Nudge
The Price Precision Effect: Evidence from Laboratory and Market Data
Manoj Thomas, Daniel Simon & Vrinda Kadiyali
Marketing Science, January-February 2010, Pages 175-190
Abstract:
We examine two questions: Does the roundness or precision of prices bias magnitude judgments? If so, do these biased judgments affect buyer behavior? Results from five studies suggest that buyers underestimate the magnitudes of precise prices. We term this the precision effect. The first three studies are laboratory experiments designed to test the existence of the precision effect and examine the underlying psychological processes. In Study 1, we find that precise prices are judged to be smaller than round prices of similar magnitudes. For example, participants in this experiment incorrectly judged $395,425 to be smaller than $395,000. In Study 2, we show that precision is more likely to affect magnitude judgments under conditions of uncertainty. Study 3 demonstrates that manipulating prior experience with the pattern of roundness and precision in numbers can moderate the precision effect. Studies 4 and 5 examine whether the precision effect influences buyers' willingness to pay for negotiated purchases (e.g., houses). In Study 4, we conduct an experiment on a nationally representative sample of homeowners to demonstrate that participants are willing to pay more for houses when the sellers use precise (e.g., $364,578) instead of comparable round (e.g., $365,000) prices. In Study 5, we analyze data from residential real estate transactions in two separate markets and find that buyers pay higher sale prices when list prices are more precise. These empirical results enrich our understanding of the psychological processes that underlie price magnitude judgments and have substantive implications for buyer and seller behavior.
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Loss Aversion and Status Quo Label Bias
Avital Moshinsky & Maya Bar-Hillel
Social Cognition, April 2010, Pages 191-204
Abstract:
Many factors contribute to status quo perseverance, some justifiable, some not. We focus on an advantage accruing to a policy from just calling it status quo, which is that the mere label makes it look better. When comparing pros and cons of competing policies, labeling one status quo sets it up as the reference point with respect to which pros and cons are potentially either losses or gains. Since "losses loom larger than gains," pros one has weigh more than pros one does not, while the reverse holds for cons, thereby tilting the overall balance of pros and cons in favor of the policy designated as status quo. Direct evidence for this account is presented by showing that: (a) A policy's attractiveness increases when it is labeled status quo; (b) A policy's attractiveness is predictable from its pros and cons; and (c) The magnitude of status quo enhancement is predictable from a quantitative model that measures aversion to potential losses (accruing to having it replaced). Alternative processes, which may be valid in other paradigms, are obviated in the present one.
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Do Tasting Notes Add Value? Evidence from Napa Wines
Carlos Ramirez
George Mason University Working Paper, February 2010
Abstract:
This paper evaluates whether tasting notes - the brief testimony that describes the sensory properties of wines - add value. The analysis is based on a sample of over 2700 recent vintage cabernet sauvignon wines evaluated by Wine Spectator. I estimate a dynamic wine price model to evaluate the marketing effect of the note, controlling for quality measures as well as other wine characteristics. The results indicate that the length of the tasting note exerts a strong positive influence on the wine's price, even after controlling for quality. A 10 percent increase in the number of characters in the tasting note (about 23 additional characters) contributes about two to four dollars to the price of the wine. Further analysis reveals that the value of the tasting note does not come from the "analytical" words contained in the note but rather, from the more subjective component of it.
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The Objective Value of Subjective Value: A Multi-Round Negotiation Study
Jared Curhan, Hillary Anger Elfenbein & Noah Eisenkraft
Journal of Applied Social Psychology, March 2010, Pages 690-709
Abstract:
A 2-round negotiation study provided evidence that positive feelings resulting from one negotiation can be economically rewarding in a second negotiation. Negotiators experiencing greater subjective value (SV) - that is, social, perceptual, and emotional outcomes from a negotiation - in Round 1 achieved greater individual and joint objective negotiation performance in Round 2, even with Round 1 economic outcomes controlled. Moreover, Round 1 SV predicted the desire to negotiate again with the same counterpart, whereas objective negotiation performance had no such association. Taken together, the results suggest that positive feelings, not just positive outcomes, can evoke future economic success.
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Revisiting the Debate over Attorneys' Contingent Fees: A Behavioral Analysis
Eyal Zamir & Ilana Ritov
Journal of Legal Studies, January 2010, Pages 245-288
Abstract:
Building on Kahneman and Tversky's prospect theory, this paper presents a series of experiments designed to reveal people's preferences regarding attorneys' fees. Contrary to common economic wisdom, it demonstrates that loss aversion (rather than risk aversion or incentivizing the lawyer to win the case) plays a major role in clients' preferences for contingent‐fee arrangements. Facing a choice between a mixed gamble and a pure positive one, plaintiffs prefer a contingent fee (framed as a pure positive gamble), even if it yields an expected fee that is 2 or 3 times higher than a noncontingent one (framed as a mixed gamble). At the same time, defendants, who face a choice between two pure negative gambles, are typically risk seeking and prefer fixed fees. Our findings indicate that information problems and lack of alternative fee arrangements probably do not loom large in clients' choice of fee arrangement. We discuss the policy implications of our findings.
