I have recently gotten hooked on ABC’s Shark Tank (based on the original Dragon’s Den), a reality show in which rookie entrepreneurs seek investments from wealthy self-made investors. These investors are the titular “Sharks,” who receive investment proposals ranging from a folding guitar company to a business in cat toilet-training kits. Once a sales pitch is made, Sharks can offer to invest, and will sometimes compete with one another for the opportunity. At times, the entrepreneurs leave with nothing, and occasionally they are laughed off the stage.
One lure of Shark Tank is the way it puts the psychology of negotiation on display. When entrepreneurs enter the “shark tank,” they put forward an offer, asking a specific amount of money in exchange for a percentage of equity in their company. (Dividing the dollar amount by the percentage stake provides an estimated valuation of the company.) This offer serves as a powerful anchor for both parties, which can exert a dramatic influence on the subsequent negotiations.
In spite of their own appetites for money, when an entrepreneur presents an inflated valuation of their company, Sharks often pass up the investment opportunity. For instance, if an entrepreneur asks for $100,000 in exchange for a 10% stake in her company, but the Sharks estimate the company’s worth at far less than a million dollars, they may back out brashly rather than make a lower offer. Although an inflated valuation may indicate poor business sense on a contestant’s part, it often seems that the Sharks’ decisions to pull out in scenarios like this are based on emotion rather than business savvy.
On the other hand, sometimes a Shark’s initial offer appears to bias an entrepreneur against considering other options. An offer that demands double the equity for the same cash investment may appear unfavorable when, in fact, the initial valuation was off. When a Shark offers to buy a business outright and pay the founder royalties, entrepreneurs tend to reject the proposition, even if it makes financial sense. The entrepreneurs clearly have more invested in their ideas and products than dollars and cents.
The show exposes some interesting contradictions. The Sharks are personable, yet they attack at the first scent of weakness. Kevin O’Leary, the bombastic Shark known as “Mr. Wonderful,” claims that “it’s all about MONEY,” but at times even his emotions seem to cloud his judgment. In other situations, a compelling performance by a contestant is enough to sway the Sharks’ minds, even when the sales figures don’t.
Then again, perhaps letting emotions factor into negotiations is not such a bad idea. It would probably be unwise to go into business with someone with an established negative rapport. A waffling sales pitch may indeed predict wishy-washy behavior in future negotiations, which might seriously hinder business prospects. And perhaps an entrepreneur’s “gut” is actually guiding him in the right direction when he rejects a Shark’s offer. It is, of course, impossible to know for sure, but it is this fascinating blend of calculation and emotion that keeps me swimming after this show’s bait!
The Wii U is mainly available in two forms: a $350 Deluxe version and a $300 Basic, and without a doubt the $350 deluxe is a much better deal for most shoppers..
The decoy effect is a psychological bias in which the valuation of an option in a choice set increases with the introduction of an option that is directly inferior to a specific option in the choice set.
In the case where the choice set is a video game console, and the Basic version is a directly inferior option to the Wii U Deluxe, the Deluxe option shines in comparison. This may lead consumers to overvalue the Wii U Deluxe, both in general and as compared to other console options (e.g. an X-Box Bundle).
Might Nintendo be purposefully using the decoy effect to boost holiday sales? Maybe. However, regardless of the intention, the Wii U pricing structure may lead shoppers to buy the Wii U Deluxe this holiday season – a decision they may not have made if the Wii U Basic did not exist.
Recently, the “choose-your-ride” car (pictured here) has been roaming around downtown Durham and Duke University. The car seeks to reduce drunk driving by posing a choice between a $20 taxi or $1,000 fine. At first glance, this seems like a good strategy and it may indeed do some good. However, the car seems to missing one important element and it is the topic of Dan Ariely’s new book: morality.
In “The (Honest) Truth about Dishonesty,” Ariely argues that morality matters. He explains how criminal behavior is not a simple cost-benefit analysis, and the threat of punishment only seems to work well when enforcement is nearly certain and extremely severe. Given that 300,000 of the Americans arrested for drunk driving every year are re-offenders, it seems that the threat and actual experience of consequences are not working so smashingly. Overall, drunk driving is rampant in the states. There are 900,000+ arrests a year. That’s arrest alone! The number of people driving drunk is much higher.
