The New York Times and Time Magazine have recently posted interesting articles about two new books that discuss consumer behavior: Chris Anderson’s Free and Ellen Ruppel Shell’s Cheap (see links in The New York Times and Time Magazine).
Both books reference our Hershey’s Kiss experiment that is described in Chapter 3 of Predictably Irrational. If you recall, in one trial of one study we offered students a Lindt Truffle for 26 cents and a Hershey’s Kiss for 1 cent and observed the buying behavior: 40 percent went with the truffle and 40 percent with the Kiss. When we dropped the price of both chocolates by just 1 cent, we observed that suddenly 90 percent of participants opted for the free Kiss, even though the relative price between the two was the same. We concluded that FREE! is indeed a very powerful force.
It’s important to note that we have carried out lots and lots of studies on the effect of FREE!, many of which are detailed in Predictably Irrational. Describing them all, however, would be too much for those who are trying to make just one point abut this effect, so naturally we see authors making choices about which experiments to describe and which ones to leave in footnotes, or not to mention at all. But, some kinds of omissions are made as well — ones that are important for understanding the complexity of the effect.
For example, in one study of FREE!, we tried lowering the price from 2 cents to one cent on the Kiss to see if we observed that same level of increase in demand in the Kiss. We didn’t. In another study we also tried seeing what would happen if we lowered the price from FREE! to negative one cent, and we also didn’t see a difference in behavior. We also tried the experiment on a broad demographic–not just college students, but also on children and older adults.
Personally, I think it is perfectly fine for people to take the main point from some experiments and build on it, but as readers (and writers) we should realize that often there is more complexity to the picture and that before criticizing particular findings, or citing them as supporting evidence, we should keep in mind the nuances.
Tweet 
Like Someone should remind Michael Bloomberg that free does not always mean free lunches.
In order to speed up the pace of Manhattan’s famously slow crosstown buses, mayor Bloomberg suggested eliminating the $2.25 fare on a few of the buses, as it would put an end to all the time passengers spend fumbling for their MetroCard and cash at the bus door. It would mean free bus rides for all, but without much additional cost to the city, he reasoned, since the majority of crosstown passengers are already riding for free, using their MetroCards to transfer from the subway. If we aren’t charging folks anyway, it’s not a big money loss, is the gist of his claim.
In short: win-win.
Except, there’s a flaw to his argument. If bus fare falls to zero, it’s likely that more people (many more people) will start riding the bus, which will lead to even worse congestion and potentially require the city to spend on introducing more buses.
In other words, mayor Bloomberg is harboring under the assumption that demand for the cross town bus will not change as the price drops. In all likelihood, however, the number of bus-riders will go up dramatically because free is exciting. In fact, according to our research on free, such a change will cause many people who now walk a few blocks, to switch their ways and hop on the free bus.
Motivating people is an extremely difficult and delicate task as anyone who’s ever taught, managed, collaborated with or given birth to someone knows. In business, as opposed to say, child-rearing, the debate is slightly less daunting, though not always much clearer. For instance, offering incentives to employees for improved performance is a fairly common approach to encouraging higher sales —though surprisingly unproven by data.
For the most part, the effectiveness of incentives is supported by intuition and some anecdotal evidence. Wouldn’t everyone work at least a little harder for a $100 bill on top of their usual paycheck? Certainly it can’t hurt. But one important open question is whether monetary or tangible (spa retreat, ipod, dinner for two, etc) rewards more efficacious motivators?
Those who advocate for monetary incentives claim they have the greatest appeal given that the winners can do anything with them; what if someone needs an ipod like they need another hole in their head? On the other side, those in favor of tangible incentives argued that money lacks the emotional appeal of, say, a weekend for two at a romantic country inn or swank hotel. But either way, there was nothing to back up either camp.
Thankfully, there is some data on this debate. A few years ago Goodyear Tire & Rubber Company decided to test which method was more successful in an effort to improve sales of a new line of Aquatred tires. Their plan was simple and elegant: first they ranked their 60 retail districts according to previous sales, then divided them into two groups of equal performance and assigned one group to receive monetary incentives and the other to receive tangible incentives of equal value to the first group.
