The Decision Strategist

Just a quick post about referencing effects. It turns out we think a sale is a bigger discount if the right-most digit is low instead of high. You can read about it on Science Daily. It’s probably a case of a referencing bias. Since products are priced at a flat amount ($200) or just below ($199), we see low numbers and assume they are a discount from the higher value.

It’s a great example of our implicit references and how they can affect our decision making. I wonder if marketers will start pricing sale items at $191 instead of $189.

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In the battle over what we want to do, much of it can be framed in terms of a struggle between our ‘want selves and our ’should’ selves (some info from HBS). The want self wants the candy bar, cigarette, beer and ice cream now. The should self recognizes that you’ll feel better in the long run if you don’t.

It turns out that which self is stronger depends to some extent on whether we expect consumption to be sooner or later. Decisions that make an immediate difference are decided using the ‘want’ self, and longer term decisions, even just several hours away, are made using the ’should’ self. Candy next to the checkout lane is so effective precisely because eating it will happen very soon. We never buy a candy bar from the checkout lane so that we can eat it later on.

Marketers use this idea to get you to make ‘want’ decisions. “Drive it away now” and “Own your house immediately” are ploys to get us thinking in terms of immediate consumption and make decisions using that framework.

If you’re looking for ways to fight advertising, it can be helpful to recognize which self is active during your decisions. Do you really want to spend $2,000 on a plasma TV so you can go home and watch the game (I have to admit a love of technology. I would have a hard time saying no if I had an extra $2,000)?

The 30 Day Hold List

This is why the 30 day hold list for things works so well. The idea is simple: any time you want to buy an expensive new toy put it on a hold list for 30 days. If you still want it at the end of that 30 days, go ahead and buy it, but otherwise, cross it out.

The hold list forces your ’should’ self to do the thinking and devalues the importance of the ‘want’ self. The result is that you only buy the toys you really want, and the others you realize you don’t need.

-zot

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In How To Fight Advertising, I wrote about an article at Get Rich Slowly based on Blink: The Power of Thinking Without Thinking. Now Lazy Man and Money has a follow up article that examines some of the conclusions from a different point of few.

My favorite part of the article has to do with children thinking that store-bought food wrapped in McDonald’s wrappers tastes better. In How To Fight Advertising I talked about advertising appealing to our stories about ourselves, and an exercise I had done to determine what factors I was particularly susceptible to. What’s interesting about Lazy Man and Money’s article is that he questions whether it was advertising that caused the kids to think the food tasted better, or whether the fact that all but two of them had eaten at McDonald’s previously was more of a factor. While advertising can be very effective, I’d put my money on previous experiences as having a bigger impact.

Memories Of a Cheeseburger

Human memory is largely associative, so that we are constantly referencing past experiences and relating them to current experiences. NASA has a great site with five memory games on it.

Point being that if you’ve eaten McDonald’s before, and then you see food in the same wrapper, the brain stirs up all the sensations: smell, taste, and enjoyment, involved in eating McDonald’s. Whatever store-bought food your eating takes on some of the same sensations.

I propose a new study where you feed people McDonald’s while causing them pain. I bet they will associate McDonald’s with pain after that, and think the store-bought food is worse, regardless of how many commercials they’ve seen.

Do you disagree? Let me know what you think. I think the experiment needs some serious re-thought, but the basic idea would work.

-zot

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Seth Godin has this post on cheap media advertising that got me thinking. Basically he says that companies don’t make smart decisions with respect to advertising, because they will spend millions for a superbowl ad spot and then spend millions on the ad. The superbowl ad only runs once, but they will only spend a tiny amount on banner ads or AM radio ads, which are very cheap.

I can see two sides here. First is that Seth is right and the companies are falling prey to the framing and endowment effects, discussed on the Decision Making Errors page. Since they shell out millions for the ad spot, companies mistakenly think that spending millions is justified, and vice-versa for the cheap ads. We see this in all consumer goods, where a higher price gives the impression of quality, though there may be no actual difference.

On the other hand, it could be the case that the super bowl is an effective way of reaching millions of people at the same time. If considered in terms of dollars per person viewing the ad, I wonder if it’s still so much more expensive. Also consider the target market. Budweiser probably sees much more success from a super bowl ad than they would from web-banners or AM radio.

I was going to break down the numbers to see super bowl advertising was cost-effective, but turns out several people have already done that. XTVWorld assumes a $4 million cost per :30 ad, with a view rate of 80-85%. Roughly 42 million households watch the super bowl, up to 100 million people. This article quotes a media expert as saying an add for the same rating show would normally cost about $840,000. That means the super bowl is roughly four times as expensive as it should be. And yet clearly something is causing executives to buy the ads and shell out the cash for expensive production.

To be honest, I think it is a little of both. Advertising is more about establishing a brand name than actually getting people to buy something. If you’re Budweiser, you just want the next person who wants to buy beer to pick Budweiser. This won’t happen if they don’t recognize your brand (on the other hand, microbreweries depend on word of mouth to spread their brand). How much would it cost Budweiser for people to see a Pabst Blue Ribbon commercial instead? At the same time, I’m sure that ego comes into play more than a little bit.

-zot

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