Another shopping tip: Consider opportunity costs

As we approach the holidays many of us are doing a lot of shopping.  We buy gifts for family and friends, and we also pick up a few things for ourselves, taking advantage of holiday sales. 

It ought to seem obvious that every dollar we spend on one purchase is a dollar that we can’t spend on another purchase.  Economists would say that each purchase has an opportunity cost.  Once we have made that purchase, that money cannot be spent on something else in the future.  To what extent do these opportunity costs affect the purchases we make?

A paper by Shane Frederick, Nathan Novemsky, Jing Wang, Ravi Dhar, and Stephen Nowlis in the December 2009 issue of the Journal of Consumer Research suggests that people often ignore opportunity costs for a purchase. 

They start their paper with a compelling story.  One of the authors of their paper was trying to decide between two stereo systems, one of which cost $1000 and had somewhat better speakers than a second system that cost $700.  After agonizing over the choice, the salesman asked whether he would rather have the better system or the cheaper system and $300 worth of CDs.  Immediately, he selected the cheaper stereo.  That is, even after putting in a lot of effort to think about this choice, the shopper had not considered the prospect that money not spent on the stereo would be available for other purchases that might enhance the quality of the stereo.

In a series of studies in this paper, the authors set up a number of situations in which people had to make choices.  In some cases, they chose between purchasing an item (say a DVD) and not purchasing it.  In other cases, they chose between a more expensive option and a less expensive option.  In each case, people were far more likely to purchase the cheaper option (or not purchase at all) if they were reminded of the opportunity cost of making the purchase.  These results suggest that people generally ignore opportunity costs when making choices.

People tend to ignore these opportunity costs in a variety of settings beyond just shopping at the holidays.  For example, the University of Texas is working hard to help students graduate from college in 4 years.  An increasing number of students are staying in college for a fifth year.  Often, the students reason that tuition for that fifth year is not so expensive.  However, the students who make this choice are typically not factoring in the opportunity cost of the extra year in school.  There is salary that they are not making for that year, as well as other ways that they may have chosen to spend their time.  Some students may elect to stay in school for an extra year even after considering these opportunity costs, but many students have never considered them at all when making this decision.

So as you do your shopping in this holiday season—and as you make important decisions in the years to come—spend some time thinking about how opportunities in the future may be affected by the choices you are making now.

Money and stuff create different beliefs about fairness

Fairness matters a lot to us.  From a young age, children complain about inequalities with the chant, “That’s not fair.”  Debates about public services by the government focus on whether particular programs are treating taxpayers and citizens fairly.  People’s happiness at their jobs is influenced by whether they feel like they are being treated fairly at work.  The Occupy Wall Street movement is based on the perception that wealth is not distributed fairly in the United States.

Part of what complicates the ability to treat others fairly is that what people may consider to be fair may change with circumstance.

For example, people generally have (at least) two different beliefs about fairness.  One prominent belief about fairness is equity.  That is, we often like to distribute things to people evenly, so that everyone gets the same amount. 

However, a second strong belief is fair reward.  That is, we believe that people should be compensated for an outcome based on how much they contributed to that outcome.  That is why we allow people to be paid different amounts at a job.  We think it is fair that people who are more successful on the job are paid more money, even though that means that there are inequalities in how much people are being paid. 

A study by Sanford DeVoe and Sheena Iyengar in the February, 2010 issue of Psychological Science examined these beliefs in fairness.  They found that the standard people used to judge fairness was based on the object used to reward people.

They had participants in a study evaluate the fairness of a reward.  They were told that a company was planning to reward its sales staff after a very good year.  Some people were told that the reward was money (the sales staff was going to get a bonus).  Some were told that the staff was going to get rewarded with credit card reward points that could be exchanged for goods.  A third group was told that the sales staff was going to get vacation days as a reward.  A fourth group was told that the staff was going to get boxes of chocolate.

Participants were then told that the reward was going to be divided equally among the sales people.  That is, the sales staff would each get the same reward, even though not every sales person sold the same amount that year.  Participants rated the fairness of this reward scheme.

There was a strong effect of the type of reward on the beliefs about fairness.  People thought that rewarding people equally was fairer when the reward was chocolate or vacation days than if it was money or credit card points. 

This result suggests that we associate different types of items with different concepts of fairness. 

We tend to distribute things equally to people.  For example, when we are giving candy to a group of children, we tend to distribute it equally to all of the children.  So, when people see things distributed to groups, they tend to use this kind of scheme to evaluate fairness.

On the other hand, we tend to distribute money unequally.  People make more money when they are more successful.  So, we tend to judge the fairness of transactions with money (and with things that are like money such as credit card points) based on a scheme in which reward is related to success.

