UUCF Summer RE 2011

1. UUCF Summer RE 2011 Brain Glitches Session 6: Anchoring Bias And the Decoy Effect

2. Quiz Do not look any of the answers up or ask for help. This is about your best guesses. 1. a) Please write down the last two digits of your telephone number here $_________.00 b) How much would you be willing to pay for a download of the hottest new computer game? $_________.00 2. a) Do you think the population of Venezuela is more or less than 75 million people? (check one) _________ more __________ less b) Please give your best estimate of the population of Venezuela : _________ million • Suppose you were interested in subscribing to a magazine on one of your favorite activities. Assuming you could afford either one, which one of these choices would you pick? _____ a) online edition: $49.00 per year _____ b) print edition: $129.00 per year _____ c) special deal – both print and online versions for only $129.00 per year!

3. Anchoring Bias Suppose you see a really fabulous leather coat in a store. Maybe like one of these.

4. You try it on. It’s the best coat you’ve ever seen. It fits like a dream. It feels wonderful. You WANT this coat! So you check the price: YEOWCH!!!! $1000

5. But the friendly salesperson is right there to help you. “Its usually $1000, but we are having a really big sale. Today only, its $400.” Wow. It’s a bargain, right? Really?

6. Would you normally have walked into a store, paid $400 for a coat, and walked out thinking you got a bargain? No? What’s going on here? It’s something called the “Anchoring effect”.

7. Let’s look at the quiz I handed out at the beginning of class, and at the question about the population of Venezuela. What was your answer?

8. Most people, when asked questions of this sort are likely to give an answer somewhere around the number given, in this case 75 million. That number has no relation to the correct answer. The population of Venezuela is around 28 million. How did you do?

9. What’s going on here? When your brain is asked to assign a numerical value to something, and you really have no idea what that value really should be, your brain looks around for a comparison. And once you have that comparison number in your head, it affects what you are thinking, even when it’s an irrelevant number.

10. Lets look at another example. How much did you say the computer game was worth? The number you wrote down just above it was random, with no relation to what the price should be. Should it have had an effect on you? Did it?

11. A research study in 2006 tested this idea with a mock auction. The researchers would hold up a bottle of wine, or a textbook, or a cordless trackball and then describe in detail how awesome it was. Then, each student had to write down the last two digits of their social security number as if it was the price of the item. If the last two digits were 11, then the bottle of wine was priced at $11. If the two numbers were 88, the cordless trackball was $88. After they wrote down the pretend price, they bid.

12. Sure enough, the anchoring effect scrambled their ability to judge the value of the items. People with high social security numbers paid up to 346 percent more than those with low numbers. People with numbers from 80 to 99 paid on average $26 for the trackball, while those with 00 to 19 paid around $9.

13. One more example: Black pearls. Pretty, right? Are they worth more or less than regular pearls?

14. In the 1970’s, when these pearls were first introduced, people had no idea whether these should be more or less expensive than regular white pearls. But – jewelers know about the anchoring effect. Harry Winston Jewelers (of Hope Diamond fame) put the pearls in expensive settings and put them on display next to other fabulous pieces of jewelry. Like this:

15. Now Tahitian black pearls are an expensive luxury item. Not because they really have more value than other pearls, but because jewelers have gotten us to think they do. Do marketers use this on us? All the time! $19.95 sounds cheap RIGHT? $19.95!!

16. Just 3 Easy Payments of $19.95! (plus s&h) (OK, $19.95 is about $20. So that’s really about $60 total, plus about $10 shipping, so we’re talking $70 here.)

17. We’ll throw in this! And this thing! And a bunch of these! (Just pay separate shipping and handling for each) NOW HOW MUCH WOULD YOU PAY?

18. By the time they are done throwing in free junk, with all the shipping and tax, you are paying maybe $100 for a pile of stuff you don’t need. But they got you to anchor on a number ($19.95) that sounds like a sweet deal, and never mentioned another dollar figure. They just keep repeating $19.95 over and over again. Does this only apply to money?

19. In a 1975 study researchers asked a group of students to volunteer as camp counselors two hours per week for two years. They all said no. The researchers followed up by asking if they would volunteer to supervise a single two-hour trip. Half said yes. Without first asking for the two-year commitment, only 17 percent agreed.

