November 30, 2008 BY danariely

I wrote this about 8 months ago — but it makes particular sense right now ….

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.