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  1. 1. CONTINUOUS ASSESSMENT COVERING SHEET 2011 Please staple this sheet to your essay.Surname: Serenaite Initials: Grita Student Id:Surname: Initials: Student Id:Surname: Initials: Student Id:Surname: Initials: Student Id:Surname: Initials: Student Id:Surname: Initials: Student Id:Surname: Initials: Student Id:Programme: Postgraduate Advertising and Digital CommunicationsModule:Lecturer:Date of Submission: 13/12/2011________________________________________________Declaration:The submission attached for assessment does not contain any work or effort or ideas orarguments from unattributed sources.Signed: Date: 1
  2. 2. Priceless: The hidden psychology of valueBy William Poundstone<>Did you ever notice that Dunne Stores entry doors are on the right? Any suggestions why is that?<>Mostbizarre finding in this book suggests that US supermarket shoppers spend on average $2 per trip morewhen moving through the store in an anti-clockwise direction. (Just because it is handier to reach shelvesfor right-handed people)<>Did you notice that stores like Prada carry few obscenely expensive items that no one can really afford tobuy? Let’s say 4000$ bag? Why is that?<>To boost sales for everything else which look like a bargain in comparison. For example 400$ bag looks agreat deal comparing with $4,000 one.What beer would you choose in the off license: pricy €2.5 per can, or bargain for €1? What if I give you onemore choice for €1.80, which one will you choose now? Why is that? Seems most rational choice isn’t it?Thou the price is just a number, it can evoke a complex set of emotions, something now visible in brainscans. Depending on the context, the same price may be perceived as a bargain or a rip-off; or it may notmatter at all.<>“Poundstone has managed to write a book that is fun to read and yet well-researched and substantive.Without a minute of suffering the reader gets to know nearly all the key contributors to the science ofdecision making. Recommended for anyone who has to make decisions.” —Richard H. Thaler, coauthor(with Cass R. Sunstein) of Nudge: Improving Decisions on Health, Wealth and Happiness<>I have to agree with Ritchard H. Thaler, it’s hard to believe that book that has 43pages ofacademicreferences can be so easy to read. William Poundstone makes complicated economic and psychologicalconceptsunderstandable by using day to day language, experiments and refreshingly short chapters.Priceless is divided in 4parts and 55 chapters.<>First part “The more you ask for the more you get”Poundstone’s opening scene for the book is controversial lawsuit in which a jury awarded $2.9 million indamages to a woman who had spilled a scalding cup of McDonalds coffee on herself. How did the jurorsagreed to this legal award? The jurors were amazingly persuaded by lawyers’ demand –<>“to penalise McDonald’s in the amount of one or two days of the company’s worldwide coffee sales, whichis approximately $1.35 million a day”.To be able to understand why it worked we have to understand the concept of anchor.<>Psychophysics determined that people are very sensitive to difference and not so sensitive to absolutevalues. Imagine you are asked to lift a suitcase and guess the weight. How accurate would your guess be?Given two identical looking suitcases one weighting 15kilos and one 18kilos, it’s a easy to tell which heavierby lifting. But without the scale you wouldn’t be able to tell if it would meet an airlines 20 kilo limit.Judgements of monetary value have much in common with sensory judgements like weight, brightness,loudness, warmth, intensity of odours. People display a similar cluelessness about prices.<> 2
  3. 3. Behavioural decision theory introduced anchoring and adjustment concept.Tversky and Kahnemantheorised that an initial value (the anchor) serves as a mental starting point for estimating an unknownquantity. It is like anchor exerts a magnetic attraction pulling estimates closer o itself.Anchoring is an artefact of guessing. Whenever we guesstimate an unknown quantity that cannot becalculated we are liable to be influenced by other numbers just mentioned or considered. It isn’t somethingthat we are aware of.Poundstone provides big amount of case studies, experiments and theories through out the book to showthe influence of an anchor for behavioural decision making.One of the experiments brings us back to court rooms. Eight students were presented with hypotheticalcase of a young woman who said contracted ovarian cancer from birth control pills and was suing herhealth care organisation. 4 groups heard different demand for damages: 100$; 20,000$, 5 million and 1billion. The ‘jurors’ were asked to give compensatory damages only. The results were as follows:<>Demand Award$ 100 $990$20,000 $36,000$5 million $440,000$1 billion $490,000The more you ask for the more you get<>Impressive.Now lets go back to McDonalds’ case. So why did it worked? Because the anchor was set by lawyer and itwas indeed memorable. A day or two of McDonalds coffee sales had the ring of poetic justice and it alsomade jurors scaling (comparing and adjusting) easier.<>Part two “Black is white with a bright ring around it”In part two Poundstone explains psychophysics further. Here down to earth definition of psychophysicswould say it is a study of the relationship between physical quantities (noise, light, heat, weight) andsubjective perception of them.One of the many examples was that working under the ruby-red light in a photographic darkroom you cannote something odd. The tip of the cigarette glows green. It makes it look green in comparison. Eyes andbrain are not registering an absolute colour, but a difference between colour of the cigarette and thebaseline colour of the room.In part two Poundstone also introduces the economists and psychologists love hate relationship during thedecades. He introduces two different perceptions:<>To an economist a reserve price is the maximum amount a buyer is willing to pay, or the minimum a selleris willing to accept. Transactions are expected to take place at price somewhere between theseextremes.Economics investigates how market forces affect prices paid.<>But there is quite different way of looking at things. Reserve prices can be thought of as magnitude scale.For a buyer prices are a numerical measure of desire to possess something. For a seller, prices measuredesire to keep what one already has (including such all-important possessions as time, energy and selfrespect).Even though economists at the time didn’t want to hear it at the time, psychologist was stating that whenestimating monetary values, people are easily swayed by the legerdemain of the anchoring, by illusiontrading on contrasts and the power of suggestion. 3
