Shhh . . . Don't Say 'Recession.'
If (as is often the case) talking about sex makes people more interested in having it, does that mean that the current talk about a recession could actually be creating one? Well, maybe.
Or so one general finding of behavioral economics would have us believe. With all this chatter about a recession, consumers might, for example, hold off on buying that new dishwasher because of the “bad economy,” or pass up the more expensive restaurant because “we’re in a recession.” Without any discussion about recession, we’re unlikely to change our pattern of behavior. But talking about it can be a force that affects our decisions and alters our consumption habits.What makes me think that we’re such creatures of habit? Consider the experience of eating a Godiva truffle: The chocolate is melting in your mouth, the aroma penetrates your nose, there is a small nut inside. . . . Now think about this familiar experience and try to determine how much it’s worth to you. A quarter? $0.50? $0.75? $1.25? $2.50? While the experience of eating a truffle is very familiar, figuring out what we would be willing to pay for it proves difficult. So what do we do when we make purchasing decisions?
Generally, we use past decisions as a guiding principle. If we have paid $0.50 for a Godiva truffle in the past, we remember this decision, assume it was a good one and probably repeat it again and again.Let’s look at the following experiment: What if I asked you for the last two digits of your Social Security number (mine are 79), then asked you whether you would pay that number in dollars (for me this would be $79) for a particular bottle of 1998 Cotes du Rhone. Would the mere suggestion of that number influence how much you would be willing to spend on wine? Sounds preposterous, doesn’t it? Well, here’s what happened to a group of MBA students at MIT a few years ago.
“Now here we have a nice 1998 Cotes du Rhone Jaboulet Parallel,” said Drazen Prelec, a professor at MIT’s Sloan School of Management, as he lifted a bottle admiringly. Sitting before him were the 55 students from his marketing research class. On this day, Prelec, professor George Loewenstein of Carnegie Mellon University and I had an unusual request for this group of future marketing pros. We asked them to jot down the last two digits of their Social Security numbers and tell us whether they would pay that amount for a number of products, including the wine. Then we asked them to actually bid on these items in an auction.
What were we trying to prove? The existence of what we called arbitrary coherence. The basic idea of arbitrary coherence is this: Although initial prices can be “arbitrary,” once those prices are established in our minds, they will shape not only present prices but also future ones (thus making them “coherent”). So would thinking about one’s Social Security number be enough to create an anchor? And would that initial anchor have a long-term influence? That’s what we wanted to find out.”For those of you who don’t know much about wines,” Prelec continued, “this bottle received 86 points from Wine Spectator. It has the flavor of red berry, mocha and black chocolate; it’s a medium-bodied, medium-intensity, nicely balanced red, and it makes for delightful drinking.” He held up another bottle, a Jaboulet Hermitage La Chapelle, 1996, with a 92-point rating from the Wine Advocate magazine. “The finest La Chapelle since 1990,” he intoned, while the students looked on curiously. “Only 8,100 cases made.”
Prelec held up four other items one by one: a cordless trackball, a cordless keyboard and mouse, a design book, and a one-pound box of Belgian chocolates. He passed out forms that listed all the items. “Now I want you to write the last two digits of your Social Security number at the top of the page,” he instructed. “And then write them again next to each of the items in the form of a price. In other words, if the last two digits are 23, write $23. Now when you’re finished with that,” he added, “I want you to indicate on your sheets whether you would pay that amount for each of the products.”
When the students had finished, Prelec asked them to write down the maximum amount they were willing to pay for each of the products (their bids). Then they passed the sheets up to me, and I announced the winners. The students enjoyed this exercise, but when I asked them whether they felt that writing down the last two digits of their Social Security numbers had influenced their final bids, they dismissed my suggestion. No way! When I got back to my office, I analyzed the data.
Did the digits from the Social Security numbers serve as anchors? Remarkably, they did: The students with the highest-ending Social Security digits bid highest, while those with the lowest-ending numbers bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, students with Social Security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with Social Security numbers ending in the lowest 20 percent.
Now, if the last two digits of your Social Security number are a high number, I know what you must be thinking: “I’ve been paying too much for everything my entire life!” This is not the case, however. Social Security numbers were the anchor in this experiment only because we requested them. We could just as well have asked for the current temperature, or your shoe size. Any question, in fact, would have created the anchor.Does that seem rational? Of course not. But when we make one decision, even when it’s about an arbitrary number, we bring this history into our future decisions, and continue to make the same decisions over and over without going back and questioning their wisdom.
This suggests that if we just ignored the talk about recession, we would repeat our past behaviors and not deviate much from our pre-recession pattern of purchasing decisions. But when everyone is talking about recession, it’s likely to make us stop, rethink our past decisions and feel that something needs to change. And so we change our patterns, start acting as if we’re in a recession — and thereby create one. On the whole, it might be better if we just talked about sex instead.
