Archive for the ‘arbitrary coherence’ Category

“The ‘R’ Word”… Can’t Say ‘Recession’

March 16, 2008

 By Dan Ariely
The Washington Post
Sunday, March 16, 2008; Page B03

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? 50 cents0? 75 cents? $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 50
cents 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.

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