  4. 4. You can clearly see it in the market today, when people are considering 60euro Nike tracksuit as a hugebargain, and 60euro Penneys tracksuit as a rip-off.<>Part three “incoherence is more than skin deep”In the part three Poundstone historically looks into evolution of psychophysics, the influence of anchor andbirth of behavioural economics. Here author provides examples of different experiments held onbehavioural psychology, including gambling, fair price, ultimatum game experiments. All of theseexperiments supportanchor theory.In Kahneman and Tversky’s terminology – reference point is much like the ‘adaptation level’ ofpsychophysics. The reference point (anchor) determines whether something is entered as a gain or a losson the mental ledger. That can make a huge difference in behaviour. For example the house you want tosell. Even though you get the offer greater than current market value, you would accept it as a loss, if youcompared it with the price you bought the house for. Another example could be Deal or No Deal show,where player already expects to win 10,000euro, and gets an offer of 7000euro from the banker, but hesees it as loss, even though there is a possibility to walk out with empty pockets.In prospect theory – losing money hurts more than gaining the same thing delights. Gamble experimentsshowed that more people went for sure deal (more chance to win smaller amount, rather than relativechance to loose vs wining bigger award).Certainty effect also showed huge subjective difference between absolute 100%sure and something that isonly 99%likely, expressed in prices as well as choices. Meanwhile difference between 10% and 11% wasshrugged off.<>Cardinal rule of fairness appeared to be don’t increase your profit at my expense. When asked to share 10$with their peers majority participants in the experiment referred to support fair deal and divided it 50:50.However, when the rules were changed, and participants didn’t have to face each other in transaction,majority kept all 10$ to themselves. It is not fairness so much as the appearance of fairness that drives thepsychology of prices.<>Negotiation isn’t a pretty picture. Much of the time the skilful negotiator is the one who best misrepresentsvalue.To sum up, price numbers are influences by factors the conscious mind would reject as irrelevant,irrational, or politically incorrect. Contrasts create emotions, and emotions influence actions. As AmosTversky noted : we choose between description of options rather than between the options themselves.Part four “pricing is the dangerous lever”Part four is a list of marketer’s magic tricks, suggestions and warnings. Here are few of them:<> 1. A profusion of blind taste tests claim that avid drinkers can’t tell Budweiser from Miller from Coors. The one trade-off is between price and quality (and you have to wonder whether ‘quality’ is an illusion of marketing. Third choice, either higher or lower price, increases a volume of sales of a middle choice.<> 2. In 1961 Procter & Gamble introduced Pampers, disposable nappies. Was seen as convenient but far more expensive. Later on in 1978 Procter & Gamble rolled out a higher-priced brand Luvs, to create the contrast. What can I say – it worked. 3. Restaurants know what they want to sell you. Bundling is most known method . By discounting the third item a small amount the overall gross profit goes up. Restaurants also employ fairness 4
  5. 5. research findings. When the prices are increased, they add notes that petrol or tax went up. Don’t put prices into column. Menu isn’t a pricelist. Also avoid euro signs. Pictures in the menu is a seller. 4. The anchor is for sale, but its fine if no one buys it. Its realy there for a contrast. Ergo – the way to sell a lot of £500 shoes is to display some 800 shoes next to them 5. Don’t rise the price, lower the discount. Price 100euro but give discount of 25. When you want to increase the price just reduce the discount. People are not sensitive to inflation, but sensitive to price rises. 6. Better looking employees are paid more. However it was more profitable to be a man than to be very attractive.<> 7. We all end up paying for air. Lets take batteries. What you are buying is battery life. But non of the batteries states the life time. We buy into pink bunnies. 8. Relative 100$ is undreamed of richness for 5year old, and meaningless to billionaire. 9. 9 is truly magic number. None of explanations (people rounding down or think it’s been discounted) can give the answer. And yet the winner is sale price marking 10. Discount wholesalers know that you think you are getting best prices. So are you? 11. Who is happier- Mr.A who won 50 and 25 in two lotteries or Mr.B who won 75. Everyone said Mr.A. It is valuable to brake down product in several products and sell it as bundle. 12. “Free food” in cruise. People forget that they paid hell of a lot of money beforehand.Last<> 13. Do you know a real cost of MSG<> – 1/1,000 cent. Do you remember the price we used to pay and still paying? No wonder the text message business plan was huge success. 14. Loss-aversion as fear can push around buying and selling prices. 15. A person who is risk-averse in one situation will become reckless in another all it takes is changed reference point. 16. Price scanner data offers a bridge price psychology and practical reality. It captures any and all behavioural effects and provides information on how customers react/ don’t react to a price increase, sale or rebate.Customers who use loyalty cards are self-selected group of misers 17. The gym. We all have done it. We think it is reasonable to buy membership instead of getting one off entrance time to time. And if you divided your membership by how many times you went there – what would you get? 18. Things no one believes still effects behaviour 19. Anchor works in negotiation for promotion 20. Our society is a crazy Pavlov’s dog experiment in which money is a bell. After much repetition we salivate over the hollow symbol, not the meat. 5