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Irrational Demands: Of Anchors, Pearls, and Procrastination
Read MoreHide Full Article
(0:20) - Dan Ariely: Predictably Irrational
(4:10) - Do first impressions get imprinted on us?
(6:30) - Arbitrary Coherence: Why do we accept anchors?
(12:00) - Are price tags anchors?
(14:30) - Dan Ariely: Payoff
(16:40) - What gets scheduled, gets done.
Welcome back to Mind Over Money. I’m Kevin Cook, your field guide and story teller for the fascinating arena of Behavioral Economics.
Today we’re going to focus on the work of Dan Ariely, author of Predictably Irrational. When he published the book in 2008, Ariely was a professor of Behavioral Economics at MIT. Now, he’s Professor of Psychology and Behavioral Economics at Duke University and he also is the founder of The Center for Advanced Hindsight. Ariely's TEDtalks have been watched over 7.8 million times.
We’ve talked before about the cognitive bias called anchoring. Ariely has picked up where the forefathers of Behavioral Economics like Daniel Kahneman and Richard Thaler left off by doing new experiments to find out how prevalent this bias really is.
In the podcast, I read from Chapter 2 of Predictably Irrational, titled "The Fallacy of Supply and Demand: Why the Price of Pearls – and Everything Else – Is Up in the Air."
Ariely begins with a story about the "pearl king" Salvador Assael who achieved a remarkable marketing feat in the 1970s New York luxury jewelry scene by making so-called black pearls from Tahiti into a nearly precious gem.
He tells this story to help explain the power of price anchors in decision making, especially when the initial price reference is completely arbitrary, and thus, irrational.
Then he describes an experiment he conducted with colleagues at MIT in the first decade of the 21st century. The researchers used a class of 55 marketing MBA students to conduct a specialized auction where the participants were first asked to write down the last two digits of their social security numbers.
The act of writing down those digits had a surprising overall impact on the results of the auction, which included fine wines, computer equipment, and chocolate. Listen to the podcast and hear me read an excerpt from Dan's book that I hope inspires you to read it yourself.
The GAF Economy
Ariely's experiments with price anchors and buying decisions got me thinking about my favorite "big brothers" and hoarders of tons of data on consumer buying behavior: Alphabet (GOOGL - Free Report) , Amazon (AMZN - Free Report) , and Facebook .
I bet Ariely would love to have access to these databases for virtually unlimited testing. Note to self: see if Dan is looking for research partners in this ocean of data.
Followers of my stock research and trading articles know that I often talk about The GAF Economy comprised of Google, Amazon, and Facebook. My focus is on the behemoths who have changed our entertainment, education, shopping and entrepreneurship with a digital deluge of information and marketing opportunities.
Together, Google and Facebook will break the $100 billion mark this year in advertising revenues according to market research firm eMarketer. Google broke the $50 billion mark a few years ago and Facebook topped $26 billion in 2016.
Their combined 2017 haul will command over a 46% share of advertisers' total global digital ad spend. Just think about the volume of consumer purchases triggered by that $100 billion in ad spend.
And if you have been listening to me about digital advertising growth in the past year, you know that Facebook is not stealing market share from Google in that growth. Together, they are expanding the pie as tons of small and medium-sized businesses realize the power of digitally-targeting audiences and geographies, efficient ads testing, and fine-tuning of their ad budgets.
Welcome to the Jungle
And in the "retail rainforest" that is Amazon, consumers continue to adopt its convenient platform for more purchases -- at the expense of traditional retailers. Amazon’s total annual revenues grew 27% last year to $136 billion as it was responsible for possibly one-fourth of all online transactions in the US.
Testifying to that reach, according to web marketing services provider BloomReach, 55% of consumers started their product searches on Amazon in 2016, up from 44% in 2015.
And here are some amazing stats from Amazon's Q4 report...
Fulfillment by Amazon (FBA) delivered more than two billion units on behalf of sellers in 2016, and the number of active sellers using FBA grew more than 70%. Using the FBA service, Amazon sellers from more than 130 countries fulfilled orders to customers in 185 countries.
In 2016, there were over 100,000 sellers with sales of more than $100,000 selling on Amazon.
