Mini Episode 10 - Why aren’t we shopped out by Boxing Day?

Lauren from Prahran wants to know why people still shop after Christmas drops.

Dan: 00:18 Hey and welcome to Bad Decisions, mini episode 10. I'm your host, Dan Monheit from Hardhat and we are using these mini episode formats to tackle your weird and wonderful questions. Today's question comes from Lauren in Prahran and it could not have arrived at a better time. Lauren, what you got for us?

Lauren: 00:35 Hey, Dan. It's Lauren. Love the show by the way. So my question is, after Christmas and everything, why aren't we shopped out by Boxing Day?

Dan: 00:46 Lauren, Lauren, Lauren. This is a super insightful question. Right. This is on par with you know when you go out for a really big meal and you are completely stuffed and then they're like, "Would anybody like dessert?" And you're like, yes, please, I totally have room for dessert. It seems like that is what's happening here. I got to tell you that as an impartial observer, growing up as a Jewish kid and all, this whole thing around Christmas and Boxing Day has always seemed very, very strange to me. Because if you look at this from the outside, as I tended to, the lead up to it all looks insane. By the time December 25 rolls around, most people have already spent days or weeks or months plowing time and energy and effort into finding perfect gifts for those closest to them. I'm talking friends, family, teachers, colleagues, coaches.

Dan: 01:35 When I grew up, I even remember the garbos getting six packs of beer left out for them. And the thing is, just as the craziness cranks up to the final crescendo, we get this mad sprint to the finish with shopping centers open 24 hours, online retailers going crazy with super express delivery options and every service station in the country, loading up their front counters with whatever last minute gifts they can muster. If you ever want a USB powered fan or a really cool pair of reflective sunglasses, do not hold back, just hit your local servo. So this is all in the lead up and then just when I imagine everyone is about to fall into a giant retail fatigue induced heap, we miraculously see this second wind to end all second winds with millions of us rushing straight back out to the shops.

Audio effect: 02:21 Gear up for Boxing Day at-

Audio effect: 02:22 25% off store wide sale this Boxing Day.

Audio effect: 02:25 Savings this boxing day. Achieve long term hair removal results.

Audio effect: 02:28 60% off sale. Don't miss out.

Dan: 02:31 What the actual? Is what you might ask, is in fact what you did ask and it seems that to me, the actual has a lot to do with something called the licensing effect. A cognitive bias that refers to our core desire to maintain balance between our indulgent and our virtual selves. Essentially it's the... Because I did X, I really deserve Y mentality. So psychologically we work on this internalized bargaining system. As our mind tries to constantly evaluate and offset our positive acts against our negative ones and vice versa. To demonstrate let me just go to some research real quickly here. A study by [Wen Bin Chiou 00:03:05] in 2011, looked at the impact that a small virtuous act could have on people's subsequent choices. So what they did in this experiment is they brought a number of participants in, randomly split them into two groups, gave one a multivitamin each morning and a second group didn't get the multivitamin.

Dan: 03:22 The group that received the multivitamins ended up being way more susceptible to a wide variety of bad decisions, including smoking, drinking to excess, turning away from healthy activities like walking and yoga, simply because they felt that the multivitamin that they had in the morning was countering the effects of all of these bad things. Similar studies have found that energy efficient lights get left on more. People that buy more water efficient washing machines tend to use them more often and none of us need a research paper to know that if we do a really good gym workout in the morning, we are far more susceptible to smashing a cheeseburger with fries and dessert for lunch, because we deserve of it. Which brings us all the way back to December 26, after all that effort, shopping for everybody else in our lives the unofficial festival of licensing effect aka Boxing Day has become the 24 hour period where we turn our attention and generosity squarely inwards.

Dan: 04:15 It is the day for treating ourselves with all of the goodies that Santa didn't quite get around to bring us this year, and we will battle crazy car parks, packed escalators and credit card wear out just to make it happen. For brands, the big opportunity here is to look for instances where you can be the trade, knowing that this year, especially this year, people are coming off a long period of virtuousness and looking for any way that they can reward themselves for a really big, really tough year. If you are on the more virtuous side, the thing you can do is look for people who have just treated themselves, knowing that it is only a matter of time before they want to offset the treats and get themselves back up to equilibrium. So, Lauren, I hope that answers your question on why we are not shopped out by Boxing Day. I hope you have a great time buying wonderful gifts for all of your friends and family and then for yourself and I look forward to answering your next question in a couple of weeks from now. See you.

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.

Mini Episode 8 - Why is there a $140 option at my local car wash?

Dustin in Fairfield wants to know why people splash out more than $100 for suds and water.

Dan: 00:17 Welcome to Bad Decisions, Mini Episode eight. I'm your host, Dan Monheit. And today's question is from Dustin in Fairfield.

Dustin: 00:25 Hi, Dan. Dustin here from Fairfield. Love the show. Keep the episodes coming. I've got one for you. So I went to get my car washed at my local the other week, and I saw an option for a deluxe, $140 wash. And I just thought, "Who actually wants that? Why is it even an option?" Can you get your thoughts?

