What Should Volkswagen Do Next?


Volkswagen Group AG has admitted to gaming U.S. Environmental Protection Agency diesel-emission control testing affecting some 2 million vehicles worldwide. As a result, Volkswagen has replaced its CEO, Martin Winterkorn, with former Porsche CEO, Matthias Mueller, continues to run TV ads for its non-diesel vehicles and prepares to weather a wide range of U.S. and German government fines and sanctions. It appears to not be dealing with its biggest risk, the continued and worsening “loss of confidence” in its vehicles by its consuming public. Such a loss of “faith,” if not dealt with directly, will become more severe as more details about the scandal become available and could require years, if not decades, to repair. Some are even speculating that its implications could spread to the German auto industry and Germany’s leadership role in the EU.

As behavioral scientists, we would define Volkswagen’s situation as a bias against the purchase of its vehicles resulting from the decline in the expected utility of its vehicles.

What does this mean for Volkswagen in the short and long term?

In the short term, the behavioral economic “causes” are:

Lack of Reciprocity and Fairness — Buyers were told that its diesel vehicles were both clean and efficient and now feel taken advantage of.

Loss Aversion — Buyers do not know who or how their vehicles will be brought into EPA compliance, thereby introducing the risk of additional repair cost and loss of resale value.

Violation of Social Norms — Potential buyers are being asked to assume the additional risk of social approbation with ownership.

In the longer term, the behavioral economic causes will be the result of generating “explanations” for wrongdoing and cognitive dissonance when no accurate explanations occur.

Negative Endowment — Simply stated, the “haves” (those running Volkswagen) appear “above me” because they still expect their vehicles to be bought without dealing with buyers’ concerns.

Cognitive Bias — These are full-blown explanations as to why the problem occurred and how and why it could happen again. It can include corporate culture and conspiracy theories and is the most difficult to overcome since it is both self-generated, based on gross generalizations, and projects them onto future events.

So what should Volkswagen be doing?

Step 1 — Take responsibility. Don’t wait for the U.S. EPA or Department of Justice to first make its case publicly, and then impose its fines, sanctions and punishments on the organization and individuals within it. Find out which employees did what and why and deal with them accordingly; explain it to the public and dealers; and let it be known that this type of behavior will not be tolerated. This isolates the problem, demonstrates it is not a “we-you” issue and clearly states that social norms are in common with the market and excludes other erroneous and more damaging explanations.

Step 2 — Apologize to current owners. Don’t sit back and give your owners time to distance themselves from the brand and communicate to others why they regret their purchase. This takes owners out of immediate loss aversion risk and demonstrates reciprocity and fairness in “making them whole.”

Step 3 — Stop promoting the sale of other vehicles. Don’t assume that the public is interested in buying your vehicles with so many unanswered questions. Wait until they hear the solution to the current problem. This negates negative endowment.

Step 4 — Take full corrective action. Communicate specific steps taken to ensure that this or a similar problem cannot occur in the future. Think big, on the order of an independent ethics audit, not just internal reviews. This minimizes cognitive bias by excluding speculation about future events.