Posts Tagged ‘Behavioral Economics’

You probably paid too much … especially if you’re bad at math.

August 14, 2012

Ac couple of weeks ago we reported a study that consumers almost invariably pick 33% more stuff than a 33% price discount.

Ouch.

Consumers are notoriously bad at spotting real values. Why?

According to the Atlantic ….

  • First: Consumers don’t know what the heck anything should cost, so we rely on parts of our brains that aren’t strictly quantitative.
  • Second: Although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.

More specifically, here are some more ways consumers end up paying too much …

  1. Anchoring Effect: People are heavily influenced by the first price we see … it’s called “anchoring” …  that’s why the appliance salesman shows you the most-featured, highest-priced appliance first … it makes every other appliance seem like deal.
  2. Aversion to Extremes: People are  terrified of extremes … they don’t like buying the cheapest item … or the most costly …  they shy away from prices that appear too high or too low.For example, in one famous study, people were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80.

    Around 80% chose the more expensive beer.

    When a third beer was introduced, a super bargain beer for $1.60, 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

    Then researchers removed the $1.60 beer and replaced with a super premium $3.40 beer.

    Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.

  3. Shining Light Effect: Savvy restaurants, for example, design their menus to draw our eyes to the most profitable items by things as simple as pictures and boxes.Good rule of thumb: If you see a course on the menu that’s highlighted, boxed, illustrated, or paired with a really expensive item, it’s probably a high-margin product that the restaurant hopes you’ll see and consider.
  4. Dulled senses: Alcohol narrows the range of complicating factors people can hold in their heads at once.  People are easily made dumber by alcohol, time, decisions.When we’re drunk, stressed, tired, and otherwise inattentive, we’re more likely to ask and answer simple questions about buying things.

    Cheap candy bars and gum are situated near the check-out at grocery stores because that’s where exhausted shoppers are most likely to indulge cravings without paying attention to price.

  5. Concealed habits: To save some $$$, cancel recurring payments like gym memberships and subscriptions to papers and services you don’t use.Cancelling is a hassle, right?

    So what?

    Cancel that subscription.

  6. Peace of mind… allows some companies to make more money on extended warranties and service contracts than they do on their productsExcept for PCs (high prices, risk of crashes), extended warranties don’t pay-off … otherwise, why would retailers push them so aggressively?

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Profitable pricing is literally “shrouded” in mystery…

July 20, 2012

A couple of years ago, behavioral economists Xavier Gabaix and  David Laibson wrote a seminal paper on the concept of “price shrouding,” and “information suppression”.

Here’s a summary excepted from The Red Tape Chronicles

The principle is simple, and shows why cheating is rampant in our markets and why honesty is rarely the best policy.

First, a definition of shrouding:

In days gone by, price tags were simple.

An apple cost 10 cents.  A cup of coffee cost $1.

But today, the consumer marketplace is far more complicated, giving sellers the opportunity to create confusion.

Many items have follow-up costs that make the original price tag meaningless.

Computer printers are the classic example.

You might get a great deal on a printer, but if the ink is expensive, you lose in the end.

In fact, Gabaix argues that it’s impossible for consumers to intelligently shop for printers.

No consumer knows how much ink costs — the cartridges don’t come in standard sizes, the amount of ink used to print varies and ink costs are unpredictable.

That makes the true price  “shrouded” — not quite hidden, but not quite clear, either

So, it’s easy for printer companies to lowball printer price tags and overcharge for ink, enabling them to print money.

Shrouded price tags are everywhere.

The hotel website might say “$99 a night” but you know the bill will be more like $120 or $130.

Pay TV companies promise $30-a-month service, which ends up costing more like $50.

At its best, the maddening mixture of coupons, rebates, sales and fine print fees can feel like a game.

At worst, it’s being cheated.

You’d think shoppers would love a chance to buy from a store that doesn’t play these games, the way car buyers (allegedly) like shopping at no-haggle auto dealerships.

They don’t.

Shoppers hunt for the tricks that let them save money.

Stores hide booby traps that let them take money.

If a firm tries to educate consumers on tricks and traps, and tries to offer an honest product, a funny thing happens: Consumers say, “Thank you for the tips,” and go back to the tricky companies, where they exploit the new knowledge to get cheaper prices, leaving the “honest” firm in the dust.