20. Marketing people know about this effect, and they will use it against you. But it can work for or against you in other ways, too. Try this. You are applying for a job, and negotiating a salary. Suppose you let your employer suggest a salary, and he says $30,000 is about right. You think that’s low.

21. “Can you do better?” you say “Well, since you’re well qualified, I can increase that by 10%” And you get offered a salary of $33,000. Now say you take the lead instead. “I think $40,000 is an appropriate salary for this job” you say. “That’s a little high. I can do it if we take 10% off of that figure”

22. So you get a job offer for $36,000. Either way, the boss would only move 10% off the number in his head, but when you put a number in there before he could fix on one of his own, you came out $3,000 better. If you are aware of the anchoring effect, you can use it in your favor, and catch when people are using it on you!

23. Decoy Effect When bread machines first came out, they looked really cool. One store was having trouble selling them, though. They had a good machine for a moderate price. What was wrong? $$

24. They asked a marketer what to do. The marketer said: get a few really nice expensive machines and put them on display too. $$ $$$$

25. The new expensive machines didn’t sell at all. But the lower priced ones started to sell! Because now people had a point of comparison, a place to start from in figuring out whether something was priced fairly.

26. We Rely on Comparisons Now back to our quiz: • online edition: $49.00 per year • print edition: $129.00 per year • both print and online editions: $129.00 per year! What’s up with this? Do they really expect people to buy the print only edition?

27. No, of course they don’t! But researcher Dan Ariely saw this and tried an experiment. He gave one group the choice we had above. He gave a second group this choice: • online edition: $49.00 per year • print and online versions: $129.00 per year How do you think this experiment came out?

28. Nobody bought the expensive print only edition. But when there were only two choices offered, fewer people took the more expensive choice. Adding the decoy option got more people to choose the more expensive one. Watch for this, it gets used all the time. Nobody actually takes the decoy, but it changes the choices people make.

29. Decoys don’t have to be just money! Here’s another study. Face A and Face B are about the same attractiveness. Face –A is Face A Photoshopped to look uglier. Same deal on Face -B

30. Women were shown one column of faces only, and asked who would you rather go out with? When presented with A, -A and B, more women chose A. When shown A, -B and B more women chose B. Nobody chose the ugly faces.

31. When presented with a hard choice between equally good things, we look for a comparison. And when the comparison is similar, but not as good as, one of our other choices, it makes that choice look better. Even when it isn’t. $500,000 $490,000 $500,000 needs repairs

32. Related Ideas We put more value on things that belong to us than on other similar things. Even if those objects are pretty much identical. How much would you pay for a used Nintendo DS? How much would someone have to pay you for your DS for you to sell it? Are these two numbers different? Why?

33. Significant Objects We attach significance to objects that has nothing to do with their actual value. Supposing you are cold, and a friend offers you a sweater:

34. Do you put the sweater on? If it’s a new sweater? How about if it’s his favorite sweater?

35. Do you put the sweater on? If it’s from a thrift store? How about if it belonged To his uncle who died last week?

36. Do you put the sweater on? If it’s George Clooney’s sweater? Hitler’s sweater? It’s just as warm. Do you put it on?

37. In each case the sweater will keep you just as warm. It’s the same sweater. But how we feel about objects gets mixed up with how valuable or useful they are. Sometimes we cling to things we shouldn’t or avoid things that would be really useful because of this.

38. Loss Aversion And we really don’t like losing things. We call this “loss aversion”. Getting $100 is great. But losing $100 sucks. Really sucks. We’ve found out from research that people think losing $100 sucks way worse than not getting $100 in the first place. So people often pass up opportunities for getting something good, because they don’t want to let go of what they have. Even if what they have isn’t really that great to begin with. (This goes back to the sunk cost fallacy from last week.)

39. One last example Suppose you are headed to the movies and a ticket costs $10.00.

40. Scenario A: You get to the theater and realize that you lost a $10.00 bill on the way. Do you still buy a ticket and see the movie? Scenario B: You buy your ticket in advance, but when you get to the theater you’ve lost it. Do you buy another ticket and see the movie anyway? Are your answers different?

41. Watch out! Watch out for these things that might cause you to make bad decisions: • Anchoring • Decoys • “Mine!” • Loss Aversion Remember, to debug your brain, you need to know about the glitches in the system!