To help put Amazon's share of retail sales in some perspective – I say “some” because the company doesn’t break out their revenues clearly enough for us to know for sure -- let me share some paragraphs from an October USA Today article titled Amazon could be a lot bigger than we think...
In the United States, total annual retail sales are about $5 trillion, with the Department of Commerce estimating 8% of that is e-commerce. That puts total online sales at around $400 billion, and Amazon’s share at 15% (for domestic revenues only).
Amazon's retail revenue, however, doesn't reflect the full value of the items sold on Amazon by other retailers. These are companies that use Amazon as an online sales venue, sometimes their only one. Amazon says 49% of its units sold come from third-party sellers.
The company may actually be handling double that amount — 20% to 30% of all U.S. retail goods sold online — thanks to the volume of sales it transacts for third parties on its website and app. Only a portion of those sales add to its revenue.
“The punchline is that Amazon’s twice as big as people give them credit for, because there’s this iceberg under the surface, but you only see the tip,” said Scot Wingo, executive chairman of Channel Advisor, an e-commerce software company that works with thousands of online sellers.
When third-party sales are taken into account, Amazon's share of what U.S. shoppers spend online could be as high as $125 billion yearly, and it could represent close to 30% of the online goods Americans buy, according to an analysis of Amazon's financial statements.
Gene Munster, a senior analyst at Piper Jaffray, estimates Amazon touches 30% of total e-commerce in the United States, and its share is growing.
“Amazon’s just going to slowly grab more and more of your wallet,” he said.
Again, Dan Ariely if you are listening, we need to study the buying data and behavior of the GAF Economy. There must thousands of A/B split tests just sitting there waiting with evidence of how predictably irrational we are.
A Surprisingly Simple Solution for Procrastination
Finally, at the end of my podcast I introduce Ariely's latest book, Payoff: The Hidden Logic That Shapes Our Motivations. I share a productivity secret from Dan that could literally change your life. It’s a real golden nugget that will help you control, if not crush, procrastination. Or should I call it a black pearl?
Make the time to read Ariely’s book. If you liked Freakonomics for the way it gave you new perspectives about society and human behavior via statistics, you’ll love Predictably Irrational for its ability to go inside our decision making.
And be sure to listen to the podcast for that "productivity pearl." It'll have you finishing your own book this year.
Disclosure: I own shares of Facebook for the Zacks TAZR Trader.
Image: Bigstock
Irrational Demands: Of Anchors, Pearls, and Procrastination
Welcome back to Mind Over Money. I’m Kevin Cook, your field guide and story teller for the fascinating arena of Behavioral Economics.
Today we’re going to focus on the work of Dan Ariely, author of Predictably Irrational. When he published the book in 2008, Ariely was a professor of Behavioral Economics at MIT. Now, he’s Professor of Psychology and Behavioral Economics at Duke University and he also is the founder of The Center for Advanced Hindsight. Ariely's TEDtalks have been watched over 7.8 million times.
We’ve talked before about the cognitive bias called anchoring. Ariely has picked up where the forefathers of Behavioral Economics like Daniel Kahneman and Richard Thaler left off by doing new experiments to find out how prevalent this bias really is.
In the podcast, I read from Chapter 2 of Predictably Irrational, titled "The Fallacy of Supply and Demand: Why the Price of Pearls – and Everything Else – Is Up in the Air."
Ariely begins with a story about the "pearl king" Salvador Assael who achieved a remarkable marketing feat in the 1970s New York luxury jewelry scene by making so-called black pearls from Tahiti into a nearly precious gem.
He tells this story to help explain the power of price anchors in decision making, especially when the initial price reference is completely arbitrary, and thus, irrational.
Then he describes an experiment he conducted with colleagues at MIT in the first decade of the 21st century. The researchers used a class of 55 marketing MBA students to conduct a specialized auction where the participants were first asked to write down the last two digits of their social security numbers.
The act of writing down those digits had a surprising overall impact on the results of the auction, which included fine wines, computer equipment, and chocolate. Listen to the podcast and hear me read an excerpt from Dan's book that I hope inspires you to read it yourself.
The GAF Economy
Ariely's experiments with price anchors and buying decisions got me thinking about my favorite "big brothers" and hoarders of tons of data on consumer buying behavior: Alphabet (GOOGL - Free Report) , Amazon (AMZN - Free Report) , and Facebook .
