Audio Software icon An illustration of a 3. Software Images icon An illustration of two photographs. Images Donate icon An illustration of a heart shape Donate Ellipses icon An illustration of text ellipses. EMBED for wordpress. Want more? Advanced embedding details, examples, and help! Why do our headaches persist after taking a one-cent aspirin but disappear when we take a cent aspirin?
Why does recalling the Ten Commandments reduce our tendency to lie, even when we couldn't possibly be caught? Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup?
Why do we go back for second helpings at the unlimited buffet, even when our stomachs are already full? This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More. Close Privacy Overview This website uses cookies to improve your experience while you navigate through the website.
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These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience. These individuals told themselves, "Well, I listened previously to that annoying sound for a high amount. So since I said a high amount for the previous one, I guess I could bear this sound for about the same price.
There was one more step to this experiment. This time we had our participants listen to the oscillating sound that rose and fell in pitch for 30 seconds. We asked our cents group, "Hypothetically, would you listen to this sound again for 90 cents?
Once again, the participants typed in yes or no. Then we asked them for real bids: "How much would it take for you to listen to this again? Which one of these would have the largest influence on the price they demanded to listen to the sound? Those who had first encountered the cent anchor accepted low prices, even after 90 cents was suggested as the anchor.
What did we show? That our first decisions resonate over a long sequence of decisions. To illustrate this process, consider this example. You're walking past a restaurant, and you see two people standing in line, waiting to get in.
He sees three people standing in line and thinks, "This must be a fantastic restaurant," and joins the line. Others join. We call this type of behavior herding. It happens when we assume that something is good or bad on the basis of other people's previous behavior, and our own actions follow suit.
This happens when we believe something is good or bad on the basis of our own previous behavior. Does that make sense? Let me explain. I assume that nearly everyone has had this experience, since Starbucks sits on every corner in America.
You are sleepy and in desperate need of a liquid energy boost as you embark on an errand one afternoon. You glance through the windows at Starbucks and walk in.
The prices of the coffee are a shock—you've been blissfully drinking the brew at Dunkin' Donuts for years. But since you have walked in and are now curious about what coffee at this price might taste like, you surprise yourself: you buy a small coffee, enjoy its taste and its effect on you, and walk out. The following week you walk by Starbucks again. Should you go in? The ideal decision-making process should take into account the quality of the coffee Starbucks versus Dunkin' Donuts ; the prices at the two places; and, of course, the cost or value of walking a few more blocks to get to Dunkin' Donuts.
In doing so, you just became the second person in line, standing behind yourself. You become the third person in line, standing behind yourself. Buying coffee at Starbucks has become a habit with you. Now that you have gotten used to paying more for coffee, and have bumped yourself up onto a new curve of consumption, other changes also become simpler.
Even though you don't know how you got into this price bracket in the first place, moving to a larger coffee at a rela- tively greater price seems pretty logical. If you stopped to think about this, it would not be clear whether you should be spending all this money on coffee at Starbucks instead of getting cheaper coffee at Dunkin' Do- nuts or even free coffee at the office. But you don't think about these trade-offs anymore.
You've already made this decision many times in the past, so you now assume that this is the way you want to spend your money. You've herded yourself—lining up behind your initial experience at Starbucks—and now you're part of the crowd. If anchor- ing is based on our initial decisions, how did Starbucks man- age to become an initial decision in the first place? In other words, if we were previously anchored to the prices at Dunkin' Donuts, how did we move our anchor to Starbucks?
This is where it gets really interesting. He worked diligently to separate Starbucks from other coffee shops, not through price but through ambience. Accordingly, he designed Starbucks from the very beginning to feel like a continental coffeehouse.
The early shops were fragrant with the smell of roasted beans and better-quality roasted beans than those at Dunkin' Donuts. They sold fancy French coffee presses. T h e show- cases presented alluring snacks—almond croissants, biscotti, raspberry custard pastries, and others.
Starbucks did everything in its power, in other words, to make the experience feel different—so dif- ferent that we would not use the prices at Dunkin' Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us. And that, to a great extent, is how Starbucks succeeded. This time, we had a different twist to explore. Do you remember the famous episode in The Adventures of Tom Sawyer, the one in which Tom turned the whitewash- ing of Aunt Polly's fence into an exercise in manipulating his friends?
As I'm sure you recall, Tom applied the paint with gusto, pretending to enjoy the job. Could we do the same? We thought we'd give it a try. One day, to the surprise of my students, I opened the day's lecture on managerial psychology with a poetry selection, a few lines of "Whoever you are holding me now in hand" from Walt Whitman's Leaves of Grass: Whoever you are holding me now in hand, Without one thing all will be useless, I give you fair warning before you attempt me further, I am not what you supposed, but far different.
