The floating anchor
How humans establish a concept of value is curious, especially value in terms of worth or money. It is best illustrated by how humans would value a new item they have never encountered before, say, something like a bright blue pearl.
Within a group of people, there would be several valuations, and most of them would be biased towards using the value of other pearls – some people would value it above a good pearl and others at less than a good pearl.
Then people would be asked how much they would actually pay for such a pearl and most people would offer a lower price than their own valuations (the utility of the pearl is usually less than the valuation). At least, that would be the case if the seller does not offer more information.
However, if people are told blue pearls are extremely rare and this is the only one available this year, then automatically all valuations and buying price offers would probably go up significantly.
But if the seller then says his asking price is RM500, then the valuations and buying prices will both converge around that price, regardless if the previous numbers were significantly different.
The point is people are often lost if they have to estimate the worth of things where they do not have a previous price on which they can “anchor” a value. So initially they would use the anchor price of something similar; e.g. price of other pearls in the example above.
But once more information is provided, the human mind adjusts the anchor price to fit around the new circumstances, such as rarity, availability and asking price. Therefore our minds can be controlled/tricked simply by how information is presented, perhaps even to the point where we forget that an item may have no utility.
This is one way people end up with things they may not need, like a second frying pan, which may have been marketed with a new “patented ceramic cancer-free” coating, a “super-efficient” heat distributing base, German workmanship, lifetime warranty, etc.
All this information raises the anchor price higher than for an existing pan – if the selling price then comes in under the new perceived anchor price, then buying a second pan is often inevitable, whether it is needed or not. And from that point, the new pan defines the anchor price of other pans.
Therefore, humans can be controlled when anchor prices in our minds are altered simply by the provision of new information. Note though that this does not always result in sensible behaviour as the manipulation of mental anchor prices is another way of inducing irrational loss aversion – and of course such new information may or may not be true anyway.
Nothing special, something special
Changing anchor pricing is often ridiculously easy. For example, people will almost certainly prefer to pay more for a bottle of “mountain water” than one labelled as tap water.
But there is actually no official definition of mountain water, not even here in France – the authorities just require the source of water to be correctly named on the bottles.
It is also the basis of branding. Seeing Charlize Theron wearing Dior perfume would raise many people’s anchor pricing for the perfume, even though the scent gives me headaches.
How this effect works is through attributing a sense of unusual rarity to an item; e.g. the beauty of an actress, the elegance/power of a car, or other charming, desirable characteristics such as perfect teeth, happy homes, cute animals, shiny hair, healthy old folks, etc.
Context and decoys
Anchor prices are part of how a human brain regards context, which is the settings or terms used to make a decision. The issue is context is not always regarded as rationally as one might expect – and this leads, for example, to humans often falling easily for decoys.
To understand the decoy effect, consider the following options on a menu:
Regular Fish & Chips – RM10.00
Large Fish & Chips – RM15.00
Large Fish, Large Chips, Fresh Salad in French dressing – RM16.50
Most people will elect the last item in the above choices because in the overall context, it would appear to be the “best value for money”, being only RM1.50 more for more chips and a salad.
The decoy is the large fish & chips, which now looks like poor value compared to the last option – this decoy is also used to benchmark the difference between a regular fish and large fish, implying that a large fish is 50% bigger than a regular fish.
However, people are often unaware of the real difference between the menu choices; e.g. the use of different sizes of plates, the large fish may only be 20% bigger than the regular fish, large chips may only mean a few more chips and fresh salad may be industrial sauces squirted over a few leaves.
A survey has found that the large fries in some fast food chains contain on average only 12 more fries than normal portions, despite using a larger sleeve and costing around 10-20% more.
So when people buy an “upsized” fast food meal, they may actually be overpaying for the few extra fries and larger drinks due to the decoy effect. In short, people often end up eating and paying more than what they had originally planned.
The decoy effect is also known as the asymmetric dominance effect as one of the options is always presented to be perceived as relatively asymmetric or “unfair” in our minds. It is one of the most commonly used tactics for manipulating purchasing behaviour.
Many modern sales websites and food chains offering multiple purchase options are usually applying the decoy effect to lure people towards the deals they really want to sell.
We want to be nice
Generally, most people want other people to treat them nicely, or at least, fairly. They may not actually expect niceness or fairness from other people, but it would be preferable. This leads to another way our behaviour may be modified.
A simple experiment in New York, USA, whereby diners at restaurants were given a single candy per diner with the bill resulted in an almost 18% increase in the size of gratuities. Offering one more candy per diner provoked a bigger increase of 21%.
This phenomenon appears to be due to a human trait called reciprocity, where people instinctively reward kind actions. Reciprocity also means that people tend to punish actions perceived to be unkind or unfair.
Reciprocity is used in many ways; classic examples are store or bank reward cards – buy enough with the cards and get product discounts, air miles, gift vouchers or various free items.
Once someone has signed up for a reward card, the provider would often bombard cardholders with special offers and opportunities to collect reward points (by spending money, of course).
Other less obvious ways are online restaurant reviews praising or denouncing dining experiences – the same also applies for product reviews. Another example is products which are labelled “environmentally-friendly”.
Many years ago, a London chef confided that dessert is the most important course in a menu – and in his establishment, the desserts were indeed spectacular as well as visually-pleasing. It was hard to leave his restaurant unimpressed, especially after the generous petit fours with the coffees/digestifs.
We would travel across town to dine there not infrequently, but sadly he left quite a few years ago, ostensibly to run a small tavern in the country. Reflecting upon it now, that was also an example of reciprocity as he always provided us with great evenings, which in turn ensured our loyalty.
We want to believe, part 1
As with our Palaeolithic ancestors, we usually delegate some control of our lives to other people. The problem lies not in the need to do this, but in how we make our choices of people we believe in – they can sometimes be extremely unwise.
There are no clearer examples of this than Trump and Brexit, and until recently, the corrupt Asian ex-PM who almost bankrupted his own country.
How these situations arise is too complex for this column as it needs to explain how large groups of people get induced into a state called cognitive dissonance where reality and facts are twisted by bizarre biases into an alternative paranoid self-reinforcing world view which excludes rationality.
We want to believe, part 2
Another belief-based trait is the placebo response. Most human brains have the capability to trick the body into a somewhat self-therapeutic mode when administered with placebos. Even the ritual of taking placebos is sometimes enough to provoke the placebo response – needless to say, it does not always work.
It is a curiously complex neurobiological reaction and magnetic resonance imaging scans of the brain have shown it involves the middle frontal gyrus region, which is about one-third of the brain’s frontal lobe.
Nobody knows exactly why the placebo response exists – though this is maybe what is keeping the old gentleman alive after having bak kut teh for breakfast every day for over 40 years.