Drunk driving is not a niche offense; it is a social phenomenon that many see as a perfectly acceptable behavior. In movie The Hangover, Zach Galifinakas captures many American’s thoughts on drunk driving when he fondly remembers the night before and laughs it off saying, “Driving drunk, classic!” Many Americans simply feel no moral outrage with drunk driving, especially if they or their friends are the drivers. And what troubles me is that attempts like the “choose-your-ride” car do nothing to address this moral hole in the American conscience. According to Dan Ariely’s research on cheating, people cheat just as long as they can see themselves as good people. It’s no wonder people keep driving drunk, because society has done nothing to convince people that it is wrong.
Here are three specific ways this car fails to appeal to morality:
It makes it a choice. Think of other moral violations such as cheating in a marriage. For many, to even contemplate the idea of marital infidelity would be morally taboo. It should be the same with drunk driving. People engage in cost-benefit analyses for many actions, but when the action is in the moral domain this happens to a far lesser degree. When something is in the moral domain, hardline rules and concerns for one’s self-concept take over.
It puts a price on the crime. It turns a moral issue into a question of whether you want to pay $1,000 or if you can outwit the cops. According to the message sent by this car, you are not a bad person if you drive drunk. Instead, you are simply a person who is willing to pay a $1,000 fine.
It removes moral feelings. In chapter 9 of “The Upside of Irrationality,” Ariely discusses how thinking of situations like a math problem (rational thinking) can lead to less morality, because moral action is often driven by feelings. Here, the only feeling the car potentially activates is fear and the mathematical nature of the appeal might reduce any potential moral feelings people might have to begin with.
So what can we do?
Like with most socio-political issues, it is easy to criticize others’ solution and hard to put forth your own. Next week, I’ll attempt to put forth my own potential solutions to transform drunk driving into a moral issue. In the meantime, what do you think? Do you know people who chronically drive drunk? Can drunk driving be turned into something that is globally seen as morally detestable? If you have any solutions, ideas or articles you think would serve the blog, leave them in the comments and I’ll try to include them in part 2.
A Chinese tourist destination decided to experiment with offering free toilet paper, the Wall Street Journal reports. Rather than the usual procedure in China, where people bring their own toilet paper, in Qingdao they now encounter a toilet paper dispenser when they enter the public restroom (and, naturally, pass it again on the way out).
Now that the dispensers have been in the bathrooms for a month, it has become clear that visitors to Qingdao’s restrooms take an astonishing amount of care for their personal hygiene. Two kilometers (1.24 miles) of toilet paper disappear each day.
In this case, the excess T.P. use seems to reflect our findings with other forms of cheating and stealing: most people are cheating a little, rather than a few people cheating a lot. Of course, there are exceptions.
The toilet paper scenario meets the right conditions for people to cheat: they’ve got the opportunity and face no consequences for taking a bit extra, they can use the toilet paper later, and they can rationalize their behavior. They might tell themselves that the government is paying for their bathroom use in general, not only for that specific restroom; or that it’s expected that they’d take extra on the way out; or that they’ve already paid for it in the form of taxes; or that the government deserves what it gets. They’ve easily justified a way to walk out with wads of toilet paper and an untroubled conscience.
But why steal something like toilet paper?
One explanation probably has to do with the power of free. Maybe Qingdao’s bathroom users are so enchanted with the idea of FREE toilet paper that they would take it in any case, regardless of what they know about its value or usefulness.
Another explanation that pops up a lot with government-provided goods is the tragedy of the commons. The theory goes that individuals will use a limited resource (like commons for grazing animals) in an unsustainable way, so long as they get the full benefit and the harm is spread across the group. In the case of the toilet paper, the theory suggests that people use no more than they need when they have to pay for it individually. But when the cost is spread out across Qingdao, they are happy to overuse the resource. The usual prescription is to make individuals pay for the resource on their own—in other words, to go back to the days without free toilet paper.
But there might be a better solution. We can take research from behavioral economics to think of ideas that may be less strict than taking away the free toilet paper and, instead, simply push people toward lighter use of the product. How about replacing the landscape paintings above some dispensers with a picture of watching eyes—a tactic that has effectively encouraged people to clean up after themselves and pay on the honor system.