These findings make clear that if we want to predict whether people will think we are judging them fairly, we have to take into account both the beliefs people have about what is fair as well as the relationship between those beliefs and the specific objects that are involved in the situation.   

What do you pick when you see a sequence of options?

Some choices are made when all of the options are right there in front of you.  For example, if you go to the supermarket, you see the wall of tomato sauce, and you can stand in front of it and compare all of the different brands and the different flavors of sauce for each brand.

For other choices, though, you get information about the options one at a time, and then you have to make a decision.  For example, if you are buying a new car, you have to go from one dealership to the next, test driving cars and talking to salespeople.  Students who apply for graduate schools may visit the schools to which they have been accepted in a sequence until they have to make a decision about where to go.

What happens in those cases?

A paper by Antonia Mantonakis, Pauline Rodero, Isabelle Lesschaeve, and Reid Hastie in the November, 2009 issue of Psychological Science looks at this question.  They had people sample a number of wines in a sequence.  After sampling the wines, they had to decide which one they preferred.  Participants were assigned to try 2, 3, 4, or 5 wines, and the sequence was determined randomly.

The choices people made depended both on the number of wines they sampled and their expertise about wines.  For people who did not have much expertise, they were most likely to choose the first wine they sampled.  For example, when there were two wines, people selected the first wine they tried 70% of the time.  For a sequence of five wines, they still picked the first one 50% of the time (but if they had chosen a wine at random, they would only have chosen this wine 20% of the time). 

For people who had more expertise, there was a combination of two effects on choice.  There was still a tendency for experts to select the first wine they tried.  When sampling only 2 wines, they picked the first one 80% of the time.  When sampling 3 wines, they picked the first one about 65% of the time.  But, when they sampled 5 wines, they picked the first one only about 25% of the time.  In this case, they picked the last wine they tasted about 40% of the time. 

Why is there a difference between experts and non-experts?  The wine experts have a more sophisticated ability to taste differences among wines.  So, they keep comparing each new wine they sample to their favorite.  There is a tendency for the first wine to be a favorite, because it sets the standard for comparison.  However, each new wine that is sampled will have some new flavors, and so they provide a reason to pick the last wine tasted.  The experts taste these new flavors and so they tend to stick with the most recently tasted wines, particularly when they taste a long sequence of wines.  The non-experts can’t taste much difference among the wines, so they often stick with the first one they sample.

One thing that is interesting about these results is that the wines in the middle of the sequence are not chosen very often.  There is an overwhelming tendency for people to pick either the first or the last of the items in the sequence.  For example, for experts choosing from among 5 wines, the first and last items accounted for about 65% of their choices, while the remaining 3 items accounted for only about 35% of the choices.

What does this mean for you?

If you are in a situation in which you have to sample the items in a sequence, and if the choice is important to you (say a car or a graduate school), you should try to write down your criteria for making a choice in advance.  Try to evaluate each option after seeing it by using these criteria.  If you discover a new dimension for evaluating options after seeing the third or fourth item, go back and evaluate the earlier items along that dimension as well.  Do what you can to give each of the options (even the ones in the middle of the sequence) the best chance to be the one that gets chosen.   

Vice, virtue, and the box office.

It is summertime, and the movie studios trot out their summer blockbusters and comedies.  That’s what summer is all about.  In Texas, when it gets to be 102 outside, sitting in an air-conditioned movie theater is not such a bad thing.  But why are people flocking to movies that are clearly so awful.  The poster-child for awful movies this year is Transformers: Dark of the Moon.  The reviews of this movie are uniformly terrible, but the film has already done over $300 million in sales in the United States alone.  What gives?

We could assume that the critics are all just wrong.  But that doesn’t seem to be a complete explanation.  Everyone I know who saw this movie says it was a confused mass of metal.  So the hordes going to the movie must reflect something more basic about the way people make decisions.

The success of summer movies rests on what the behavioral economist George Loewenstein called vices  and virtues.  He’s not talking about the themes of movies here, but about the way people make their choice about the movie they want to see.  The vices in movies are all about the enjoyment.  The virtues are all about the value of the experience of seeing the movie.

Some of the vices in movies are thrills.  Car chases, explosions, and action heroes mowing down endless rows of evildoers are all vices.  Neatly-tied emotional experiences are vices as well.  The standard boy-meets-girl, boy-loses-girl, boy-gets-girl plot of the standard romantic comedy is a vice.  We know by the closing credits the two beautiful stars will be locked in a kiss.  Familiarity is also a vice.  We are far more comfortable with remakes, sequels, and movies that come from familiar TV shows and toys than with things that are new.

Virtues are things that add value to the movie-going experience.  Learning something new is a virtue.  (Documentaries—even well-made documentaries—are chock-full of virtue.)  A complex emotional experience is a virtue.  Grappling with real-world issues is a virtue.  Movies with virtues are satisfying both in the theater and also long afterward.

