, Android pay and others will only add to the acceleration in adoption.

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The good news:
Digital payments simplify our lives by make spending hassle free, trackable and more flexible

The bad news:
However eliminating all the friction that comes with spending cash and swiping credit cards – i.e removing the “pain of paying” means that people will find it extremely easy to spend and as a corollary “saving for the future” becomes even more tougher.

“Saving money is already very hard. Do we really need to make the process of spending any easier?” – Dan Ariely and Merve Akbas

Thus digital payments is our second big enemy who will make us spend more (as spending becomes far more convenient and less painful) and thereby as a corollary “savings” that much more difficult!!

Additional Reading: Here’s proof you’ll be spending more money in 2016

3) Banks and other lenders

There is an additional element to the “pain of paying” concept.

The pain of paying is reduced when there is a period of time gap between when the purchase is made and when the money actually leaves your bank account.

This essentially means paying by your credit card or taking a loan via EMI (easy monthly installment) to purchase something, significantly reduces the guilt and pain associated with the spending and tempts us to spend more.


The pain of paying is further reduced as the payments are made in small installments


The Indian context

Our consumer debt is significantly low compared to other countries..

Retail Debt.png

Further, since the loans that Banks have lent to corporate companies haven’t fared well in the last few years (Eg Mr Mallya’s Kingfisher Airlines) most of them have turned their focus on us (i.e retail credit).


They want us to borrow more and spend more!!

Add to it the new breed of disruptive lenders who make it damn easy to borrow



Peer To Peer Lending India  Personal Loans   Lend or Borrow Money Online   Lendbox.jpeg

And a data rich future which will make it easier for many to take loans..

Source: www.exploringstartups.com & Link

Thus Banks and other lenders are our third enemy as they will tempt us to spend more and lure us into the EMI paying trap.


One of the basic assumptions that I got wrong in my life till date was that
“I was in control of all my purchase decisions and was rational” 

But thankfully after being introduced to behavioral finance and psychology, I slowly started realizing that most of my buying decisions are secretly manipulated by marketers.

The Science of How Marketers (and Politicians) Manipulate Us

Marketers know how to encourage us to spend and how to work out natural impulses to increase our willingness to part with our cash.

The topic on the techniques that they use is an ocean in itself. So, instead of reinventing the wheel, let me share a few mind blowing articles which will give you a sense of how our purchase decisions are being manipulated by clever marketers.

As seen above marketers have been developing several techniques over decades and will continue to develop new, more targeted and more sophisticated strategies to separate us from our money.

Out of all the four enemies, I personally think marketers are the most deadly and will be extremely difficult to consistently keep off from their manipulations.


Now an honest confession. While I have identified some of the most important enemies for our savings habit, at this juncture, however I do not have an exact solution on how to fight them.

So going back to Sun Tzu’s valuable advice:
Know your enemy and know yourself and you can fight a hundred battles without disaster”

Now while we have known our enemy, the next key step is to “Know Yourself” 

This means figuring out our various behavioral biases and decision making patterns which most often are exploited by our enemies to manipulate us.

I shall cover some important behavioral biases and their impact on our financial lives in the coming weeks. And most importantly on how we can attempt to give a strong fightback in this war against our savings.

If you like the content, it would be awesome if you could consider following the blog. 🙂

Till then happy investing as always!!