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Cognitive Biases: Pricing Biases

Laurie Santos (Yale University) examines how people's economic choices tend to confuse price and value. She then describes how these so-called pricing biases compel us to incorrectly assume that higher priced goods will often work and taste better.

Speaker: Dr. Laurie Santos, Associate Professor of Psychology, Yale University.


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  • orange juice squid orange style avatar for user Daniel Rigal
    Obviously this works in reverse, with cheaper products being perceived as lower quality but I wonder how this affects the perception of free products? Are these perceived lowest of all or are they a special case?

    I am wondering if removing the price completely affects different people in different ways? I am thinking about some people who show an absolute aversion to free software, even when objective evaluation shows that at least some of it is excellent. Likewise, I guess there must be some people who think that Khan Academy can't be any good if it doesn't even cost a few dollars a month to sign up ;-) . For the rest of us, I wonder how we evaluate free products? Do we think about the costs of the commercial equivalents (where they exist)? Do we stop thinking about money completely and start thinking about the product itself?

    Also, I wonder if there is an inversely crazy situation to the people who avoid good stuff when it is free. What about people who pay for really gross stuff just because it is expensive and "classy"? I mean, caviar is just a bunch of stinky fish eggs, possibly from an endangered species, right? Why would I want to eat that even if I could afford it?
    (4 votes)
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    • leaf green style avatar for user David Greene
      Although I am not aware of any data about this topic, my guess is that people would be compelled to asses the product's quality themselves if they no longer had the standard (price), however illusory, by which they usually determined a product's quality. Due to the nature of capitalism and how it shapes society, however, people may feel more compelled to simply take the product regardless of quality because it is free, assuming the product is not difficult enough to take that they have to actually assess whether it is worth the effort.
      (2 votes)
  • piceratops ultimate style avatar for user Dan Olson
    Deleuze and Guattari argue that schizophrenia is a product of capitalism. (Anti-Oedipus) Do these neurological experiments prove the effects capitalism has on brain function and add more credence to their philosophy?
    (3 votes)
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    • leaf green style avatar for user David Greene
      I would say no, principally because such a minor example as this is not sufficient proof of a causal correlation between two complex topics like schizophrenia (mental disorder) and capitalism (economic system). Although that is an intriguing proposition, and my political and economic views compel me to favor the possibility of such a relation, I am not aware of any rigorous critique which connects the two aside from Capitalism and Schizophrenia.
      (4 votes)
  • male robot hal style avatar for user Roy
    The pricing bias is a useful concept, but is presented here as a lot more irrational than it really is, it seems to me. In the way a market economy works, the price of a good of which alternatives exist could be considered the best estimate for its quality. When I go to a liquor store and I pick an expensive wine, I can be reasonably certain that it's a decent one, even when an expert could probably pick out a few underpriced gems or overpriced bad ones.
    (1 vote)
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    • blobby green style avatar for user aoeu512
      No thats still irrational, because what qualities you choose to decide which wine is good or not depend on you knowing the price before hand. To get rid of the bias, you need to lots of differently priced wines, then taste them blind. After tasting the wines blindly for 1 week, you should then decide what price you want to pay for each wine and compare actual vs subjective price.
      (1 vote)
  • blobby green style avatar for user Garlam Won
    Pricing biases is definitely useful sometimes but other times we're being a victim of our own cognitive bias. Ex. Buying big brand cough medicine (Advil, Tylenol) for higher price when store brand (Shopper's drug mart life brand) would work exactly the same.
    (1 vote)
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Video transcript

(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