Cognitive Biases: Pricing Biases

(intro music) My name is Laurie Santos. I teach psychology at Yale University, and today I want to talk to you about pricing biases. This lecture is part of a series on cognitive biases. Congratulations! You've just won a raffle, and your prize is a bottle of wine Here are your choices. Option number one is a lovely bottle of California Pinot Noir the costs twenty dollars. Option number two is another bottle of Pinot Noir, from the same region, that costs fifty dollars. Which would you choose? If you're like most people, you probably went with the more expensive wine. People tend to pick the most expensive option, whether their choices involve wine, or meats, or even cassette players. What's a bit weirder, though, is the fact that we still like higher-priced good even when we know that the price it totally arbitrary. One experiment that showed this bias at work was done by the neuroscientist Hilke Plassman and her colleagues. They allowed people to taste a glass of wine from two bottles that were labeled as either ten dollars or ninety dollars. What they didn't tell participants, however, was that the two bottles were identical. They contained exactly the same wine inside. Even though the wines should have tasted identically, people reported liking the wine with the more expensive price tag even better. It seems that merely labeling one thing as more expensive makes us like it more. We seem to be confusing a good's price with its value. This confusion is what's known as a "price effect." Simply telling someone something costs more make them like it more. And the effect seems to hold for lots of different kinds of goods. You might be tempted to think that people aren't as fooled as it seems in Plassman and colleagues' studies. Maybe people just say they like expensive stuff better, even though they don't really subjectively feel like it's better. Plassman and her colleagues worried about that too, which is why they used a pretty ingenious technique to test whether subjects actually liked one wine better than the other. Rather than just asking subjects, they used brain imaging techniques to test how people's brains processed the same wine with different price tags. They found that the parts of a subject's brain that process rewards, the same spots that would fire a lot if you won some money, or saw an attractive mate, or even tasted an amazing dessert, fired more for the very same wine when it was labeled with a higher price tag. So our pricing biases appear to affect more than just the subjective evaluations we report on a survey. We seem to like higher-priced things more, even at the level of the reward areas in our brains. But arbitrarily higher prices don't just affect what we like. They can also affect how well a given product works. The behavioral economist Baba Shiv and his colleagues let people pay different amounts for an energy drink, and then tested how those drinks worked. Did they make people more or less energized? Shiv and his colleagues found that people reported feeling more energized after drinking the very same energy drink with a higher price tag. But they also did better on a set of mental acuity puzzles. Somehow, participants really were more energized after a drink with a high price tag than when drinking an identical drink with a lower price tag. These results suggest that the price we pay, for an aspirin, or a bottle of wine, or even an energy drink, doesn't just affect what's in our wallets. Because of price biases, our minds assume that higher prices mean better quality, even in cases where the price of a good is totally arbitrary. Subtitles by the Amara.org community