In Qingdao, restroom managers have attempted to confront their problem by posting a poetic reminder of social responsibility:
Convenience for you,
convenience for me,
civility is there for all to see.
My paper use, your paper use,
conservation is up to us.
The sign hasn’t had a noticable effect yet, but it may be on the right track. Reminders like the poem sometimes work (p.41, The (Honest) Truth About Dishonesty) to keep people from stealing toilet paper. The Qingdao bathroom poets appeal to bathroom users’ social norms (“civility is there for all to see”) and allude to future benefits (convenience and conservation)—tactics that have been shown to work in getting people to wash their hands. But getting some sort of assent—like a signature—may be even more effective.
For example, bathroom visitors could sign in under a poem like this:
Future benefits and social obligations
Should outweigh your current temptations
You agree not to steal by signing below
You’ll take just what you need when you need to go
Sign here: _______________________
Of course, if the bathroom management is going to ask people to sign anywhere, they might also want to keep watch over the “free” pens.
My 2-year cell phone contract was up last month, and even before the date when I could opt for an upgrade, I began to experience the pain of indecision: which was it going to be – a Samsung Galaxy S3 or an iPhone 5? I was one of the only Android (HTC Evo) users in our Center for Advanced Hindsight team, and swayed by the rest of the group’s dedication to Apple, I was looking forward to switching to the new iPhone as soon as my contract was up. But I was not going to be able to befriend the newest iOS 6-adorned Siri until the iPhone’s release in a couple of months. In today’s impatient tech age, that is an eternity. My longing for an Apple clashed with my itching desire to get a new phone.
After watching a hopeless number of face-off videos, reading about the features and specs of Galaxy S3 compared with the endless mock ups of the rumored iPhone 5, and even throwing the question around at dinner parties, I decided to come to my senses, listen to what research has to say, and make an irrationally rational decision. Though surely evidence from decades of research is not limited to the following considerations, I picked a number of conceptual tools from decision-making research that could help shed light on this quandary of iPhone vs. Samsung:
- Now vs. Later: I should pit my short-term interest in having a new smartphone now against my long-term interest in having an iPhone later. Temporal discounting suggests that we have the tendency to want things now rather than later, and delaying gratification depends on whether we are convinced that what will happen in the future is going to be better than what we can have now. In other words: howmuch better is this nebulous iPhone of the future when I could have this immediately awesome Galaxy S3? Given that the specs of Galaxy S3 are available but those of the iPhone 5 are not, it might be smart to bet for what is certain. (Winner: Galaxy S3)
- Misremembering the past vs. mispredicting the future: I can go with the certain specs of Galaxy S3, or potentially recall my past experiences with iPhones and decide accordingly. Sadly we are bad at remembering past feelings; rather than correctly weighing the positives and negatives we remember the peak moments and selected experiences. Since I am unable to accurately recall my past emotional states, then maybe I can imagine how much pleasure each of these phones could bring me in the future? Unfortunately, we are also notoriously bad at predicting the duration and intensity of future feelings. (Winner: Galaxy S3)
- Want vs. need: Do I want a new phone? Yes. Do I really need a new phone? No, because my old one is still in good shape. With the irresistible discounts of signing up for a new 2-year plan, I am conditioned by the cell phone market to switch to a new phone as soon as possible. This conditioning moves me from casually wanting a new device to absolutely needing it to survive (!). I feel that the longer I wait, the more I am giving up on a perceived opportunity. (Winner: wait until my current phone gives up, and then get an iPhone 5).