Who is he that would become my follower? Who would sign himself a candidate for my affections? After closing the book, I told the students that I would be conducting three readings from Walt Whitman's Leaves of Grass that Friday evening: one short, one medium, and one long. Owing to limited space, I told them, I had decided to hold an auction to determine who could attend. I passed out sheets of paper so that they could bid for a space; but before they did so, I had a question to ask them.
This, of course, served as the anchor. Now I asked the students to bid for a spot at my poetry reading. Do you think the initial anchor influenced the ensuing bids? Before I tell you, consider two things. First, my skills at reading poetry are not of the first order. So asking someone to pay me for 10 minutes of it could be considered a stretch. Second, even though I asked half of the students if they would pay me for the privilege of attending the recitation, they didn't have to bid that way.
They could have turned the tables completely and demanded that I pay them. And now to the results drumroll, please. They offered, on average, to pay me about a dollar for the short poetry reading, about two dollars for the medium poetry reading, and a bit more than three dollars for the long poetry reading.
Maybe I could make a living outside academe after all. But once the first impression had been formed that they would pay me or that I would pay them , the die was cast and the anchor set. Moreover, once the first decision had been made, other decisions followed in what seemed to be a logical and coherent manner. For one, they illustrate the many choices we make, from the trivial to the profound, in which anchoring plays a role.
According to economic theory, we base these decisions on our fundamental values—our likes and dislikes. But what are the main lessons from these experiments about our lives in general? Could it be that we made arbitrary decisions at some point in the past like the goslings that adopted Lorenz as their parent and have built our lives on them ever since, assuming that the original decisions were wise?
Is that how we chose our careers, our spouses, the clothes we wear, and the way we style our hair? Were they smart decisions in the first place? Or were they partially random first imprints that have run wild?
Descartes said, Cogito ergo sum—"I think, therefore I am. What then? You might begin by questioning that habit. How did it begin? Second, ask yourself what amount of pleasure you will be getting out of it. Is the pleasure as much as you thought you would get? Could you cut back a little and better spend the remaining money on something else? In the case of the cell phone, could you take a step back from the cutting edge, reduce your outlay, and use some of the money for something else?
And as for the coffee—rather than asking which blend of coffee you will have today, ask yourself whether you should even be having that habitual cup of expensive coffee at all.
Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention. Socrates said that the unexamined life is not worth living.
Perhaps it's time to inventory the imprints and anchors in our own life. Even if they once were completely reasonable, are they still reasonable? That seems to make sense. Traditional economics assumes that prices of products in the market are determined by a balance between two forces: production at each price supply and the desires of those with purchasing power at each price demand.
The price at which these two forces meet determines the prices in the marketplace. The results of all the experiments presented in this chapter and the basic idea of arbitrary coherence itself challenge these assumptions. First, according to the standard economic framework, consumers' willingness to pay is one of the two inputs that determine market prices this is the demand. But as our experiments demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don't in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences.
What this means is that demand is not, in fact, a completely separate force from supply. Here is an illustration of this idea. Now imagine that two new taxes will be introduced tomorrow. One will cut the price of wine by 50 percent, and the other will increase the price of milk by percent. What do you think will happen?
These price changes will surely affect consumption, and many people will walk around slightly happier and with less calcium. But now imagine this. What if the new taxes are accompanied by induced amnesia for the previous prices of wine and milk? Under conventional economic theory, this should cut demand.
But would it? Moreover, much as in the example of Starbucks, this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel such as corn-based ethanol fuel. I am not suggesting that doubling the price of gasoline would have no effect on consumers' demand.
But I do believe that in the long term, it would have a much smaller influence on demand than would be assumed from just observing the short-term market reactions to price increases.
The basic idea of the free market is that if I have something that you value more than I do—let's say a sofa—trading this item will benefit both of us. In other words, in many cases we make decisions in the marketplace that may not reflect how much pleasure we can get from different items. Now, if we can't accurately compute these pleasure values, but frequently follow arbitrary anchors instead, then it is not clear that the opportunity to trade is necessarily going to make us better off.
If anchors and memories of these anchors—but not preferences— determine our behavior, why would trading be hailed as the key to maximizing personal happiness utility? Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account. What about all those F R E E! And what about the worthless F R E E!
It's no secret that getting something free feels very good. Zero is not just another price, it turns out. Would you buy something if it were discounted from 50 cents to 20 cents?
