The choices you think you have
People’s consumption patterns can be influenced by discounts, promotions and sales.
I like my dog. We set off for walks two to three times a day and he always picks his own route through the village and woods. There are many forks in the paths, so there are many options and we rarely have an uninteresting walk – but although he has a few favourites, his inquisitive but fickle nose initially ensured I never knew which route he would choose beforehand.
My dog’s behaviour is interesting because it became possible to know to a high degree of certainty which way he would turn, just by observing a few factors. It is also a fun extension of some work I had done on Game Theory, a branch of mathematics to do with establishing a “dominant strategy” which is dependent on pay-offs received for various actions involving target subjects. As not all data is always known, it was necessary to apply Bayesian logic, where outcomes are modelled on available data. Examples are: If we left home after 10am, my dog would tend to follow the path of the neighbour’s dog which had been out before him. If it had rained, he would prefer mossy paths – if sunny, he likes sandy paths. In autumn, he is fonder of chestnut tree leaves on the ground than oak leaves, and so on. Therefore, if we left after 10am on a rainy day and the neighbour’s dog had gone down a mossy path, then it is very certain my dog will do the same. The maths does not attempt to explain why my dog has these preferences; only that his behaviour is predictable by certain conditions – and the same predictability applies to humans.
Human idiosyncrasies are startlingly similar
We like to think of ourselves as independent, thoughtful persons, able to weigh up pros and cons before making decisions about what to buy or eat. But as described in my article What We
Think Of When We Think of Food on star2.com, many human decisions are actually based on System 1 thinking, as quick decisions using biases are a survival strategy hardwired into us during our evolution.
However, humans also make decisions based on other curious perceptions of reality, and these perceptions are surprisingly easy to manipulate. In fact, chances are very high you would want to choose the decisions engineered for you without even knowing why. People are simply hard-wired to make a lot of flawed decisions. The factors controlling our decisions are well-known, usually immutable and it can be fun to observe them in action, even within your own self.
So following are several startling ways we can be manipulated to be predictable. They are an intrinsic part of modern life, and they affect what we buy, eat and even feel about ourselves.
Before we start, a couple of terms need to be understood. One is “utility”, which in economics is defined as the benefit or satisfaction of consuming/buying an item. The other is “marginal utility” which is therefore the benefit or satisfaction of consuming/buying an ADDITIONAL item.
Something free is even more valuable
It is a common mistake to assign monetary values to desirability, because in reality, the right equation should express an inverse relationship. As an item gets more expensive, the normal reaction is a drop in demand as people weigh up the utility of owning or not owning the item against the cost. Hence, when we see beluga caviar on the menu at RM500, we would likely get very curious and many people would want to try it, but unless you are an ex-PM of Malaysia, we probably would not actually order it. However, if the price is lowered to RM50, we would be much more likely to order it as it then becomes affordable enough to satisfy our curiosity, if nothing else.
Following this innate logic in our brains, the very most desirable items are therefore those that are perceived as free. That is why we prefer to buy items marked as “Buy one, get one free!” because the desirability of getting something for free is extraordinarily high, even though we might not have wanted the item originally. The same tactic also works for items marked as “Buy X, get Y free!”, even if Y is some worthless toy. The emotional charge of getting something for free is quite primal, often irrational and has boosted sales of billions of unhealthy children’s meals packaged with pointless plastic trinkets. Similarly, many adults prefer unsound meals with “unlimited free refills” for drinks, simply because humans very much prefer anything they perceive as zero cost.
Why this behaviour evolved may be due to the efforts required by our Palaeolithic ancestors to acquire food and shelter items. In their harsh environments, usually nothing was acquired easily and therefore anything that they could obtain for free or at a low cost in terms of effort would be extremely desirable and probably even irresistible.
Zero cost marketing strategies rely on the customers’ own motivations, which influence perceptions of utility and/or marginal utility – but it is important to note that these motivations are dictated by culture and environment. For example, buy-one-get-one-free roasted grasshoppers would not have the same appeal in Europe as in some Asian countries.
As an aside, an experiment found that people would eat up to 85% more if food is perceived as free.
Nobody wants to lose out
It is pretty common to see signs in shops and supermarkets for discounts which will expire within a certain period; stuff like “50% off while supplies last!” We also often get time-limited vouchers/coupons to dine at a discount. This works because humans have an instinct for loss aversion, or an intense dislike for losing something (e.g. because an offer has expired), even though they may not have wanted it in the first place.
There are a lot of similarities between loss aversion and zero cost strategies; for example, buying two items at 50% discount is the same as buying one and getting the second for free. They are also usually combined to drive demand up during a short space of time; e.g. “Get 50% off dinner for 3 days only!”
However, loss aversion strategies work differently from zero cost. In the above examples, to get a “free” item, you have to buy two items at 50% off. This then supposes you actually require two such items; for example, buying only one oven or kitchen sink at 50% off would be more sensible than buying two units and wasting space to store a surplus, unused kitchen fitting, even if it is 50% discounted. This effectively means that you have paid the full price for one item and have the inconvenience of storing an unused duplicate item. In cases like this, the utility may be very high, but the marginal utility is very low. In such cases, the discounts would tend to be less generous as there is little marginal utility to drive up sales volume.
But loss aversion is actually (much) more complex. A 1991 paper by Kahneman, Knetsch & Thaler investigated this phenomenon and identified three additional characteristics: 1) endowment effect, 2) sunk cost fallacy and 3) status quo bias.
Loss and endowment
Let us assume a stranger gave some people a free RM5 lottery ticket each. Then another stranger comes along and offers RM5 each for the tickets. It was free to acquire but practically everyone will refuse the RM5. So another stranger comes and offers RM10. At this point, a few people may sell but it would be a very small percentage. Then another stranger offers RM100 – at this price more people would sell but many will still hold on to the ticket. Therefore, in the minds of many people, the ticket has attained an additional value, worth up to 20 or more times its real value, JUST BECAUSE THEY OWN THE TICKET – this is called the endowment effect. Loss aversion has disrupted the ability to discern the real value of an item, even if it is printed on the face of the item.
Loss and sunk cost
This is something you must have seen. A party over-orders the food at a restaurant and rather than letting it go to waste, some of the people will try to eat everything left on the table even though it makes them ill. This is because they believe the sunk cost or the money paid for the food will be lost if they do not eat it all.
Loss and status quo
At breakfast in KL, I once met a man in a restaurant who said he has had the same breakfast every day for over 40 years – a pork rib soup called bak kut teh. When asked why he does not vary his breakfast, he said he was over 70 years old and the soup keeps him healthy. I just nodded, as the reality, of course, is there must be better ways to start the day than an oily salt-laden pork soup. But fear of changing the status quo and losing his regular daily breakfast precludes him from other healthier options, and probably even prevents him going away on holidays. I hope he is still alive.
This series concludes next with how we often incorrectly assign value to things, how we are decoyed into choices, and other curiously inflexible perceptions lurking inside our brains.