- Decoy options iPhone 4s vs. HTC Evo: In my indecision, I can introduce a third option that is asymmetrically dominated either by Galaxy S3 or iPhone 5. If I consider iPhone 4S as a potential option, it would (hopefully) be dominated by iPhone 5 but could still be superior to the Galaxy S3 with the ease of its use, compactness and such. If I am leaning more towards the Android options, then I can consider staying with HTC Evo as a potential third choice, and given that Galaxy S3 surpasses my old Android in nearly every domain, I would lean towards upgrading to Samsung. (Winner: Depends on the decoy option)
- Reactance to unavailability: The brands also complicate the issue as they control supply and increase demand by playing with the availability of their products as well as the timing of their release. This can create several types of responses:
- Since iPhone 5 is currently unavailable, I experience a pressure to select iPhone 4S which is a similar alternative. If I perceive this as a limitation on my freedom to choose, I might react by selecting a dissimilar option. (Winner: Galaxy S3)
- The unavailability of iPhone 5 could also lead me to perceive it as more desirable. (Winner: iPhone 5)
- Or I can just despise what I can’t have. (Winner of the sour grapes story: Galaxy S3)
So, what should I do? Given the considerations above, there is still no clear winner for me. Yes, I have the plague of newism: I run after the genuine, exciting proposition of the emerging trends and products. Yes, I know there is something good now, but possibly something better around the corner.
At the end of the day, I will toss a coin: not because it will settle the question for me, but because in that brief moment when the coin is in the air, I will suddenly know which side I hope to see when it lands in my palm. And besides, whether I purchase my new phone from Apple or from Samsung, I will stick to my commitment, almost immediately forget about the forsaken option, and justify my choice infallibly in retrospect.
This week, I visited a camera store to order two enlarged prints as a gift. I don’t order photo prints very often; in fact, I’m not sure that I have ever ordered prints aside from graduation photos. As I was making my purchase, the friendly, middle-aged woman who had been helping me asked whether I wanted to become a store “member.” I learned that for only 13 dollars and change, I could save 10% on purchases at the store for the next year, including around five dollars on the order I was purchasing. (I asked whether this discount applied to cameras. It did not.) After fleeting consideration, I explained that I did not think it was likely that I would be buying more prints in the next year, and hence membership was not a worthwhile purchase for me.
To the friendly saleswoman, this did not seem be a satisfactory answer. She continued to push the membership offer, emphasizing the five dollars that I would be saving. “I don’t know about you,” she said, “but I’m someone who likes saving money.”
As I walked from the camera store to my car, I couldn’t help but contemplate this saleswoman’s comment. Did she actually believe that purchasing a camera store membership would benefit my bank account in the long run (as she appeared to), or was she simply a loyal store representative, eager to make additional sales (which seemed more likely)? Either way, her comment reflected a “save by spending” mentality that permeates modern-day America.
Membership programs and customer reward programs that charge an initial fee are prime examples of the “save by spending” creed. The customer is presented with various opportunities for future discounts, provided he or she coughs up money for a membership. As in my camera store situation, the membership offer is usually presented right before purchase, and the amount saved on the purchase itself is highlighted by the salesperson. The customer is forced to decide on the spot whether he or she would like to join.
Membership programs are rather curious in light of the established research finding that, in general, people will settle for less money if they can have it immediately – a tendency psychologists refer to as temporal discounting. (Think Money Mart loans or pawnshops.) In contrast, joining a membership program means foregoing money now for the possibility of earning that money back later on.
There are several reasons these programs may work. First, they force the consumer to project the likelihood of future purchases in a biased setting. People are notoriously bad at predicting the future; when buying an enticing summer novel at Barnes and Noble, surrounded by other books, one is more likely to consider spending money on books than on the variety of other products out there. Second, when presented with the membership program, people may experience mild social pressure from the sales associate. Third, if people are making their purchases with credit cards, they’ll be more willing to slap on an additional membership purchase; research attests that using credit cards makes people spend more, compared with cash.
Last but not least, the feeling of saving money is just plain rewarding. We know that money is valuable. At the same time, we don’t want to save by foregoing that sparkly new iPhone accessory. Membership programs offer us the opportunity to have our cake and eat it too – to experience the joys of saving and spending at the same time. And I’m guessing this makes companies pretty happy too.
Of course, membership programs aren’t the only example of our tendency toward saving by spending. Who hasn’t relished in the experience of buying a product at 50% off, focusing on that 50% that they have magically “earned”? I know I have. This may be part of the reason that the average American has half as much personal savings as personal debt.
Thank you, kindly saleswoman, but I will simply pay for my photo prints this time.
At a coffee shop in Bluffton, South Carolina, people have been spontaneously paying forfuture customers’ drinks on a fairly consistent basis. Sometimes, those who are not even looking to buy coffee for themselves will come in and donate money for future (anonymous) customers.
