This book changed how I see the world and helped me finally understand the sales department!
"Valuations are constructed and not revealed - like architecture, not archaeology. To name a price is to build a valuation"
In the world of Lean we look at "Value" and "Non-Value", this book helps to understand how Value is created.
What I found most amazing is that value can be manipulated in any direction necessary.
Every time I look at a menu or compare prices I visualize this book.
I used to think that I was an intelligent person who made informed decisions based on solid data and reasoning.
While that may be true when working on complex process problems...it is not true when I go shopping at the grocery store, the mall, trade stocks or shop for a hotel room.
Extremeness aversion....I suffer from it.
This is where the most expensive one is just to silly to buy and the cheapest one MUST be inferior so you purchase the one that is in the middle of the price list.
This happens to everyone when they are purchasing items where there is a wide variety to choose from or brands we aren't familiar with. Example: Wine, expensive chocolates, even hotels.
On my way home today my wife called me and asked that I pick up dish detergent at the store. I didn't know the one we normally purchased and I was drawn to the middle of pack. This was a real "Aha" moment for me.
"This book will show that price numbers are influenced by factors that the conscious mind would reject as irrelevant, irrational or politically incorrect."
Items Learned:
- How anchor pricing effects everything I buy.
- I understand priming effects and how they manipulate me.
- Why an endowment effect causes people to put crazy price tags on garage sale items.
- Why loss aversion is true - just watch "Deal or No Deal".
- That we all operate by an unwritten "Rule of Fairness". (see Ultimatum Game)
- How a completely irrelevant number like 65 can influence how much I spend on toilet paper.
- Coherent arbitrariness - We don't really know what anything should cost. It's more like the theory of relativity (prices that are relative to each other)
People primed with money -
- Wanted more personal space
- Wanted to work alone
- Wanted to play alone
- Were less helpful to a stranger
- Didn't ask for help themselves
- Gave less to charity
Note: "The idea that money leads to greed or selfishness seems to be part of modern Western cultural lore but does not seem to fit the data in the above research. The working theory is called "self sufficiency" than just basic "greed"."
I recommend this book to anyone that wants to see what's behind the curtain. If you really don't want to be aware....then DON'T read it.
Small business owners will get the most out of this book because they will learn the tricks on how to price and sell their products and services.
Buyers will learn how these tricks work and how to consciously detect them.
---------------------------------------------------------------------------------------
Notes that I don't ever want to forget:
Behavioral decision theory - The study of HOW people make decisions....not how they OUGHT to make decisions.
Anchoring is real and it can mess with anyone...especially really smart people.
"Let's play a game using a wheel of fortune apparatus with a variety of numbers on it (but rigging it to only land on 65 and 10) 65 (high number) and 10 ( low number). Spin it for a group and have them answer the following question.
a) Is the percentage of African nations in the United Nations higher or lower than (number X) ?
b) What is the percentage of African nations in the United Nations?
When using 10 the average estimate was 25%
When using 65 the average estimate was 45%
BTW: The real number is 23%"
New Term - Utility = a personal price tag that everyone places on things and outcomes (Dollar Cost + Usefulness)
What stock you buy and what you have for lunch...it all comes down to the mental math or "expected utility modeling"
"We choose between the descriptions of options, rather than between the options themselves"
Example of endowment effect - "In the absence of market values, selling prices are typically twice as much as buying prices"
Priming - Breaking up with your girlfriend and then only hearing love songs on the radio. They were always there but now you notice them. It effects your actions as well. Seeing a person yawn will often become contagious because you've been primed. It's also called anchoring which can manipulate how you value anything.
"This book will show that price numbers are influenced by factors that the conscious mind would reject as irrelevant, irrational or politically incorrect."
Loss aversion: "Many of the losses people fear most are not life-threatening, but there is no telling that to an emotional system over-adapted to convey fear signals. Thinking of loss-aversion as fear also implies the possibility that inducing emotions can push around buy and selling prices"
Rule of fairness : "Don't increase your profit at my expense" The ultimatum game
"Survival often requires us to make quick decisions without complete knowledge of the problem. The mind is presumably optimized for mostly accurate hunches and an improvisatory approach that constructs desires and beliefs on the fly. This can lead to inconsistent prices and choices.
"a person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise."
Shoppers moving in a counterclockwise direction spend on average $2.00 more at the supermarket.
"The art of luxury pricing lies in quantifying the value-to-consumer regardless of cost, competitor or market prices" You can use extremeness aversion and trade-off contrast to support your pricing model. - Prada handbag effect.
"Consumers do not recognize true worthlessness when they see it." - Tom Sawyer effect
"Experts have predictive models, and people who have experience have models that aren't necessarily predictive" - Real estate pricing
"Things that no one believes can still affect behavior" - McDonald's and earthworms
"Responding to an initial offer with suggested adjustments gives the anchor some measure of credibility....Threatening to walk away from the table is better than agreeing to an unacceptable starting point" - Negotiating Rationally
"There is a "beauty premium" for the congenitally fabulous. For everyone else there's a plainness penalty"
"By considering how your judgement may be wrong, you might come up with an overlooked reason and change your mind. "Consider the opposite" affects the intuitive and automatic side of decision making....and can diminish the power of anchors on prices."