I bet Ariely would love to have access to these databases for virtually unlimited testing. Note to self: see if Dan is looking for research partners in this ocean of data.
Followers of my stock research and trading articles know that I often talk about The GAF Economy comprised of Google, Amazon, and Facebook. My focus is on the behemoths who have changed our entertainment, education, shopping and entrepreneurship with a digital deluge of information and marketing opportunities.
Together, Google and Facebook will break the $100 billion mark this year in advertising revenues according to market research firm eMarketer. Google broke the $50 billion mark a few years ago and Facebook topped $26 billion in 2016.
Their combined 2017 haul will command over a 46% share of advertisers' total global digital ad spend. Just think about the volume of consumer purchases triggered by that $100 billion in ad spend.
And if you have been listening to me about digital advertising growth in the past year, you know that Facebook is not stealing market share from Google in that growth. Together, they are expanding the pie as tons of small and medium-sized businesses realize the power of digitally-targeting audiences and geographies, efficient ads testing, and fine-tuning of their ad budgets.
Welcome to the Jungle
And in the "retail rainforest" that is Amazon, consumers continue to adopt its convenient platform for more purchases -- at the expense of traditional retailers. Amazon’s total annual revenues grew 27% last year to $136 billion as it was responsible for possibly one-fourth of all online transactions in the US.
Testifying to that reach, according to web marketing services provider BloomReach, 55% of consumers started their product searches on Amazon in 2016, up from 44% in 2015.
And here are some amazing stats from Amazon's Q4 report...
Fulfillment by Amazon (FBA) delivered more than two billion units on behalf of sellers in 2016, and the number of active sellers using FBA grew more than 70%. Using the FBA service, Amazon sellers from more than 130 countries fulfilled orders to customers in 185 countries.
In 2016, there were over 100,000 sellers with sales of more than $100,000 selling on Amazon.
To help put Amazon's share of retail sales in some perspective – I say “some” because the company doesn’t break out their revenues clearly enough for us to know for sure -- let me share some paragraphs from an October USA Today article titled Amazon could be a lot bigger than we think...
In the United States, total annual retail sales are about $5 trillion, with the Department of Commerce estimating 8% of that is e-commerce. That puts total online sales at around $400 billion, and Amazon’s share at 15% (for domestic revenues only).
Amazon's retail revenue, however, doesn't reflect the full value of the items sold on Amazon by other retailers. These are companies that use Amazon as an online sales venue, sometimes their only one. Amazon says 49% of its units sold come from third-party sellers.
The company may actually be handling double that amount — 20% to 30% of all U.S. retail goods sold online — thanks to the volume of sales it transacts for third parties on its website and app. Only a portion of those sales add to its revenue.
“The punchline is that Amazon’s twice as big as people give them credit for, because there’s this iceberg under the surface, but you only see the tip,” said Scot Wingo, executive chairman of Channel Advisor, an e-commerce software company that works with thousands of online sellers.
When third-party sales are taken into account, Amazon's share of what U.S. shoppers spend online could be as high as $125 billion yearly, and it could represent close to 30% of the online goods Americans buy, according to an analysis of Amazon's financial statements.
Gene Munster, a senior analyst at Piper Jaffray, estimates Amazon touches 30% of total e-commerce in the United States, and its share is growing.
“Amazon’s just going to slowly grab more and more of your wallet,” he said.
Again, Dan Ariely if you are listening, we need to study the buying data and behavior of the GAF Economy. There must thousands of A/B split tests just sitting there waiting with evidence of how predictably irrational we are.
A Surprisingly Simple Solution for Procrastination
Finally, at the end of my podcast I introduce Ariely's latest book, Payoff: The Hidden Logic That Shapes Our Motivations. I share a productivity secret from Dan that could literally change your life. It’s a real golden nugget that will help you control, if not crush, procrastination. Or should I call it a black pearl?
Make the time to read Ariely’s book. If you liked Freakonomics for the way it gave you new perspectives about society and human behavior via statistics, you’ll love Predictably Irrational for its ability to go inside our decision making.
And be sure to listen to the podcast for that "productivity pearl." It'll have you finishing your own book this year.
Disclosure: I own shares of Facebook for the Zacks TAZR Trader.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research.