General problem of dependencies (or diffusion). Our world gets more and more dependent. It happens in financial markets where the dependence between markets is reported to increase, so diversification becomes less useful, and here via the media via self-.. {prophicies}.
On the other hand, people need always to re-balance their personal decisions and expenses. many do not do it at an ordered “rational” basis. Therefore, it maybe rational to reconsider expenses on every outside cue.
In our case it actually depends on whether previous levels of spending were adequate, abuot which many economists say that US citizens were spending too much……
Here the dependencies work via the fact that the very expectation of recession creates recession via various channels.
Would it be predictably irrational to purchase stocks when they are high and sell when they are low? Case-in-point: clearly buying a stock [e.g. now] when it is low would mean a much better upside. But when stocks are flying high, everyone wants a piece of them.
The spread of toxic ideas –poisonous memes– via the media may have an effect on the attitudes of investors. Investors may ‘swarm’ away from bad news, may react in a way that they try to minimize their losses, etc., consistent with the idea that we humans are more afraid of loss as a motivation than we are for making a profit. This mass ‘swarm’ to mitigate potential losses is nothing new historically, but its effect is magnified by faster communications, e.g. the Internet and 24 hour cable news channels, by the complicated nature of financial instruments, and by computer trading. These factors may lead to increased volatility drivern primarily by the human urge to avoid loss from a panicky psychology that swarms.
sorry my english… i try to explain myself…
i think is not question of expectances or if buy or not when the price is up. The more suggestion issue in the article, in my point of view, is not waht happen when we -or others- say “recession” all the time.
How we construc reality? What are the ways of the sense of reality? Waht is the role of rationality here?
I think rationality is like maths: an instrument. Don´t work alone but on bases stablishes by the sense we construc. I think that institutionalism speaks very well about this things.
Rationality dont works alone.
one more thing, talking about sex, iirationality and all this:
deleuze says that our unconscious is a factory of desire.
There are moments – or sometimes enormous timescales- in that calculus stops working, that´s a humna necessity. I think. We are no computers, we dont come from mars. We are hormonated beings.
In the experiment you described, it appears as though the number that you had students write down functioned as some sort of prompt or exerted (very loose!) stimulus control over bids, which is interesting. Would you say this is accurate?
I wonder, though, if the social security experiment you described above is applicable to behavior in the natural environment, where there are many, many competing and interlocking contingencies, complex learning histories, and (perhaps most importantly) rules. When findings from basic behavioral labs do not generalize to the natural environment it is usually for the aforementioned reasons, and I would argue, largely due to complex rules and personal histories with rule-following.
Rule-governance behavior exerts a GREAT deal of control over language-able human’s behavior, and rules typically specify a contingency. A rule about studying might be, “If I study, I will get an A on the test.” Getting a good grade on the test is contingent (usually) on studying. Seems reasonable. We say that deciding to study on a test is rule-governed behavior, as the response (studying) to reinforcement (good grade on the test) delay is too great for a direct-acting contingency. An example of rule-governed behavior from your book may be the experiment on honesty and the 10 Commandments (Rule: “If I follow some honor code, I will be a good person, good things will happen to me, people will be kind to me….ect”)
When discussing a recession, the rule might be, “I have to limit my spending in order to save money for the impending recession.” Having money in the future is contingent on saving in the present. The problem with THIS rule is that is a WARNING, and warnings, by their very nature are aversive. Naturally, we learn to avoid aversive events. So instead of following this rule, we ignore it or forget about it (i.e., avoidance) or perhaps even rationalize why we are not following the rule in an attempt to mitigate some of our guilt. Warnings are also difficult to follow because they cause us to forgo positive reinforcement in the present. That is, we must forgo the new appliance or nice restaurant now in order to avoid the effects of the recession in the future. This is hard to do.
Though this point is minor and probably irrelevant, I think that thinking about sex is not analogous to thinking about a recession. In thinking about sex, one is thinking about the sexual reinforcement that is eminent in the act. Assuming that the sexual act is safe and monogamous, there are very little risk and aversive outcomes in the act. So sex is all positive reinforcement and no punishment. A recession is aversive, as are all warnings. Warnings are so called as they warn us that punishment is approaching. So we ignore or rationalize the recession/the impending doom and thus maximize reinforcement in the short-term (e.g., buy a new appliance).
Anyway, I guess my point is that the social security numbers appeared to exert some degree in stimulus control over bids; it was an arbitrary number and had no rules associated with it. Thinking about a recession, however, involves rules and warnings, which involve different behavior mechanisms than simple stimulus control (i.e., they have different effects on behavior). (Or maybe I’m completely incorrect and thinking about a recession also functions merely as some sort of stimulus control). What are your thoughts?