While certainly unique, this may not be too surprising when viewed under the lens of behavioral economics — and could suggest an interesting business model. Let’s consider a hypothetical coffee shop that chooses to employ a strictly “pay-what-you-want-for-other-customers” pricing strategy, in which customers can only leave money to be used by other customers, and are allowed to leave as much (or as little) as they would like. In turn, their drinks are paid for by previous donations.
First, there are a number of examples in the scientific literature (and in the real-world) of the benefits of pay-what-you-want pricing systems. Allowing people to pay the price they want can sometimes result in people paying more money than they would if a standard price was requested for any particular product or service.
Second, recent research by Elizabeth Dunn, Lara Aknin, and Mike Norton shows that spending money on others can have a more positive impact on one’s happiness than spending money on oneself. So this may mean return visits by customers who wish to get that extra boost in happiness that they do not get from places where they buy their own selected product(s).
Third, Dan Ariely has studied how powerful the idea of “free” can be; in short, people love free things. Receiving a “free” drink in our hypothetical coffee shop (paid for by another customer) should be more desirable than directly paying for the drink.
At this hypothetical coffee shop with a “pay-what-you-want-for-other-customers” pricing strategy, customers may have an experience in which they get to enjoy a “free” product (good for that customer), get a boost of happiness from buying something for others (good for that customer…and the customer(s) who get to spend that money), and may wind up spending more money overall than they would have under a traditional pricing scheme (good for the coffee shop). Thus, allowing people to pay what they want for other customers may potentially lead to a lot of good all around.
There are certainly many risks that come along with a “pay-what-you-want-for-other-customers” pricing system. But if the events of the coffee shop in South Carolina are any indication, such a pricing strategy may just be irrational enough to work.
The image (and jingle) of the bells of Salvation Army volunteers is almost as synonymous with the holiday season as Santa Claus himself. However, the New York Times reported last month that a change may be coming to a street corner near you; the charity has begun testing the use of a digital donation system called Square that would allow passersby to donate via credit card, rather than have to worry about scrambling for loose change.
The article mentions two potential benefits of this kind of system. First, people are less likely to carry cash on them as they were in the past, and so Square’s credit card system provides people with a quick, simple, and convenient way to donate when they don’t have any real money handy (and with 1 in 7 Americans carrying at least 10 credit cards, this shouldn’t be a problem). Second, a credit card system would be safer because donations would not be vulnerable to theft like money in the kettle has always been.
Still, this credit card system may unintentionally have another significant benefit: it may lead people to want to donate more money than they would otherwise. There is a concept in behavioral economics known as the “pain of paying.” Simply put, it hurts us to spend (and part with) our money. And since buying things with a credit card is a less direct, less tangible way to part with money than using cash, it can feel less painful, and therefore lead people to spend more.
Assuming that this effect generalizes from buying products to donating to charities, Square’s credit card system may actually lead to larger total donations for the Salvation Army, whether it is because more people decide to donate, or because more money is donated by each individual. (Not to mention the possibility that people may feel silly choosing “loose change”-style amounts (e.g., 35 cents) to donate via credit card, and so may round up to the whole dollar for that reason alone).
So Square’s credit card system may, through behavioral economics, lead people to be more generous with their donations to the Salvation Army. If the Salvation Army uses this new system and winds up faring well, perhaps other charities should take note and consider implementing such a system as well.
Have a happy holiday season, everyone! And remember that doing the most good may be just a swipe away.
Did you know that free checking works by exploiting the everyday cash shortages of the poorest in our country? There is a company that dresses it up and sells it to banks.
I recently moved to Durham from Boston, and as it goes I had to set up new accounts to establish services for my loft. Part of this task involved deciding on a bank to take my deposits and facilitate payments. I set up a simple matrix to help me decide on a bank that included two simple categories: proximity and fees. There were plenty of banks within a reasonable distance to me, but where my matrix failed was in the fee category.
