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The Price of Framing & Anchoring

I love wikipedia, which is why I am more than willing to donate some money. But I was a little taken back when I saw that its initial asking price is $20. I was thinking a few bucks at most, certainly not $20… that’s four Bud Lights in NYC! What’s interesting is that after seeing the initial price of $20, giving five, six, or seven dollars as opposed to one or two didn’t seem that bad. But then my knowledge of cognitive biases reminded me that Jimmy Wales was playing me.

The green box on the right illustrates a cognitive bias known as anchoring, which “describes the common human tendency to rely too heavily… on one trait or piece of information when making decisions” (I took this quote, appropriately, from wikipedia). A good bargainer uses anchoring to set the initial price high and give the buyer the illusion that he or she is getting a good deal. Likewise, Wales set the smallest donation at $20 to make, say, ten dollars seem like not that much. I mentioned anchoring about a month ago; now, I want to turn to its evil twin, the framing effect, which also distracts us with irrelevant information.

To get a sense of the power of framing, consider Dan Ariely’s example, which appears in the first chapter of Predictably Irrational. Below are three subscription plans offered by Economist.com. Which would you choose?

  1. Economist.com subscription – US $59.00 One-year subscription to Economist.com. Includes online access to all articles from The Economist since 1997.
  2. Print subscription – US $125.00 One-year subscription to the print edition of The Economist.
  3. Print & web subscription – US $125.00 One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997.

If you read closely, something strange should have jumped out at you. Who would, as Ariely says, “want to buy the print option alone… when both the Internet and the print subscriptions were offered for the same price?” At first it seems as if someone at The Economist may have made a mistake, after all, how could a one-year subscription have the same value as a one-year subscription and access to online articles since 1997? But after thinking for a second, you may realize that the people at The Economist are not all that stupid; they may in fact know a thing or two about human behavior.

To see just how influential the “framing” of the Economist’s subscription plans are, Ariely conducted the following experiment. First, he presented his MIT Sloan School of Management students with the options as seen on Economist.com and had them choose a subscription. Here were the results.

  • Internet-only subscription for $59 – 16 students
  • Print-only subscription for $125 – 0 students
  • Print-and-Internet subscription for $125 – 84 students

It makes sense – who would choose option two given option three? But the question is: how much did option two influence the student’s decision making? Ariely conducted a second experiment to find the answer. He gave the following subscription plan, this time without the second option, to a second group of students and had them pick one. Here were the results.

  • Internet-only subscription for $59 – 68 students
  • Print-and-Web subscription for $125 – 32 students

As you can see, by simply removing the second option the preference of the students shifted dramatically. Without the second option 68 students chose option one while only 32 students chose option two. How significant is this? Well let’s say that instead of running this experiment with 100 graduate students, you did it with 10,000 customers in the real world. And let’s say that all 10,000 customers chose to sign up for a subscription. In scenario one, where three options are presented, 8,400 people would have chosen option three, 1,600 would have chosen option one, none would have chosen option two, and The Economist would have made $1,144,400 in revenue. Let’s compare this to the second scenario; 6,800 chose option one, 3,200 chose option two, and The Economist would have made $801,200 in revenue. By simply placing a decoy option, The Economist has made $343,200 more.

So what’s the lesson? When you go out this weekend to restaurants or bars, remember that all those gimmicks are just waiting to feast on your cognitive biases. Maintain rationality!

5 Comments Post a comment
  1. Great examples and post! A former student from my Behavioral Decision Making MBA class just returned from a trip to the U.S. (she is not from the U.S.), and wrote me an email commenting on a similar trick. She noted: “Sometimes when you’re given your check, you also get a guideline on how to tip. Whenever I get this, I leave very little as I don’t think it’s nice to tell me how much I should tip. But this new thing is better. You get a helpful calculation (depending on the amount) of possible tip amounts. You have 3 variants: 15%, 18% and a 20% tip. This has an amazing effect as it definitely works as an anchor”.

    Sounds like restaurants and Wikipedia have teamed up. 🙂

    January 5, 2012
    • sammcnerney #

      Glad you like the post. And a wonderful example from your former student!

      January 5, 2012

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