SHHH . . . DON’T SAY ‘RECESSION.’
I wrote this about 8 months ago — but it makes particular sense right now ….
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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.
If someone points out to you that you have been acting irrationally, should you consider this information and perhaps change course.
Imagine that you have been consistently outspending your income on the assumption that you could always borrow as needed on a HELOC because home values would rise forever. You become aware that this is an irrational course of action. You are also aware that if everyone else comes to this conclusion then the recession will get worse.
Should you continue to charge into bankruptcy? Would that be rational? Maybe you should sell or rent out your house and buy a mobile home, reducing you outlay maybe 1,500 a month. Retrench and allow the fools to continue their stampede. Rational?
The recession has been in the making for at least a year now. In my opinion, the economic stimulus checks were an attempt to defer the recession until Bush was out of office.
Prudence in our purchasing decision might be the difference between a Recession and a Depression.
It’s good that we’re talking about it.
I thought this was going to be about sex and didn’t really get the point you were making because I kept thinking about sex after you introduced the topic in the first paragraph. OK just kidding, this is interesting. I am curious that no one seemed to wonder how much the items were really worth.
Just finished the book and thought I would check out the web site – three quick comments: First, your book is a fun read and has potential for goodness. I’d like to think people will use its insights for good vs. evil, but just money and the internet can be used for good or evil, so can behavioral economic findings. Second, your use of “free lunches” will require a pretty significant culture change… it’s hard to change a “culture” – specially America’s culture. I do sincerely hope we all try harder to do so (for the better) though. Third, the book has helped reinforce what I already believe (not nec. practice all the time) – make decisions based with clear and logical thought. e.g. if I had to bid on the bottle of wine I would either ask for a taste and bid on the value of that enjoyment of it over what other enjoyment the funds may be able to provide. If no taste is available, I may have to fall victim to past “wine anchor” prices, or maybe for fun turn the tables and ask you to pay me to take it off your hands. Thanks again for a good read and thought provoking book.
In Spain, President Zapatero has been over half and year denying any kind of finnacial problems in our economy, despite the fact that all the macro economy figures pointed to a crisis. During all this time, Zapatero’s reasonig was a very psychological one, if you don´t say crisis people will not behave in that way. But since there is no credit, and a great part of the activity was leveraged, no matter what you think, the crisis is there. Of course, if he could accepted the situation one year ago, it could be possible to make better decissions to cope with the prolem.
I think that despite the fact that sometimes we asume arbitrary prices as reference points, the more usual influence in our bids for a product is our budget limit. I can bid for some gift on ebay and paying an inflated price based on this anchoring effects.
However, no matter what´s the initial price for a Piccaso that I can´t no bid any amount for it. Simply is out of my budget. The real problem is that an important percentaje of people can´t bid because they don´t have money to do it, and of course they dont have credit as in the last years. Even if you suggest to the congress to aprove a recession ban act, to eliminate the concept from the news and conversations, the economy will not improve for sure.
However i guess that instead of this “don´t talk about..effect” a more serious problem is the resistance of people to accept losses and adpat prices to demand offers. In my country, people resist very seriously to accept taht the real price of their products or possesions is not what the owner decides, is what people want or are able to pay for it.
However, sex is always a more interesting issue even if you practice it
best,
Carlos
But isn’t that true of many things. Our values are learnt. Our tastes are learnt. At least the latter is irrational.
Isn’t that how auctions that deal with celebrity undies and other such vital goods work?
Premier brands and labels thrive on our ignorance of true value/true price.
The interesting perspective that emerges from the study is the iffiness of the straws we clutch at in our desperation.
This jives with the idea of Appreciative Inquiry, which seeks positive change by focusing on that which is positive. They posit that if you focus on what’s broken or not working, you’re going to be mired in difficulty, whereas if you focus on what is working and try to enhance it, you’ll have better luck moving toward a more positive outcome.
But perhaps it’s irrationality that makes us temporarily abandon common sense in order to focus on what’s broken. Maybe there’s something “comforting” in knowing that something is broken? Maybe because it’s familiar, we would rather focus on the broken thing than the unknown positive outcome?
Thoughts are Things, someone said….
A few days back, I did something on similar lines.
In my team, each associate completed 15 units of work every day. After some improvements to the tools used, I figured out that the team could easily deliver 25 units per associate everyday. But from a previous experience with the same team, I was aware that convincing the team for the increase in count would be difficult as they had been used to deliver 15 for the past several months. And I was not willing to go the hard way immediately.
I started thinking about better approach to convince. In India, people bargain a lot. Starting from cab services to purchase of products, there is always a scope to bargain. I had noticed that on many occasions, the final price tend to be an average of the price that was initially quoted by the seller and the one initially suggested by the buyer.
I decided to experiment this in my team. Citing improvements in tool, I asked for a delivery of 32+. As expected, the team resisted the move. Firmly pressing on the need to increase the count, I suggested them to come up with a figure they were comfortable in. Surprisingly, my team came up with a count of 24 on its own.
Now if this incident is correlated with the experiment in your marketing class, I see a strong pattern. Somehow people, when unaware of the true quantity of an item – money in your example and work share in mine – look for a benchmark and tend to pick up the first figure they are given or suggested as the baseline.
May be, I should think about joining research in behavioral economics.
Regards
Yes. It is called “Investor sentiment” or Consumer confidence. Even those who were smart during the times of plenty by saving money, reducing extraneous expenses and preparing for any market downfalls now believe they are being hurt by a “recession”. All of the talking heads on TV continually scare the consumer into believing they are being hurt by this imprecise term. They are being hurt by the decisions they made during times of plenty and allowing those decisions to affect them today. Remember the story of the Grasshopper and the Ant? Aesop’s fable I believe. Most consumers did not use the “good times” to prepare for the bad. Now, instead of focusing on correcting those bad behaviors/decisions they can say their bad fortune came from the “recession”.
But isn’t that precisely the reason that the government NOW admits/says that one year ago we entered a recession? That is why no one should believe any positive economic statement from the government or Wall Street. One should always ask:”Does the speaker benefit if I believe that what he says is true?”.