Loewenstein suggests that people recognize the value of virtues, but when they are actually at the theater ready to buy a ticket, they invariably fall back on vices.  In one study, he gave people a coupon good for a free rental of a movie that they could pick up either that night or the next week.  They had to select the movie they wanted when they selected the coupon. They were given the choice of a virtue movie (Schindler’s List—a movie about the holocaust) or a vice movie (a low-brow comedy).  When people were choosing the movie they would watch next week, they tended to pick the virtue movie.  When they were choosing the movie they would watch that day, however, they would pick the vice movie.  In the moment of choice, people were worried that they would be bored, or sad, or generally not entertained.

Interestingly, movie delivery services like Netflix provide an interesting test of this explanation.  With Netflix, you set up a queue of movies and they get mailed to you.  So, you are choosing movies that you are going to watch some time in the future.  I find that I will put a documentary or a complex heavy “virtue” movie on my queue, and it will get mailed.  But then, it will sit at the house for a few weeks because the time never seems right to watch it.  Eventually we watch it, of course, and typically we really enjoy it and value the experience.  But in the moment of truth, it is hard to actually decide to watch it.

The same thing happens at the movie line over the summer.  In the end, we just want a pleasant experience at the movies.  So, even if the reviews are horrible, we end up valuing the potential thrills, comfort, and familiarity over the virtues of depth, complexity, and knowledge.

When will this streak end?

People have two very different responses to streaks.  For example, when watching a basketball game, we see a player hit two three-point shots in successive trips down the court, and we expect him to make a shot on the next trip down the court.  The idea that a streak is highly likely to continue is a belief in a hot hand. 

However, if you are playing roulette at a casino, and the lands on a red number 4 times in a row, you expect that there is a good chance that it will land on black the next time.  The idea that the odds that a streak will end go up as the streak gets longer is called the gambler’s fallacy.  

Just looking at these two reactions, it is clear that sometimes we expect streaks to continue and other times we expect streaks to end.  What determines which of these reactions we are going to have?

Eugene Caruso, Adam Waytz, and Nicholas Epley looked at this issue in a 2010 paper in the journal Cognition.  They find that you are most likely to assume that a streak will continue (the hot hand) when the cause of the streak is seen to be someone’s intentions.  You believe the basketball player will keep hitting shots, because he intends to make the shots.

When the streak is caused by some kind of mechanical device, then people believe the streak will end (the gambler’s fallacy).  The roulette wheel is a mechanical device that does not intend for the ball to land on either black or red numbers.

These authors tested this idea with a series of clever experiments and studies.  In one experiment, people watched a video of someone flipping a coin.  One group was told to focus on the intentions of the coin flipper to understand “what he is trying to accomplish with his tosses.”  A second group was told to focus on his actions, “the specific movements of his hands and fingers.” 

At various points, the groups made predictions for what the next coin flip would be.  For one prediction, the previous 8 tosses involved a random-looking sequence of 4 heads and 4 tails.  For a second prediction, 6 of the previous 8 tosses had been heads including a streak of 4 heads in a row.  When the sequence was random, people in both groups predicted that the coin would come up heads about half the time.  When the sequence ended with a streak, though, people who focused on the person’s intentions predicted that the coin would come up heads 68% of the time, while those who focused on the person’s actions predicted the coin would come up heads 28% of the time.  That is, thinking about intentions led people to think the streak would continue, while thinking about the mechanism of the flip led people to think it would end.

In another study, people made predictions about stock prices.  They were shown graphs of the performance of some stocks over a two-week period.  The critical items in this study were graphs that had trends in the stock price.  In one graph, the price of the stock went up consistently over the two week period.  Another second graph had a decreasing trend.  Participants were asked to predict the next day’s stock price.  Unsurprisingly, people shown the increasing trend assumed that the stock would keep going up.  People shown the decreasing trend assumed that the stock would keep going down. 

However, the authors had participants complete a questionnaire about an individual difference in anthropomorphism.  That is, some people have a tendency to give human traits and mental characteristics to inanimate objects, while others do not.  Those people who were most likely to think that the stock market has a mind of its own were the ones who were most likely to think that the streak in stock prices would continue.  Those people who were most likely to think that the stock market has no intentions were most likely to think that the streak in stock prices would end.

This last study has important implications.  In daily life, we must often make predictions about what will happen in complex situations.  It is important to recognize those situations in which we have a good causal understanding of the situation and know whether the data we observe are good predictors of future performance and those situations in which the most recent observations are just the outcome of a generally random process.  In these situations, we must take some care not to ascribe intentions to processes that are really random. 

