Your grocery store’s layout isn’t random. Nope, it’s based on a lot of experimentation and number crunching and research. For example, did you know that we’re more likely to buy items on the middle shelves of grocery stores?
When scientists study how we make financial decisions, you can bet that marketers use that research to convince you to spend more money.
In a previous post, we covered a few subliminal sales techniques that salespeople and retailers use to manipulate your spending decisions. Now let’s look at three more examples of the science used to separate you from your cash.
The Pull of an Anchor
How we perceive value is easily influenced by other numbers, even if they’re random. As researcher Adam Galinsky explains, “Because they pull judgments toward themselves, these numerical values are known as anchors.”
To show how dramatic this “anchoring effect” can be, he cites a German study that looked at estimates of car values. Actors playing “customers” mentioned a possible price to a mechanic, then asked for his opinion of the value of a car. The mechanics’ estimates were about 1,000 Deutsche Marks ($700) higher when they had heard a high “anchor value.”
In other words, just mentioning a higher price influenced the mechanics’ thought processes enough to significantly affect what they thought a car was worth.
Galinsky offers another example: a study involving real estate agents. It might seem that some of these professionals could resist the anchoring effect when inspecting a house and estimating its value. But when researchers manipulated the supposed asking price of the house, it influenced every agent in the experiment.
Retailers and salespeople understand this phenomenon. That’s why in “discount” stores, labels often include a higher “comparable price.” If you don’t want to be influenced, try to ignore these anchors, or better yet, mentally put a price on the items before looking at the tags.
The Power of a Number
Why do so many prices end in the digit 9? When we see a sign that says, “Now only $9.99,” most of us think “10 dollars,” right? So how much of an effect could the widespread practice of ending prices in a “9” have on us?
A fascinating research paper titled “Effects of $9 Price Endings on Retail Sales” looks at several experiments that asked this question. In one study, the researchers chose four dresses with a $9 ending ($39, $49, $59 and $79). For each dress they increased the price by $5 in some catalogs, in others they lowered it by $5, and in a control group of catalogs, they kept the original prices.
Now, it won’t surprise you that the dresses with original pricing ($9 endings) did better than those priced $5 higher. But in three cases, the dresses sold better with a $9 ending than they did when priced $5 lower, and in the fourth case sales were almost the same.
Yes, you read that correctly. For example, one dress had 60% more sales at $79 than it did when the price was $74. The paper’s authors found “conclusive evidence that $9 price endings can increase demand.” (Like this idea? Click to tweet it!)
Without a good explanation of why this is true (apparently there isn’t one), how do we remain uninfluenced by this magic number? The authors found that $9 price endings didn’t work as well when retailers used the word “sale” or something similar. Is that because we are reminded that we’re being sold something, making us more skeptical? If so, maybe we can break the spell of the “9” by remembering it’s a trick when we see it.
Our Predictable Biases
Okay, so maybe you’re being subtly influenced into paying too much for dresses, cars and middle-shelf grocery items. But when you make investment choices, you’re more rational, right? Well…
While economists used to assume that even if people estimated probabilities poorly, they would be able do so without a bias. In other words, they would, on average, estimate too high or too low equally. However, behavioral economists Daniel Kahneman and Amos Tversky proved otherwise. It turns out that we misestimate probabilities in consistent, predictable ways.
For example, when a mutual fund beats the averages three years in a row, most people assume the managers are better than average, even though measuring over three years is statistically insignificant. People are biased by what Kahneman and Tversky call the “law of small numbers.” That’s the stupid cousin of the probability theorem called “the law of large numbers.” If you prefer not to read up on the math, just remember that small samples don’t make for good predictions.
So how can you invest wisely when a few good years prove nothing and only 24% of mutual fund managers beat the market averages? Well, until you develop stock-picking skills of Warren Buffet, it’s wise to invest in index funds, which have lower fees and routinely beat the other 76% of the professional money managers.
Whether you’re being sold investments or groceries, can you avoid falling victim to any or all of the subtle mind tricks above? Maybe, or maybe not, but it can’t hurt to at least try ignoring obvious anchors, disregarding the “9s,” and learning a bit about probabilities.
Your Turn: Do you feel that you’re influenced in subtle ways to buy things you don’t need or to pay more than you should?