The art of persuasion: morals or money?

The results really aren’t that surprising, but interesting nonetheless. As summarized nicely by Marginal Revolution:

The authors assigned 691 households in Japan to one of three groups a) a moral suasion group, b) an economic incentive group or c) a control group. The moral suasion group were told that electricity conservation was important and necessary on peak demand days and then over a year when the peak times hit they were sent day-ahead and same-day messages to please reduce electricity consumption at the peak times. The economic incentive group were told that their electricity prices would be higher during certain peak periods and over the year when the peak times hit they were sent day-ahead and same-day messages telling then when the prices would be higher. Prices were approximately 2-4 times higher during the peak times. Control groups had smart meters installed but were not sent messages.

Moral suasion worked but not nearly as well as economic incentives (in the figure, lower use is better).

Read the original paper by Ito, Ido and Tanaka.

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The art of persuasion: morals or money?

How anchoring bias can kill

Usually when I talk about anchoring bias it’s simply in the context of marketing: an organisation has tried to make one option seem like it’s comparatively better value than another.

Here’s the definition from Wikipedia:

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.

One of my favourite (and now very well known) examples is the way The Economist subscriptions were priced:

Economist

Dan Ariely’s analysis of this is well worth a read:

Who would want to buy the print option alone, I wondered, when both the Internet and the print subscriptions were offered for the same price? Now, the print- only option may have been a typographical error, but I suspect that the clever people at the Economist‘s London offices (and they are clever-and quite mischievous in a British sort of way) were actually manipulating me. I am pretty certain that they wanted me to skip the Internet- only option (which they assumed would be my choice, since I was reading the advertisement on the Web) and jump to the more expensive option: Internet and print.

But how could they manipulate me? I suspect it’s because the Economist‘s marketing wizards (and I could just picture them in their school ties and blazers) knew something important about human behavior: humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we don’t know how much a six- cylinder car is worth, but we can assume it’s more expensive than the four- cylinder model.)

In the case of the Economist, I may not have known whether the Internet- only subscription at $59 was a better deal than the print- only option at $125. But I certainly knew that the print and-Internet option for $125 was better than the print- only option at $125. In fact, you could reasonably deduce that in the combination package, the Internet subscription is free! “It’s a bloody steal-go for it, governor!” I could almost hear them shout from the riverbanks of the Thames. And I have to admit; if I had been inclined to subscribe I probably would have taken the package deal myself. (Later, when I tested the offer on a large number of participants, the vast majority preferred the Internet- and- print deal.)

Our tendency to process information this way rarely does much harm (except perhaps to our wallets), but anchoring can lead to potentially catastrophic results in certain contexts. From an article by Danielle Ofri, M.D in the New York Times in 2012:

Anchoring bias is often considered the Achilles’ heel of diagnostic reasoning. It’s as though our brains close ranks around our first impression, then refuse to consider anything else. Once a patient is “billed” as a heart attack, or gastroenteritis, or anxiety, we view every data point through that particular lens.

If the data don’t fit, we tend to assume that it’s merely because the illness is presenting atypically rather than that our diagnosis might be wrong or incomplete. Anchoring bias casts an even longer shadow in today’s shift-oriented medical world, in which patients are serially handed off from one team to another. The label that is attached to them takes on a life of its own.

How anchoring bias can kill

The behavioural science behind Netflix pricing and the Facebook loading screen

behavioural science Facebook loading screen

I thought the above example was pretty interesting. And this too, about Netflix pricing:

You don’t understand prices. You don’t buy things based on anything resembling “logic.” You buy things based on, well, something else— mental “shortcuts.” And Netflix wants to hack your mental shortcuts.

One way companies use prices to trick us is to offer cheapo, inferior goods to get us hooked on a product that we’ll eventually spend more on. Time Warner Cable, for example, experimented with an “Essentials” package that offered cable without the most popular channels at a discount, expecting (and, as I’ve been told, often discovering) that customers would upgrade to full cable when they realized how much they love TV.  In a way, Netflix is already doing this: In December, it introduced a $6.99 plan ($1 discount) that allows streaming to one screen only.

The more sophisticated strategy isn’t to offer two prices, but three. In Hasting’s words: “good,” “better,” and “best” price tiering. Why three? Because of the magic of the Goldilocks effect in pricing.

It reminds me of a great talk I saw some time ago about the way The Economist packages up subscriptions, as explained by Dan Ariely here.

The behavioural science behind Netflix pricing and the Facebook loading screen