THINKER'S ALMANAC - April 29

How does the marketing of popcorn at movie theaters illustrate the irrational thinking of consumers?

Subject: Persuasion - Decoy Effect

Event:  Psychologist Dan Ariely is born, 1967

Even the most analytical thinkers are predictably irrational; the really smart ones acknowledge and address their irrationalities. -Dan Ariely

Imagine a movie theater concession counter.  Two options are available for popcorn:  a $3 small size or a $7 large size.  In an experiment conducted by National Geographic, the vast majority of movie-goers opt for the small size, perceiving it as the better value.  Next, imagine a slight change in the scenario:  

We add a medium option for $6.50.  Theater-goers now have three options:  The small ($3.00), medium ($6.50), or large ($7.00).  You might predict that the small option would remain the most popular; however, you might base your guess on the assumption that consumers are rational.  The truth is, however, that the large popcorn now becomes by far the most popular of the three options.

Psychologists have a name for what happened in the popcorn experiment; it’s called the decoy effect.  It describes the marketing strategy of adding a third, less attractive and inferior option, as a strategic method of influencing the consumer’s perception.  In the popcorn example, the goal is to get the consumer to purchase the most expensive option; adding the medium size ($6.50) changes the consumer’s perception of the large option ($7); instead of viewing it as much more expensive than the small size, the buyer now perceives it as only slightly more expensive than the medium option.  In presenting the medium size, the theater has nudged the buyer to spend four more dollars because the large size just “feels” like the best deal.

One man who would not be surprised by the irrational behavior of the popcorn buyers is Dan Ariely, a psychologist and behavior economist, who was born on this day in 1967.  Ariely is so certain that humans are predictably irrational that he wrote a book called Predictably Irrational.

In the introduction to his book, Ariely presents some famous lines from Shakespeare (Hamlet Act II, Scene ii) that celebrate the human mind:

What a piece of work is a man! How noble in reason, how infinite in faculty! In form and moving how express and admirable! In action, how like an angel, in apprehension, how like a god! The beauty of the world. The paragon of animals.

Ariely explains that although he does have great respect for the capabilities of the human mind, his research reveals that human thinking is often irrational:

Whether we are acting as consumers, businesspeople, or policy makers, understanding how we are predictably irrational provides a starting point for improving our decision making and changing the way we live for the better.

One illustration of this predictably irrational behavior is explained in a chapter about how ownership of something alters our perception of that thing.  Ariely explains a ticket study that was conducted at Duke University.  The tickets were for entry to a Duke Men’s Basketball game. The tickets are limited and highly prized by all students, so many participate in the lottery in hope of getting their hands on tickets.  The experiment began after the lottery as researchers called both winners and losers in the ticket lottery, asking them how much they would pay to either sell the ticket they had in their possession or purchase a ticket that they were unable to obtain in the lottery.  The results revealed that on average students who were not in possession of a ticket were willing to pay on average $170 for a ticket.  In contrast, those who had a ticket were unwilling to part with it for no less than $2,400 on average.  

Researchers call this drastic difference in value the endowment effect, which explains why the ticket holders placed such a higher value on the tickets.  The endowment effect kicks into action when we add value to an item that we own based on our emotional attachment, irrationally inflating its market value.

Just as the decoy effect makes people irrationally pay more for popcorn, the endowment effect makes ticket owners irrationally overprice their basketball tickets.  Not only is this behavior irrational, it is, as Ariely argues, predictably irrational.  

All of us, not just economists or salespeople, are affected by ownership. Throughout our lives, we acquire things by buying and give up things by selling.  It makes sense then to understand more about why the endowment effect has the impact it does on us.  

As Ariely explains, the first reason is that “we fall in love with what we already have,” either recalling the emotions attached to the thing or -- as in the case of the tickets -- imagining the experiences and emotions we will have in the future.  

Secondly, is loss aversion, the fact that humans experience more pain by losing something than gaining something.  For example, losing a ten dollar bill for many would be twice as painful as the pleasure experienced in finding a ten dollar bill.

Thirdly, we are so wrapped up in our feelings and emotions about a thing to realize that others don’t see that thing the same way.  As Ariely puts it, “It is just difficult for us to imagine that the person on the other side of the transaction, buyer or seller, is not seeing the world as we see it” (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  How do movie theaters use the decoy effect to get customers to think irrationally?

Challenge - Eradicating the Irrational:  Cognitive biases reveal the ways in which human thinking is predictably irrational.  Research a specific cognitive bias.  Define it, and explain how it causes us to be predictably irrational.  Finally,  prescribe how we might counter this effect to be more rational.

Sources:

1-Ariely, Dan. Predictably Irrational:  The Hidden Forces that Shape Our Decision.  New York:  HarperCollins, 2008.