Do you know why we sometimes find ourselves excitedly buying things we don’t really need?
Do you know why we still have a headache after taking a five-cent aspirin, but why that same headache vanishes when the aspirin costs 50 cents?
Irrational? Maybe. Predictable? Only in the comics.
For years, free market ideology has told us that market forces produce the best solution to any problem.
Unfortunately, decades of research in psychology, sociology, and economics proves that the underpinnings of free market ideology — that we understand our true motivations and self-interests, and can correctly calculate the value of the different options we face — are false.
Instead, research shows that we make decisions based on a number of seemingly irrelevant — but highly influential — factors, including the presentation of options, price anchoring, and social norms, among others.
What does this mean to you, as a product manager?
When given three choices — A, B (different from A, but just as attractive ), and A- (similar to A, but not quite as good as A), we will almost always choose A. Why? Because we make decisions based on relative thinking. Deciding between A and B is difficult. But A is clearly superior to A-, so we choose A.
When you present packages to consumers, do you leverage the idea of the three choices to guide them to the package you most want them to purchase?
Anchoring — or the tendency to rely on a single piece of information when making decisions — has a major impact on our willingness to pay.
Savador Assael created the market for black pearls. His first attempt to market the pearls completely failed. Then he leveraged a personal relationship to get the pearls placed in a 5th Avenue store window, with an outrageous price tag. Soon, black pearls were considered precious — and sold through the roof. Using clever placement and pricing, Assael created a new anchor.
Supply-side variables like MSRP can affect the consumers’ willingness to pay. That is something you can control.
Social norms are a less expensive and more effective tool than market-based norms–but they come with a higher risk.
The good news: Social norms build loyalty and make people more willing to pitch in. The bad news: If you treat consumers like family in one exchange and like a nuisance when it becomes more convenient or profitable, they will be offended–much like your mother-in-law would be if you offered to pay her after complimenting her on a fantastic dinner.
You can’t have it both ways; you need to choose. What kind of relationship do you want to have with your customers?
Overall, I highly recommend Ariely’s book to any PM, or any person, interested in better understanding the biases that affect our decision-making. For other opinions on Predictably Irrational, check out what Stewart Rogers, Dr. Jim Anderson, and Carmine Gallo had to say.
(Oh–and the reason we excitedly buy things we don’t really need? Relativity, anchoring, and self-herding. Why do more expensive aspirins seem more effective than cheaper aspirins? Price expectations can actually trigger endorphins and other biological reactions that can actually change your body!)
Dan Ariely presents examples of cognitive illusions that help illustrate why humans make predictably irrational decisions…