Once you educate consumers on the right way to shop, they will seek out the lowest cost store, and that will be the one with the shrouded prices.”

“Shrouding is the more profitable strategy.”

Like it or not, hidden fees – and secret discounts – are here to stay.

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Xmas tip: Wrap it up, dummy.

December 21, 2011

For Christmas, Behavioral Economists (you know, the guys who say we’re predictably irrational), say that gifts should be carefully wrapped.

Why?

First, wrapping adds a personal touch … showing that you care enough to select the right wrapping and put some sweat equity into the present.

Second, wrapping adds to the romance (broadly defined), suspense and ritualization … you know: the shaking of the present, the slow reveal, the shouts of joy.

So, (1) do it yourself (2) don’t use newspaper or birthday wrapping (3) don’t say “I wrapped it myself” … that’ll be obvious.

Inspired by: The Behavioral Economist’s Guide to Buying Presents

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Xmas tip: for guys: gadgets … for gals: something expensive (and useless)

December 21, 2011

For Christmas,  Behavioral Economists (you know, the guys who say we’re predictably irrational), advise getting “him” a gadget and getting “her” something expensive and useless.

Excerpted from: The Behavioral Economist’s Guide to Buying Presents

Buying for a guy? Get him a gadget. Buying for a girl? Get her something expensive and useless.

University of Utah Professors Russell Belk and Laurence Coon  found three main purposes for presents: social exchange, economic exchange, or a sign of “agapic” — that would be Greek for “selfless” — love.

In the social sense, gifts were seen as a symbol of commitment.

In the economic context, men saw gifts as a way to get sex.

Women, meanwhile, tended to be more agapic, giving out of the goodness of their hearts.

But what did men and women actually want?

Belk and Coon found women care about the symbolic value, whereas men are more interested in the utility.

So women are best off getting their guy a gadget.

Men are better off going sentimental. Or extravagant.

In his book The Mating Mind, University of New Mexico Professor Geoffrey Miller explained that  the best gifts are “the most useless to women and the most expensive to men.” Flowers. Pricey dinners. Jewelery.

The less useful, the better.

Waste is the most efficient way to a woman’s heart.

Hey, I’m just reporting …

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I paid more, so it must be better …

December 1, 2011

Punch line: Sometimes people do perceive that higher priced products are better – even when they’re not.  They’re subconsciously using price as a “quality cue”.

* * * * *
Excerpted from Free Market Madness by Peter Ubel

Standard economic theory holds that consumers independently evaluate the quality of a product and its price in order to make trade-offs between quality and price. According to this theory, people will be willing to pay more for product A than B if they perceive that A is better than B.

But consider the following experiment, in which

Researchers gave 125 people a beverage that claims to increase mental acuity, and then asked them to solve a series of word-jumble puzzles.

They informed people that the regular price of the beverage was $1.89.

However, they sold the drink at a discounted price of $0.89 to half the participants, selected randomly.

The researchers found that people in the discounted-price group not only reported lower expectations of the drink than those in the full-price group, but also performed significantly worse on the puzzle task, correctly solving 20% fewer puzzles.

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Sorry, the other guy gets first dibs …

November 30, 2011

Punch line: Few things are more attractive than those that are unavailable or in scarce supply. Tell someone that they can’t have something, and they will be much more likely to desire it.

In his book Influence, Robert Cialdini describes a trick his brother employed to sell used cars that relied on the psychological power of scarcity. 

He would place an ad in the paper, inviting people to set up a time to look at the car. 

When the first person would call, he would set up a time to meet, say, one o’clock on the following Saturday.

When the second person would call, he would set up another meeting at exactly the same  time. The first customer would arrive and start looking at the car, skeptically kicking its tires, pointing out its flaws, working hard to  ratchet down the price.

Then, inevitably, the second customer would arrive and Cialdini’s brother would tell him to “wait  just a few minutes,” the other customer had first dibs on the car. 

Cialdini’s brother had brilliantly manipulated the situation to make  the car look popular and to ramp up people’s competitive juices. 

That’s why response rates go up when  “only the first five hundred respondents …” .

Excerpted from Free Market Madness by Peter Ubel

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