Would you buy it if it were discounted from 50 cents to two cents? You bet! After all, F R E E! For instance, have you ever gathered up free pencils, key chains, and notepads at a conference, even though you'd have to carry them home and would only throw most of them away? Have you ever stood in line for a very long time too long , just to get a free cone of Ben and Jerry's ice cream? Or have you bought two of a product that you wouldn't have chosen in the first place, just to get the third one for free?
The Babylonians invented the concept of zero; the ancient Greeks debated it in lofty terms how could something be nothing? But zero really found its place about AD , when the Indian astronomer Aryabhata sat up in bed one morning and exclaimed, "Sthanam sthanam dasa gunam"— which translates, roughly, as "Place to place in 10 times in value. So much for a brief recounting of the history of zero. But the concept of zero applied to money is less clearly understood. In fact, I don't think it even has a history.
Nonetheless, FREE! As you have undoubtedly guessed by now, this procedure is called an experiment. Well, sort of. We set up a table at a large public building and offered two kinds of chocolates—Lindt truffles and Hershey's Kisses. Lindt's chocolate truffles are particularly prized— exquisitely creamy and just about irresistible. They cost about 30 cents each when we buy them in bulk. Hershey's Kisses, on the other hand, are good little chocolates, but let's face it, they are rather ordinary: Hershey cranks out 80 million Kisses a day.
In Hershey, Pennsylvania, even the streetlamps are made in the shape of the ubiquitous Hershey's Kiss. About 73 percent of them chose the truffle and 27 percent chose a Kiss. Now we decided to see how F R E E!
So we offered the Lindt truffle for 14 cents and the Kisses free. Would there be a difference? Should there be? After all, we had merely lowered the price of both kinds of chocolate by one cent.
But what a difference F R E E! The humble Hershey's Kiss became a big favorite. Some 69 percent of our customers up from 27 percent before chose the F R E E! Kiss, giving up the opportunity to get the Lindt truffle for a very good price. What was going on here? First of all, let me say that there are many times when getting F R E E! If you find a bin of free athletic socks at a department store, for instance, there's no downside to grabbing all the socks you can.
The critical issue arises when F R E E! For instance, imagine going to a sports store to buy a pair of white socks, the kind with a nicely padded heel and a gold toe. This is a case in which you gave up a better deal and settled for something that was not what you wanted, just because you were lured by the F R E E! It was an either-or decision, like choosing one kind of athletic sock over another. That's what made the customers' reaction to the FREE!
Kiss so dramatic: Both chocolates were discounted by the same amount of money. The relative price difference between the two was unchanged—and so was the expected pleasure from both. According to standard economic theory simple cost- benefit analysis , then, the price reduction should not lead to any change in the behavior of our customers. Before, about 27 percent chose the Kiss and 73 percent chose the truffle.
And since nothing had changed in relative terms, the response to the price reduction should have been exactly the same. H O W strange but predictable we humans are! In one case we priced the Hershey's Kiss at two cents, one cent, and zero cents, while pricing the truffle correspondingly at 27 cents, 26 cents, and 25 cents. It didn't. But, once again, when we lowered the price of the Kiss to free, the reaction was dramatic.
We decided that perhaps the experiment had been tainted, since shoppers may not feel like searching for change in a purse or backpack, or they may not have any money on them. Such an effect would artificially make the free offer seem more attractive.
What happened? The students still went overwhelmingly for the F R E E! Why do we have an irrational urge to jump for a F R E E! I believe the answer is this. I think it's because humans are intrinsically afraid of loss. The real allure of F R E E! There's no visible possibility of loss when we choose a F R E E!
But suppose we choose the item that's not free. And so, given the choice, we go for what is free. This, the zero price effect, is in a category all its own. To be sure, "buying something for nothing" is a bit of an oxymoron. I recently saw a newspaper ad from a major electronics maker, offering me seven FREE!
First of all, do I need a high-definition player right now? Probably not. Second, the D V D maker had a clear agenda behind its offer. This company's high-definition D V D system is in cutthroat competition with Blu-Ray, a system backed by many other manufacturers. Those are two rational thoughts that might prevent us from falling under the spell of F R E E!
But, gee, those FREE! DVDS certainly look good! But what would happen if the offer was not a free price, but a free exchange? This time I wouldn't even have to leave my home to get my answers. Early in the evening, Joey, a nine-year-old kid dressed as Spider-Man and carrying a large yellow bag, climbed the stairs of our front porch. His mother accompanied him, to ensure that no one gave her kid an apple with a razor blade inside.