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Preston McAfee, Hugo Mialon & Sue Mialon
Economic Inquiry, April 2010, Pages 323-336
Abstract:
That sunk costs are not relevant to rational decision making is often presented as one of the basic principles of economics. When people are influenced by sunk costs in their decision making, they are said to be committing the "sunk cost fallacy." Contrary to conventional wisdom, we argue that in a broad range of situations, it is rational for people to condition behavior on sunk costs because of informational content, reputational concerns, or financial and time constraints. Once all the elements of the decision-making environment are taken into account, reacting to sunk costs can often be understood as rational behavior.
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Do people respond to low probability risks? Evidence from tornado risk and manufactured homes
Daniel Sutter & Marc Poitras
Journal of Risk and Uncertainty, April 2010, Pages 181-196
Abstract:
Whether people perceive and respond to low-probability natural hazards is a research question of considerable policy relevance. We obtain evidence by considering the response of housing choice to tornado risk for manufactured homes. The vulnerability of manufactured housing, combined with its growing share of the U.S. housing market, has led to proposed mandates for community shelters in mobile home parks. Expected utility theory, however, predicts that households should account for tornado risk in their housing choice. We test for an effect of tornado risk on manufactured housing demand using cross-sectional state data, as well as counties in three tornado prone states. We find that people do respond to tornado risk; our estimates indicate that each expected annual state tornado death per million residents reduces demand for manufactured homes by about 3%. The estimated quantity effect is consistent with the market studies of the price elasticity of manufactured homes.
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Claus-Christian Carbon
Cognition, forthcoming
Abstract:
Participants with personal and without personal experiences with the Earth as a sphere estimated large-scale distances between six cities located on different continents. Cognitive distances were submitted to a specific multidimensional scaling algorithm in the 3D Euclidean space with the constraint that all cities had to lie on the same sphere. A simulation was run that calculated respective 3D configurations of the city positions for a wide range of radii of the proposed sphere. People who had personally experienced the Earth as a sphere, at least once in their lifetime, showed a clear optimal solution of the multidimensional scaling (MDS) routine with a mean radius deviating only 8% from the actual radius of the Earth. In contrast, the calculated configurations for people without any personal experience with the Earth as a sphere were compatible with a cognitive concept of a flat Earth.
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Niels van de Ven, Thomas Gilovich & Marcel Zeelenberg
Psychological Science, forthcoming
Abstract:
To help explain a regularity in democratic elections, we examined whether choosing to delay making a choice between a focal option and an alternative tends to make people subsequently less likely to choose what they would otherwise have chosen. The results of two experiments demonstrated that participants who were induced to delay making a decision were indeed less likely to choose the descriptively normative option. An additional experiment that primed a sense of doubt in participants provided support for a self-perception account of this result. Electing to delay making a choice is interpreted as an indication of doubt - doubt that tends to be attributed to the most prominent option. Delay-induced doubt about the normative option makes it less likely to be selected.
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Valuing Intellectual Property: An Experiment
Christopher Buccafusco & Christopher Jon Sprigman
University of Virginia Working Paper, March 2010
Abstract:
In this article we report on the results of an experiment we performed to determine whether transactions in intellectual property (IP) are subject to the valuation anomalies commonly referred to as "endowment effects". Traditional conceptions of the value of IP rely on assumptions about human rationality derived from classical economics. The law assumes that when people make decisions about buying, selling, and licensing IP they do so with fixed, context-independent preferences. Over the past several decades, this rational actor model of classical economics has come under attack by behavioral data showing that people do not always make strictly rational decisions. Perhaps the most important research in this field is that related to the "endowment effect" - the discovery that, contrary to economic predictions, people value the same object more when they own it than when they do not. To date, the endowment effect has been observed for a variety of goods including mugs, lottery tickets, and hunting permits. Our experiment establishes a substantial valuation asymmetry between authors of poems and potential purchasers of them. As we explain in detail in the article, we constructed a market for the poems that was modeled on a market for licensing IP. The observed differences in valuation indicate that IP licensing markets may be substantially less efficient that previously believed. Our results suggest that (1) the preferences of IP creators, owners, and purchasers are unstable and dependent on the initial distribution of property rights in creative works, and (2) large gaps arise between purchasers' willingness to pay and sellers' willingness to accept even though the poems are non-rival property and the contemplated alienation of the property is therefore only partial. Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases that drive the price that creators and owners of IP are likely to demand for transfers considerably higher than what buyers will, on average, be willing to pay. This does not mean, of course, that transactions in IP will not take place - we see such transactions happening out in the world every day. Our research suggests, however, that IP transactions may occur at a level that is significantly suboptimal, and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value, or for which no well-established custom or pattern helps to inform valuation. These results have considerable implications for the structuring of IP rights, IP formalities, IP licensing, and fair use.
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Li Way Lee
Journal of Socio-Economics, forthcoming
Abstract:
Expected-utility theory can explain why people who are terminally ill often feel a surge in wellbeing and hope to live longer when they have the option of legally ending their lives. Behavioral theories, however, may better answer larger questions such as why so few terminally-ill people bother to get that option.
