A recent study in behavioral economics, conducted at Carnegie Mellon’s Heinz School of Business, shows that people can be inconsistent about their desire for privacy. The economists at Carnegie Mellon found that most people feel entitled to have their private information protected, but conversely are willing to trade away their privacy for a small reward.

Consumers do not react with complete rationality when dealing with most things, let alone their privacy.
This is demonstrated everyday with loyalty programs which collect buying patterns or websites spruiking free iPods having discovered that they can collect gobs of data about their markets by offering sign-up freebies; these techniques are being used by savvy, and not so savvy, marketers alike. Marketers are simply turning consumer irrationality to their advantage.

The individual just doesn’t know what the information collector is going to do with their data and so often fails to consider the implications of giving away their private data.

It’s just plain difficult for a person to determine the risk of exposing personal information. Information may be resold or leaked accidentally, bartered, swapped or published; without foreknowledge of the final use of the data it is nearly impossible to accurately gauge the relative reward offered for the information. In economics terms, there exists “information asymmetry” between the collector (who has greater knowledge of what the information is for) and the consumer (who has to use limited information to make a decision).

Consumers are often unaware of the possible actions a marketer will take to collect their information (think: spyware) and are also ignorant of the steps they can take to protect their personal information.

The researchers tested the effects of spyware warnings and discovered that the more frequent and severe the warnings, the more likely consumers were to just install it anyway. Consumers’ decision-making is affected by biases, heuristics (e.g. simplified guesses), and optimistic risk analysis. The study found that people, overwhelmed by too much information, relied on simplistic strategies to decide whether or not to release their personal information. Rather than help, giving consumers too much information about their privacy leads to worse judgment.

Consumers who are concerned about their privacy must seek to better understand what information marketers can gather before making a decision to release their information and, for marketers, it seems that having a slick website and a free iPod offer is enough to get consumers to open up. How are you going to leverage personal data whether it is yours or your target markets?

Behavioral Economics, Carnegie Mellon University, consumer irrationality, decision theory, freebies, Heinz School of Business, information asymmetry, privacy

Why do some retailers and department stores always seem to have sales on, no matter what time of year it is? Is it because they love their customers and want to give them the best price or is something else happening here?

When two like products are presented together, one will typically be seen by the individual as inferior to the other and similarly, the other will be seen as the superior. The exact positioning of the products is dependent on the cognitive bias that is set (anchored) by the individual. Depending on the type of person, the bias could be anchored towards price, value or brand.

In a book by psychologist, Barry Schwartz, he asks the question: How do you determine how much to spend on a suit? Schwartz suggests one way is to compare the price of one suit to another, which means using the other items as anchors, or standards. In a store that displays suits costing over $1,500, an $800 pinstripe suit may seem like a good buy. But in a store in which most of the suits costs less than $500, that same $800 suit might seem like an extravagance.

What we see here is this psychological heuristic influencing the way we assess probabilities and options. This means that those customer loving retailers aren’t trying to help us out in these hard times, they are trying to influence the way we make purchase decisions. By creating a superior option (similar product, with reduced price) they are guiding our decision process into purchasing the product they want us to buy.

Retailers don’t just use sales prices to create anchors, they can use similar products in different brands or even different models of the same product/brand.

Another example Schwartz gives is when a high-end catalog seller of mostly kitchen equipment and gourmet foods offered an automatic bread maker for $279. Sometime later, the catalog began to offer a larger capacity, deluxe version for $429. They didn’t sell too many of these expensive bread makers, but sales of the less expensive one almost doubled. With the expensive bread maker serving as an anchor, the $279 machine had become a bargain.

When setting prices for your own products, try and consider how each product will be anchored to the surrounding products. Is the anchor how big the product is? How loud it can go? How waterproof it is? Think about what people see as value and anchor the pricing around that.

Barry Schwartz, Behavioral Economics, buying decisions, choice, choice architecture, cognitive bias, consumer behavior, decision theory, decoy pricing, influence, positioning, price, pricing, psychological heuristic, psychology

Behavioral Economics, drive, motivation, rewards, RSAnimation

MIT Behavioral Economist Dan Ariely discusses the medical effectiveness of placebos, and outlines how expectations of a given situation will affect our experiences of that situation.

Behavioral Economics, believing, choice, consumer behavior, Dan Ariely, doctors, economics, logic, logical belief, medical, medicine, MIT, pill, pills, placebo, psychology, reason, research