She stayed on the sidewalk, however, to give Joey the feeling that he was trick-or-treating by himself. After the traditional query, "Trick or treat? I placed three Hershey's Kisses in his palm and asked him to hold them there for a moment. And if you give me two of your Hershey's Kisses, I will give you this larger Snickers bar.
The small Snickers bar weighed one ounce, and the large Snickers bar weighed two ounces. All Joey had to do was give me one additional Hershey's Kiss about 0.
This deal might have stumped a rocket scientist, but for a nine-year-old boy, the computation was easy: he'd get more than six times the return on investment in the net weight of chocolate if he went for the larger Snickers bar.
In a flash Joey put two of his Kisses into my hand, took the two-ounce Snickers bar, and dropped it into his bag. Joey wasn't alone in making this snap decision.
Zoe was the next kid to walk down the street. She was dressed as a princess, in a long white dress, with a magic wand in one hand and an orange Halloween pumpkin bucket in the other. Her younger sister was resting comfortably in their father's arms, looking cute and cuddly in her bunny outfit.
As they approached, Zoe called out, in a high, cute voice, "Trick or treat! In this case I gave Zoe her treat—three Hershey's Kisses. But I did have a trick up my sleeve. On an ounce-for-ounce comparison, it was far better to give up one additional Hershey's Kiss and get the larger Snickers bar two ounces instead of a smaller Snickers bar one ounce.
This logic was perfectly clear to J o e and the kids who encountered the condition in which both Snickers bars had a cost. But what would Z o e do? Would her clever kid's mind make that rational choice—or would the fact that the small Snickers bar was F R E E!
About 70 percent of them gave up the better deal, and took the worse deal just because it was F R E E! Indeed, the draw of zero cost is not limited to monetary transactions.
Whether it's products or money, we just can't resist the gravitational pull of F R E E! Here's a quiz. Think quickly. Which would you take? If you jumped for the F R E E! A few years ago, Amazon. Some of the purchasers probably didn't want the second book and I am talking here from personal experience but the F R E E! Is the French consumer more rational than the rest of us?
Rather, it turned out, the French customers were reacting to a different deal. Here's what happened. Instead of offering F R E E! Just one franc— about 20 cents.
This doesn't seem very different from F R E E! In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase. In preparation for the new price structure, AOL geared up for what it estimated would be a small increase in demand.
What did it get? An overnight increase from , to 2 3 6 , 0 0 0 customers logging into the system, and a doubling of the average time online. That may seem good—but it wasn't good. But if the five-dollar checking account includes free traveler's checks, online billing, etc. Similarly, we might choose a mortgage with no closing costs, but with interest rates and fees that are off the wall; and we might get a product we don't really want simply because it comes with a free gift.
My most recent personal encounter with this involved a car. When I was looking for a new car a few years ago, I knew that I really should buy a minivan. In fact, I had read up on Honda minivans and knew all about them. How could I resist? To be perfectly honest, the Audi was sporty and red, and I was still resisting the idea of being a mature and responsible father to two young kids.
It wasn't as if the free oil change completely swayed me, but its influence on me was, from a rational perspective, unjustifiably large. Just because it was F R E E! O f course, with a cooler head I might have made a more rational calculation. It gets worse, though: now I have an Audi that is packed to the ceiling with action figures, a stroller, a bike, and other kids' paraphernalia. Oh, for a minivan. Time spent on one activity, after all, is time taken away from another.
So if we spend 45 minutes in a line waiting for our turn to get a F R E E! My favorite personal example is free-entrance day at a museum. Despite the fact that most museums are not very expensive, I find it much more appealing to satisfy my desire for art when the price is zero. O f course I am not alone in this desire. So on these days I usually find that the museum is overcrowded, the line is long, it is hard to see anything, and fighting the crowds around the museum and in the cafeteria is unpleasant.
You bet I do—but I go nevertheless. Food manufacturers have to convey all kinds of information on the side of the box. They have to tell us about the calories, fat content, fiber, etc. If the same general rules apply, Pepsi will sell more cans if the label says "zero calories" than if it says "one calorie.
With one brand you get a calorie-free beer, and with another you get a three-calorie beer. Which brand will make you feel that you are drinking a really light beer? Even though the difference between the two beers is negligible, the zero-calorie beer will increase the feeling that you're doing the right thing, healthwise.
You might even feel so good that you go ahead and order a plate of fries. Think how powerful that idea is! Zero is not just another discount. T h e difference between two cents and one cent is small.