Apparently, “free” checking accounts are now ubiquitous. Sounds good, right? Not for me. I work in behavioral economics. Free checking looks to me like Winnie the Pooh walking out of a XXX movie theater. In other words, innocence doesn’t have sweat on its sneaky brow. There is no such thing as free, it’s just hiding. Cost can be intangible, but this is not the case with free checking. So, who pays for free checking for all of us? Consumers with illiquidity issues, and these are the people who need their money the most. There cannot be a worse target. What used to be called a penalty fee for overdrafting an account is now called a convenience fee or value added service. How appealing. These fees add up and happen frequently enough to offer free checking.
I had to ask, from whom are all of these banks getting this bright idea? I found that banks of all sizes offer free checking, so this tells me that there must be a third party facilitator. I searched for B2B bank products under the granddaddy of all bank facilitators, Fiserv, and smiling at me like Miss America with AIDS was none other than Carreker.
Carreker calls it Revenue Enhancement and it is a very attractive service for any bank that puts money before fairness to consumers. Carreker enables a bank to collect on penalty fees and clear transactions in real time, which is how Carreker can boast that the bank will see immediate results. It is not because they have done something truly beneficial for the customer. Most of all, Carreker actually controls the overdraft decisions. They have their hand on the penalty revenue throttle. As a customer’s account goes negative, they can allow the customer to overdraft not once but for several transactions, thus incurring high fees. Senior Vice President and Managing Director of Carreker Revenue Enhancement, Jeff Burton, claims that the “fee income market is fine” provided that you [the bank] position yourself with Carreker to share in the wealth.
Aggressive revenue seeking has changed the manner of normal operations into more of a production model. Banks now call overdraft penalties by a new name: exception revenue. Furthermore, they want you to see it as if they are doing you a favor and that it is okay, in fact perfectly fine as you now know, if you need to overdraft your account. The negative connotation has been replaced by the notion that your bank is forgiving and would never prevent you from making that gratifying purchase. It is not right to allow customers to pay an average of 9 X $30 if they miscalculate their account balance. Alas, Carreker does not stop with their exception revenue system.
Burton states that they have gone as far as to create a special framework for one of their clients to allow them to profit from payday loans. This is what they call their approach to increase overall revenue and customer utilization. I’m not sure about you, but I am not here to be “utilized.” Carreker will continue to innovate new ways to capitalize on the hardships of consumers. Most frighteningly, they are not just an idea firm because they actually provide the framework, algorithms, and integration to allow the bank to carry on these evil deeds.
For what’s it’s worth, I changed my decision matrix to seek a bank that had all around low fees, so I can avoid living off of the money of people who desperately need it. I’m still looking.
In the course of our lives, we come across countless opportunities to help others. The occasional homeless person or charity asks for a donation, or the Red Cross is collecting blood across the street. But most of the time, these opportunities present themselves through our social networks — simply because we interact most often with our friends. One important difference between helping friends and helping strangers is that we know our friends can pay us back in the future, whereas strangers can usually only pay it forward. Of course, all people are not able to help others to the same degree; some people have a lot to spare while others get by on a tighter budget.
My friend Sevgi and I wondered whether people are more generous when others have the opportunity to help them back in the future, and whether people reciprocate based on the value of the gift they received. Our main questions were:
1) Do people give more when they know they may get something in return?
2) Do receivers care whether their gift is more valuable in an absolute or relative sense?
To look at these questions, we had people play a simple game as one of two players: lets call them player A and player B. We give $1 to player A and $100 to player B (they both see how much the other gets). Player A can send any amount (of his $1) to player B, and then player B decides how much (of his $100) to send back. In another version of the game, player B cannot give anything back.
Does player A send more money to player B when he knows that B can send money back? How much money does player B send back when player A sends nothing, some of his money, or even his entire dollar?
Looking at the results, we see that people are a) strategic when they offer money initially and b) reciprocating after they have been given money. On average, player A sends more to player B if he knows that B can send something back. And the more that player A sends to player B, the more he receives.
However, the amount sent back by player B does not depend on the absolute value of player A’s initial offer, but on the proportion of player A’s wealth that was offered. What does this mean? If player A has $50 instead of $1 and sends half of it to B ($25), he gets back almost the same amount of money from B as he gets after sending half of $1 (50 cents!).
So, what is the lesson du jour? It turns out that people with limited resources can gain just as much from acting altrustically as those who are well-endowed. Don’t get discouraged by a thin wallet when given the chance to help others — after all, it is your generosity that counts.