Previously, I posted about the effects of Loss Aversion. It sparked some great conversations with dealer partners and industry colleagues alike.  As a follow-up, I’d like to share some additional biases I have seen while working with dealerships over the past seven years, and provide real examples, along with potential pitfalls that can follow these biases.  I will touch on automotive scenarios that tie to these biases and provide external references for those who want to read more.  As an added bonus, our favorite rock band Kahneman and Tversky will make an encore appearance!

Recency Bias

I recently met with the used inventory team of a major dealer group in the Midwest, and one of the sales leaders offered a great example of Recency Bias: “I want to get out of the habit of selling a car, making a good spread on it, then running out to buy five more of that car to try and repeat its success,” he said. This is a perfect example of a dangerous outcome that can be realized when falling victim to Recency Bias.  From the time you stocked that VIN to the time you sold it, the market changed.  Other dealers in your area may have stocked similar VINs, consumer behavior may have changed or an influx of the same MMYT may be coming through in wholesale channels.  Before jumping back into another matching VIN, take the time to do your due diligence on the market to ensure you have a high probability of selling another matching VIN, which ensures that there isn’t a better high-probability option out there.

Negativity Bias

I was on a dealer visit with one of our account execs when she suggested a certain type of MMYT to one of our dealer partners.  “We think there is a demand shortage in your market for this type of vehicle, and based on our data, you should be a prime candidate to move this type of off-brand vehicle,” she said.  Unfortunately, this was the response: “I bought one of those four years ago and got burned.  I’ll never stock (insert brand) again!”  Negativity Bias leads back to our buddies Kahneman and Tversky, falling under the Loss Aversion umbrella.  When we experience events with negative outcomes, they have a more profound effect on our psychological processes than positive events.  This means that when this evil little VIN breaks our hearts and gets us in trouble, we immediately dismiss it as a viable option for our current and future states.  There are many reasons a VIN can lead to a bad result on a dealer’s lot, and with rare exception, it should never lead to a team member automatically eliminating that MMYT forever.  Whatever happened one, five or 10 years ago is ancient history; things have most definitely changed.  You may have even worked at a different franchised dealer brand or independent lot not positioned to move that VIN.  Don’t let one negative result influence your future decisions!

Overconfidence Effect

Many of the most important decision makers within a dealership are seasoned veterans of the industry, men and women who have spent years learning the ins and outs of the dealership, their markets and their customers.  Experience can be a great teacher, but a potential side effect of more experience is a narrower focus on what is possible, what information is available now and how we can be better at our professions. When speaking with dealer partners about our data-driven approach to identifying used vehicles and explaining why and how we come to those conclusions, we sometimes hear, “I buy based on my gut, and it’s been working well so far.” Or,“I’ve been doing this for 20 years and I know what sells.”  These should not be viewed as competing positions, but rather complementary ones.  You can strengthen your performance by adding data to your experience and expanding your decision-making arsenal. I am not suggesting you ignore lessons learned based on experience. I am stating that we all need to be open to the fact that the only constant in life is change.  Whatever we have learned as a result of experience should constantly be challenged to ensure our knowledge is still relevant and understand how we can improve.  The Overconfidence Effect is the barrier to growth, and falling victim to that bias can let your competition leap-frog your performance. 

Confirmation Bias

Following suit from the Overconfidence Effect is one of the most prominent biases in this list, the Confirmation Bias.  We are prone to search out information that strengthens our current position as opposed to challenging it, whether that information is from outside sources or from our own memory.  I was once in a friendly debate with a GM about getting out of a VIN that had been on the lot for more than 60 days.  In order to prove his point, he called in his used car manager, Mike, to whom he said, “Mike, you’re going to sell this retail right?” After which, Mike replied, “You bet, we sold the same type of car a month back and this one is ready to go next.”  So the GM called in someone with an obvious bias to sell this car and that person’s argument was that he sold a similar one, so based on that experience this one will sell too.  They doubled down on confirmation bias in one conversation.  After flipping the script to focus on reasons why this VIN wouldn’t sell, we started to punch some holes in the viability of this VIN being a profitable exit via retail.  The end result was a seven-day timeline to sell retail, or else DRIVIN would find a dealer who needed to stock that VIN, avoiding auction fees and transport.  While the VIN didn’t end up going retail, the partnership with DRIVIN minimized loss on that VIN and we were able to target a better VIN for their current lot makeup. 

Outcome Bias

Let’s play a game.  I am going to roll a standard six-sided die, and if it comes up one or six you give me $20. If not, I give you $20.   Deal?  Of course you take this bet.  Assuming that the die isn’t loaded you have twice the likelihood of winning as I do, for the same amount of money bet on each side.  We roll the die, and sure enough, a six is rolled.  You lose; I win.  Does that mean you made a poor bet?  No! The outcome was poor but the decision was sound, and in the future you would make that bet again and again – at least until I went broke.  The same goes for buying used inventory for your lot.  A vehicle can be primed to sell for all the right reasons, and sometimes the VIN just misses.  The opposite can also take place, where luck is on your side and suddenly you have the desire to repeat that win, even though the odds are against you.  It is imperative to focus on the process of making that stocking decision and not focus on individual outcomes.  Not every VIN you stock is going to be a homerun; sometimes you’ll strike out, but as long as the process you have in place continues to help you improve your inventory stocking decisions, you continue down this path. 

Conclusion:

Iterative improvements lead to the impactful changes dealers can make and they must realize that as long as you’re doing better than you were before, that is a good thing.  Biases can impede this progress, causing us to revert to the old way of doing things even though we can always find ways to improve. No matter how much we embrace change, it leads us to the unknown. I encourage all of our dealer partners to continue be cognizant of these biases on their respective roads to improved used retail sales.