The results were very interesting; it turned out that the tangible-reward group increased sales by 46% more than the monetary-reward group. They also improved in terms of the mix of products sold by 37%. One explanation, and it seems to me a fairly good one, is that we can visualize tangible rewards (imagine yourself on a Hawaiian beach), which creates an emotional response. Money, on the other hand, is not accompanied by images as often (aside from maybe Scrooge McDuck swimming in piles of it), and lacks the emotional pull that tangible rewards have, so they’re less effective in motivating employees. I guess it’s called “cold, hard cash” rather than “future beach vacation cash” for a reason.
In a follow-up to the much acclaimed “Pinch of Saffron” , this latest Predictably Irrational Short Story is a thrilling Wall Street tale of overpricing CDOs, again written by one of my Behavioral Economics students, Andrew Holmberg. It’s entitled, “Fixed Income”, and you can find it here.
So, today I tried one approach for office hours
We had some complexities and a learning curve, but I think this technology has a future for such “office hours”.
Tomorrow at 12 (EST) I will try this again, this time with a different technology, holding online office hours with Duke this Friday, July 31, at noon Eastern Time.
Feel free to ask questions, in advance or during the event, three ways: 1) Post a comment on this Facebook page — http://apps.facebook.com/dukeuniversitylive/. 2) Send an email to live@duke.edu. 3) Post a Twitter comment with the tag #dukelive. Or write comments on this blog in advance.
You can also watch on Ustream (http://www.ustream.tv/dukeuniversity) or Facebook (http://apps.facebook.com/dukeuniversitylive). <http://apps.facebook.com/dukeuniversitylive> <http://apps.facebook.com/dukeuniversitylive>
After both of these attempts, we will see what approach to adapt….
On July 30th, I’m going to hold a virtual office hour 12:00PM-1:00 PM EDT.
I’ll talk about some new research that we’ve been doing and will take some questions.
I recently started using GoToMeeting, and I am looking forward to see how it works on a larger scale.
If you want to take part, and have a question that you’d like me to try to answer, shoot me an email in advance at dan at predictablyirrational dot com.
Directions to join the office hours:
on Thursday, July 30 at 12:00 PM EDT.
1. Click on this link
https://www2.gotomeeting.com/join/249041699
2. Use your microphone and speakers (VoIP) – a headset is recommended. Or, call in using your telephone.
Dial 309-946-4601
Access Code: 249-041-699
Audio PIN: Shown after joining the meeting
Meeting ID: 249-041-699
Irrationally yours
Dan
I pleased to announce a new series of short fictional stories written by Duke undergraduate students who took my Behavioral Economics class this last spring.
I will post another one of these stories twice a month for the next few months.
The first story is called “A Pinch of Saffron,” which is about a business executive who redesigns her mother’s traditional Indian restaurant to monetize on people’s irrationalities. You can download it here.
A few days ago Dan wrote about Don Moore’s research on how we accept advice from others. A lab experiment showed that subjects adhered to advice from confident, not necessarily accurate, sources. The findings of another research, led by Prof. Gregory Berns of Emory University, show another aspect of our reaction to advice.
Berns recorded his subjects’ brain activity with an fMRI machine while they made simulated financial decisions. Each round subjects had to choose between receiving a risk-free payment and trying their chances at a lottery. In some rounds they were presented with an advice from an “expert economist” as to which alternative they consider to be better.
The results are surprising. Expert advice attenuated activity in areas of the brain that correlate with valuation and probability weighting. Simply put, the advice made the brain switch off (at least to a great extent) processes required for financial decision-making. This response, supported by subjects’ actual decisions in the task, are troublesome, perhaps even frightening. The expert advice given in the experiment was suboptimal – meaning the subjects could have done better had they weighted their options themselves. But how could they? Their brains were somewhat dormant.
I found this quote in a wonderful book called 3 men in a boat. The book was written in 1889 by Jerome K. Jerome, and interestingly it does not seem that much has changed since then.
I knew a young man once, he was a most conscientious fellow and, when he took to fly-fishing, he determined never to exaggerate his hauls by more than twenty-five percent.
“When I have caught forty fish,” said he, “then I will tell people that I have caught fifty, and so on. But I will not lie any more than that, because it is sinful to lie.”