It is more difficult to avoid anthropomorphizing than it looks.  We talk about many institutions using language often associated with the actions of people.  Reports in the business sections of newspapers talk about markets “reacting” to news.  They describe companies “striving” to overcome poor performance.  This language reinforces the idea that organizations may have intentions. 

At times, it may make sense to treat a company like a person.  Companies have managers who make decisions and these decisions may properly be cast as intentions for the strategy that will be followed in the future.  At other times, though, this language may get in the way.  There is a tremendous amount of randomness in the stock market.  When we talk about it in human terms, we gloss over all of that randomness.

In the end, we should try to be a bit more mindful about when we assume that streaks are the results of an agent’s intentions.

Why is it so hard to quit smoking?

If you take even a quick look at the newspaper, you can see that there are massive public policy efforts aimed to curb smoking.  States are raising their cigarette taxes.  Cities around the world are banning smoking in restaurants.  Even Holland (where it seems like almost every vice is legal) no longer allows cigarette smoking in restaurants and public places.  What makes it so hard to quit smoking?

That would, of course, be a topic for a whole book, and not just one blog entry.  It does provide a good excuse for me to talk a bit about some research that I have done with Miguel Brendl, Claude Messner, and Kyungil Kim.  The question of interest to us is how a goal or a need affects what you like.  For now, let’s think about smoking.

The need to smoke is affected by many factors.  Some of them involve a physiological addiction to nicotine.  However, the situation also affects the need to smoke.  Smoking is often associated with drinking coffee, for example, so a cup of coffee will often trigger the need to smoke in a smoker.  So, the strength of a goal will grow and shrink.  Sometimes, the need will seem desperate, but at other times (say right after having a cigarette), it won’t seem so strong at all.

When the need to smoke is triggered, it affects what you like and dislike at that moment.  The idea that likes and dislikes can change over short periods of time shouldn’t be surprising.  After all, you may grab a CD to listen to in the car in the morning, only to find that you no longer feel like listening to it in the evening.  Foods that were quite appealing on one day may be much less appealing on another day.

One factor that changes your preferences is the goals that are engaged at any given moment. Most of us have the intuition that if you have any strong goal, then your preference for things that would help you satisfy that goal will increase.  If you really need to smoke, then suddenly, cigarettes will look really good to you.  We call this effect of goals valuation.  That is, having an active goal makes things related to that goal more valuable.  There is some experimental evidence for this kind of valuation.

What is potentially more interesting, though, is that in a 2003 paper in the Journal of Consumer Behavior, and a 2007 paper in Emotion, we find strong evidence for devaluation.  That is, having an active goal will decrease your liking for things that are unrelated to that goal.  So, a smoker with a high need to smoke is less interested in things like DVD players, french fries, and camping tents than that same person is when the need to smoke is low. 

We found evidence for this in many ways.  In one study with smokers, we had smokers participate in a study after sitting in a long lecture class.  They could not smoke during class.  One group was asked to stay in a classroom and was given a cup of coffee (to stimulate the need to smoke).  This group really had a high need to smoke.  The other group went outside the classroom. They were also given a cup of coffee, but the experimenter lit up a cigarette, and all of the participants did too.  For this group, the coffee was a way to help us make sure enough time went by that the nicotine would help dull the need to smoke.

Before getting on to what they thought the study was really about, the participants were asked if they were interested in buying raffle tickets.  For half of the people, the prize was three cartons of cigarettes that would be given out in a drawing a week later.  For the other half of the people, the prize was an amount of money equivalent to what you’d pay for three cartons of cigarettes.  So what happened?

People who were offered the raffle to win cigarettes were somewhat more likely to buy tickets if they had a high need to smoke than if they had a low need to smoke.  That is, there was some evidence for this idea of valuation. 

People who were offered the raffle to win cash bought tickets if they had a low need to smoke.  The group in the classroom (who had a high need to smoke) bought almost no tickets at all.  That is, when people had a high need to smoke, they were really uninterested in cash. 

There are two important things to take away from this.  First, even though people know abstractly that cash can be used to purchase cigarettes, their goals have a very concrete effect on their preferences.  So, things that are not obviously related to smoking are devaluated.  Second, the people who are inside the classroom and need a cigarette probably walked out of the classroom after the study and smoked a cigarette.  Presumably, if we had offered this raffle to them after having their cigarette instead, they would have been more interested in buying tickets to win cash.  So, cigarettes can change people’s preferences pretty rapidly.

This means that a smoker trying to quit smoking can talk quite a bit about how they are going to resist the urge to smoke.  But when that need gets strong, the goal system is going to make cigarettes more and more attractive and is going to make everything else less and less attractive to help make the smoker satisfy their need to smoke.  This operation of the motivational system is usually a good thing.  It operates for all sorts of beneficial goals that people have.  But for habitual smokers, it creates a lot of problems.