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Have You Seen the News Today? The Effect of Death-Related Media Contexts on Brand Preferences
Jia (Elke) Liu & Dirk Smeesters
Journal of Marketing Research, April 2010, Pages 251-262
Abstract:
This research examines how death-related media contexts affect consumers' preferences for domestic and foreign brands. Four lab and field studies demonstrate that death-related media contexts affect subsequent brand evaluations in distinct ways, which have not yet been documented in the extant literature on media context. First, death-related media contexts shift consumers' preferences in favor of domestic brands by enhancing consumers' patriotism. Second, the death-related media context effect appears only with a temporal delay between the media context and the brand evaluation. Even after a 24-hour delay, the effect still takes place as long as consumers have not been given an opportunity to attenuate death-induced anxiety. Finally, the authors show that foreign brands can counter the negative effects of a death-related media context by making a prodomestic advertising claim.
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Unpacking Preference: How Previous Experience Affects Auto Ownership in the United States
Rachel Weinberger & Frank Goetzke
Urban Studies, forthcoming
Abstract:
As environmental concerns mount alongside increasing auto dependence, research has been devoted to understanding the number of automobiles households own. The 2000 US census public use micro sample is used to demonstrate the importance of preference formation in auto ownership by studying auto ownership among recent movers. Using a multinomial probit model, the paper demonstrates that residents in the US transit cities who moved from major metropolitan areas are more likely to own fewer vehicles than counterparts who moved from smaller metropolitan areas and non-metropolitan areas. It is concluded that these results are due to learned preferences for levels of car ownership. Once the self-reinforcing ‘cultural knowledge' of living without cars is lost, it could be difficult to regain. A focus on children and young adults, familiarising them with alternatives to the car may be an important approach to developing collective preferences for fewer cars.
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Differential information use for near and distant decisions
Alison Ledgerwood, Cheryl Wakslak & Margery Wang
Journal of Experimental Social Psychology, forthcoming
Abstract:
Whether choosing a cell phone, a Senator, or a kitchen appliance, consumers today quickly find themselves awash in information from commercials, magazines, and websites. Whereas some of this information is broad, decontextualized, and abstracted across multiple individuals and instances, other information is more closely tied to a single experience within one specific context. The present research asks: Under what circumstances do people rely on abstracted averages, and when are they swayed by another individual's particular experience? Across three studies, we show that temporal distance increases the relative weight placed on aggregate versus individualized information when participants are asked to choose between two sleeping pills, migraine medications, or kitchen appliances, and that this process impacts not only evaluation but also willingness to pay and choice. Potential implications for evaluation, decision-making, and base-rate utilization are discussed.
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Jennifer Horney, Pia MacDonald, Marieke Van Willigen, Philip Berke & Jay Kaufman
Risk Analysis, March 2010, Pages 501-511
Abstract:
Individual perception of risk has consistently been considered an important determinant of hurricane evacuation in published studies and reviews. Adequate risk assessment is informed by environmental and social cues, as well as evacuation intentions and past disaster experience. This cross-sectional study measured perceived flood risk of 570 residents of three coastal North Carolina counties, compared their perception with actual risk determined by updated flood plain maps, and determined if either was associated with evacuation from Hurricane Isabel in 2003. Census blocks were stratified by flood zone and 30 census blocks were randomly selected from each flood zone. Seven interviews were conducted at random locations within selected blocks. Bivariate and multivariable analyses were conducted to produce crude and adjusted risk differences. Neither the designated flood zone of the parcel where the home was located nor the residents' perceived flood risk was associated with evacuation from Hurricane Isabel in the bivariate analysis. In the multivariable analysis, intention to evacuate and home type were important confounders of the association between actual risk and evacuation. The belief that one is at high risk of property damage or injury is important in evacuation decision making. However, in this study, while coastal residents' perceived risk of flooding was correlated with their actual flood risk, neither was associated with evacuation. These findings provide important opportunities for education and intervention by policymakers and authorities to improve hurricane evacuation rates and raise flood risk awareness.
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Small Sounds, Big Deals: Phonetic Symbolism Effects in Pricing
Keith Coulter & Robin Coulter
Journal of Consumer Research, forthcoming
Abstract:
Studies suggest that certain vowel and consonant sounds (or phonemes) can be associated with perceptions of large and small size. Mental rehearsal of prices containing numbers with small phonemes results in overestimation of price discounts, whereas mental rehearsal of prices containing numbers with large phonemes results in underestimation. Mental rehearsal of the same sale prices characterized by small phonemes in one language and large phonemes in another language can yield differential effects. For example, when sale prices are rehearsed in English, an $11.00-$7.88 (28.4%) discount is perceived as greater than a $10.00-$7.01 (29.9%) discount; however, when these same prices are rehearsed in Chinese, the latter discount is perceived as greater. Non-price-related phonemes do not yield these same discount distortions. Collectively, findings indicate that the mere sounds of numbers can non-consciously impact and distort numerical magnitude perceptions.