But the difference between one cent and zero is huge! If you are in business, and understand that, you can do some marvelous things. Want to draw a crowd? Want to sell more products? Make part of the purchase F R E E! Similarly, we can use F R E E! Want people to drive electric cars? In the same way, if health is your concern, focus on early detection as a way to eliminate the progression of severe illnesses. Don't just decrease the cost by decreasing the co-pay.
I don't think most policy strategists realize that F R E E! But when we stop to think about it, F R E E! How would this look when the cost of the Lindt truffle was 15 cents and the cost of the Hershey's Kiss was one cent? This would give him a total expected pleasure of 35 pleasure units 5 0 - 1 5 for the truffle, and a total expected pleasure of four pleasure units 5 - 1 for the Kiss.
The truffle leads by 31 points, so it's an easy choice—the truffle wins hands down. What about the case when the cost is reduced by the same amount for both products? Truffles cost 14 cents and the Kiss is free. The same logic applies. The taste of the chocolates has not changed, so the rational consumer would estimate the pleasure to be 50 and five pleasure units, respectively.
What has changed is the displeasure. In this setting the rational consumer would have a lower level of displeasure for both chocolates because the prices have been reduced by one cent and one displeasure unit. T h e truffle leads by the same 31 points, so it should be the same easy choice. The truffle wins hands down. This is how the pattern of choice should look, if the only forces at play were those of a rational cost-benefit analysis. The turkey is roasted to a golden brown; the stuffing is homemade and exactly the way you like it.
Your kids are delighted: the sweet potatoes are crowned with marshmallows. And your wife is flattered: her favorite recipe for pumpkin pie has been chosen for dessert. The festivities continue into the late afternoon.
You loosen your belt and sip a glass of wine. Gazing fondly across the table at your mother-in-law, you rise to your feet and pull out your wallet. As silence descends on the gathering, you wave a handful of bills. No, wait, I should give you four hundred! Next year's Thanksgiving celebration, it seems, may be a frozen dinner in front of the television set.
As Margaret Clark, Judson Mills, and Alan Fiske suggested a long time ago, the answer is that we live simultaneously in two different worlds— one where social norms prevail, and the other where market norms make the rules. The social norms include the friendly requests that people make of one another. Could you help me move this couch?
Could you help me change this tire? Social norms are wrapped up in our social nature and our need for community. They are usually warm and fuzzy. It's like opening a door for someone: it provides pleasure for both of you, and reciprocity is not immediately required. The second world, the one governed by market norms, is very different.
There's nothing warm and fuzzy about it. The exchanges are sharp-edged: wages, prices, rents, interest, and costs-and-benefits. When you are in the domain of market norms, you get what you pay for—that's just the way it is. When we keep social norms and market norms on their separate paths, life hums along pretty well. We may have it free in the social context, where it is, we hope, warm and emotionally nourishing. But there's also market sex, sex that is on demand and that costs money.
This seems pretty straightforward. When social and market norms collide, trouble sets in. Take sex again. A guy takes a girl out for dinner and a movie, and he pays the bills. They go out again, and he pays the bills once more. They go out a third time, and he's still springing for the meal and the entertainment. At this point, he's hoping for at least a passionate kiss at the front door.
On the fourth date he casually mentions how much this romance is costing him. Now he's crossed the line. She calls him a beast and storms off. He should also have remembered the immortal words of Woody Allen: "The most expensive sex is free sex. Simulating the Thanksgiving incident would have been wonderful, but considering the damage we might have done to our participants' family relationships, we chose something more mundane.
In fact, it was one of the most boring tasks we could find there is a tradition in social science of using very boring tasks. The task was to drag the circle, using the computer mouse, onto the square. Once the circle was successfully dragged to the square, it disappeared from the screen and a new circle appeared at the starting point. We asked the participants to drag as many circles as they could, and we measured how many circles they dragged within five minutes.
This was our measure of their labor output—the effort that they would put into this task. Some of the participants received five dollars for participating in the short experiment. They were given the money as they walked into the lab; and they were told that at the end of the five minutes, the computer would alert them that the task was done, at which point they were to leave the lab.
Because we paid them for their efforts, we expected them to apply market norms to this situation and act accordingly. Participants in a second group were presented with the same basic instructions and task; but for them the reward was much lower 50 cents in one experiment and 10 cents in the other. Finally, we had a third group, to whom we introduced the tasks as a social request.
We didn't offer the participants in this group anything concrete in return for their effort; nor did we mention money. It was merely a favor that we asked of them. We expected these participants to apply social norms to the situation and act accordingly. How hard did the different groups work? As expected, more money caused our participants to be more motivated and work harder by about 50 percent.
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