Mini Episode 9 - Why do people pay so much for diamonds?

Jeremy from Kooyong wants to know why people are willing to cough up big for carats.

Dan: 00:17 Welcome to Mini Bad Decisions mini-episode nine. I'm your host Dan Monheit, and today we have a cracking question from Jeremy in Kooyong.

Jeremy: 00:24 Hey, Dan, Jeremy from Kooyong, my question to you is why do diamonds cost so much? Why do you have to pay thousands for an engagement ring?

Background song: 00:30 Diamonds are forever. They won't leave in the night, have no fear that they might desert me.

Dan: 00:45 There are so many reasons to spend big money on diamonds. I mean, one is because you run a manufacturing business that needs to cut very, very hard materials with very, very high degrees of precision. But other than that, most people spending big money on diamonds are doing it because they're essentially batshit crazy, right? So just as you suspected Jeremy, showing out thousands of dollars for small pieces of rock makes absolutely no objective, pragmatic, rational sense at all.

Background song: 01:10 A kiss on the hand, may be quite continental, but diamonds are a girl's best friend.

Dan: 01:20 Thankfully, we can point to one of the greatest demand-generating advertising campaigns ever produced to shine a light on what is going on here. Back in the 1940s, which I don't think many or any of us were around to remember, we were thoroughly and simultaneously convinced that diamonds were both a girl's best friend and also forever. Making them clearly the only appropriate gift to represent our undying love. Now, as widespread and effective as these campaigns were in cranking up demand, they are only half of the story behind our willingness to cough up very, very big, for very, very small pieces of shiny rock. You see, sky-high demand is a great place to start, but to truly push prices beyond the stratosphere, we need to limit supply too. How much do we need to limit it? The more, the better. What's at play here with something called scarcity bias?

Dan: 02:09 And this causes us to assume that something is more valuable simply because it is in short supply, high demand, or only available within a limited timeframe. This bias has been demonstrated in a wide array of experiments. The most interesting and delicious of which was inducted by [inaudible 00:02:25] and his team in 1975, this experiment saw 200 undergrad students taste and rate identical cookies that they believed were either limited or abundant in supply. Cookies believed to be unlimited supply were rated as significantly more likable and more attractive than those believed to be in abundance. More strikingly and more excitingly for a guy like me, participants were willing to pay 11% more for the cookies they believed were in short supply than for the cookies they believed were abundant, even though they were the exact same cookies. Now, short supply is sometimes the result of a natural limitation. So yes, there can really only be one top floor in an apartment building or one front row at a concert, but more often than not in the modern world that we live in scarcity is the result of some sort of artificial constraint.

Dan: 03:12 So Nike decided to only produce 150 pairs of pigeon dunks resulting in camp outs, riots, and 4000% markups on eBay. But when it comes to artificially limit supply, the absolute gold, or should I say the diamond standard is De Beers. The international corporation that effectively created and control the global diamond market. Over the last 130 years, De Beers managed to extract or buy the vast majority of the world's diamonds, which are stockpiled in heavily guarded vaults. From here, the company releases just enough diamonds every year to meet demand, ensuring that there is almost never a surplus keeping prices sky-high. The diamonds of forever line has also done a wonderful job of keeping pesky secondhand diamonds off the market. For brands dealing with products in rare supply, the best thing to do is look for tactful ways to play up the exclusivity and pride of ownership, knowing that we are always craving what we're told we can't have.

Dan: 04:07 If you are in a category like I'm sure most of us are where in reality, there isn't much scarcity and we are in fact, dealing with abundance. What we need to do is consider ways of reframing what we offer to make it more scarce, more limited, time-based offers ‘only 200 units available’, right? Anything we can do to make our product more diamond than rock. So that's it for today, Jeremy, I hope that answers your question of why people are paying so much for diamonds. If you have other questions or observations about weird and wonderful human behaviors, please shoot them through to me at askdonathardhat.com or you can hit me up all over the internet at Dan Monheit. I hope you're enjoying our mini-episodes and Mel and baby Layla, I know you guys are listening and I love the feedback you're sending through. I hope I'm doing you proud and I look forward to catching up with you all in the next installment. Peace out.