The Effect
When we order a fancy drink at Starbucks (or some fancier coffee house) with funny language, we believe we are sophisticated connoisseurs. But when others do the exact same thing, we just see them as annoying poseurs.

The Problem
But we don’t just believe we are hot stuff when we order at Starbucks, we also believe that other people will think we are hot stuff. This “self-serving” bias can be dangerous.

Across domains, people believe their dates will be won over by their charm, entrepreneurs believe investors will be won over by their ideas, and “connoisseurs” believe everyone will be won over by their “sophistication.”

It’s one thing to believe you are great, but it’s another thing to project your grand self-perceptions on the others’ perceptions of you. This is when biases can start to multiply and problems can go so awry. While this may not lead to tragic results in a Starbucks line, it can in love, politics, business, and academia.

~By M.R. Trower and Troy Campbell~

~Illustration by M.R. Trower~

A few times a month, I buy a bag of coffee at the supermarket on my street. I enjoy the ritual of standing before the twenty or thirty whole-bean options in the coffee aisle, imagining how the different roasts and origins might taste. This past Sunday, though, I was surprised to see how my coffee choice influenced the actions of a stranger.

I noticed another shopper in the coffee aisle, engrossed in selecting the perfect coffee for the week. Even after I had paused, nabbed a promising-looking bag, and walked off, she was still weighing her options. I don’t blame her – coffee is very important.

As I got ready to leave the store, I almost laughed when I saw her at the register. After all her cost-benefit analysis back in the aisle, she’d selected the exact same coffee that I had! The odds of us choosing the same coffee at random, considering the aisle of options, was pretty low. Instead, it seemed like my coffee choice might have signaled to her that this specific roast was more delicious and well-liked than the others. I could have influenced her choice without even speaking a word.

Although I thought this was funny at the time, I can’t say that I would’ve done differently if I had been in her place. We call this effect “herding,” and it occurs when we act based on how those around us behave. When searching for a place to eat downtown, you might see a long line out the door of a restaurant and think, “That place must be good if everyone else is standing in line, I better check it out.”

Sometimes restaurants really are just more popular because they’re higher quality, but it’s easy to see how it can become a problem. I’m not the world’s greatest coffee expert, so if I ended up leading herds of people at my local grocery store, the other customers might not be better off.

Of course getting worse coffee isn’t the biggest mistake you can make while shopping. Herding can lead to bigger problems in other cases, though (think the stock market),  and it’s worth looking out for. I don’t have as academic a background as some of the researchers in the lab, but working here has taught me more about these biases, and it’s been fun to notice these mistakes in day-to-day life.

~M.R. Trower~

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.

~Jared Wolfe~