Dan: 00:44 First of all, great question. And there absolutely is a customer base for the $140 car wash. Let's just be very clear here. If you are a professional hitman, if you are a fishmonger, if you clean septic tanks for a living, this is the wash that is going to let you be your best self, get your shine on. And I get it.

Dan: 01:02 But surely, it's a reasonable question. Could there really be enough other people out there who would consider $140 to be a reasonable price to pay to have their car washed, to even justify having it on the sign?

Dan: 01:16 And I guess it's the same kind of question for those $6,000 barbecues or the $950 Cab Sauv that you see at the top of a wine list. And basically the whole category of first-class flying. Who on earth is buying this crap? Because sure as hell nobody I know.

Dan: 01:30 And the reality is maybe nobody is buying this stuff. And actually, it doesn't even matter because of a really interesting heuristic known as anchoring.

Dan: 01:40 Anchoring refers to our tendency to depend far too heavily on the first piece of information we receive and subsequently weigh all other pieces of information against the first one.

Dan: 01:52 So the first research done into anchoring was done in 1974, by some very familiar names by now, Kahneman and Tversky. And what these guys wanted to do was really determine how powerful and how pervasive this idea of anchoring was.

Dan: 02:05 In fact, they wanted to stretch it so far that they decided to see if they could take an anchor from one category and stretch it into another completely unrelated one. So hang with me here because this all sounds a bit wild. It's going to come right back to car washing in a minute, stay with me.

Dan: 02:19 So what these guys did is they set up a roulette wheel, which was rigged to only land on number 10 and number 65. Now, if I had managed to build a roulette wheel that did that, I would probably use it for better things than scientific research. But anyway, these are very admirable guys, what we call mentors.

Dan: 02:36 So they decided to use this wonderful roulette wheel to help us all learn a little bit more about how pricing works. So they had this wheel, it stops on 10, it stops at 65.

Dan: 02:45 They got a bunch of subjects to come through and have a spin on the wheel. They would then see which number it landed on, either 10 or 65. And they would then be asked to guess the percentage of African countries in the United Nations, which it's pretty safe to assume most people would not know that off the top of their head.

Dan: 03:05 What the researchers found was that when the roulette wheel landed on 10, the average guess people made was 25%. When the roulette wheel landed on 65, the average guess was 45%. Even though the roulette wheel and the number of African countries in the United Nations have nothing to do with each other, what is very, very clear is that the result of one anchored their answer for the other.

Dan: 03:27 It's like when our brain receives a question it doesn't know the answer to, it digs around. It says, "Do we have any numbers here about African countries in the UN?" "No." "Do we have any numbers at all? Has anybody seen a number recently?" And some other part of our brand says, "Yes, I just saw the number 10." And it's like, "Well, 10 sounds a bit low. Let's go with 25."

Dan: 03:45 You can see how this happens. Now, we are especially fallible to anchoring, like most biases, when we're making decisions that are infrequent, that are under pressure, or that are in categories where we really don't have very much knowledge. And car washing basically ticks all three of those boxes.

Dan: 04:03 We don't do it all that often. You are under pressure because you have like four seconds from when the attendant comes over and asks, "What do you want?" And there's not a whole lot of info about what the difference between all of these washes are.

Dan: 04:13 So in these four seconds that we get to decide what we want, we look up, we see $140. We think, "That's crazy. I would not spend $140 washing my car. But hey, that silver option for $60, it looks pretty reasonable." Doesn't it?

Dan: 04:27 And we've got to admit that if $60 was the top price point, we would be far less likely to pick it because we've been anchored at the platinum at $140.

Dan: 04:35 So what we see here is the $140 car wash is not really designed to sell $140 car washes. It is designed to make us all feel much better about buying $60 car washes, much like the $6,000 barbecues and the $950 bottles of wine.

Dan: 04:50 For brands, the key takeaway here is to be really cognizant of the anchors that exist in the categories that we operate in. We can then price relative to the anchors that already exist or think about how we can be brave, step up, and create new categories and anchors of our own much like Red Bull, Grill’d and Cirque du Soleil of I have done.

Dan: 05:08 And the cool thing is if you do manage to go out and create something new, you get to aim high, knowing that the first price that you set is what everything else is going to be built around.

Dan: 05:17 So there you have it, Dustin. I hope I not only answered your question about the $140 car washes but also I hope that Fairfield continues to treat you well.

Dan: 05:25 If you've got any other questions about the weird and wonderful observations you've made about human behavior that you'd like me to unpick or demystify, shoot them through to askdan@hardhat.com.au or you can get me all over the internet at Dan Monheit. I'll catch you next time. Peace out.

Mini Episode 7 - Why do people pay $7 for toast at a cafe?

Lydia in Claremont wants to know why cafes can charge big bucks for a little bread.

Dan: 00:00 Welcome to Bad Decisions mini episode seven. I'm Dan Monheit, your host, and we are using this mini episode format while Mel is off with her young child to get to the end of the long list of weird and wonderful questions you've sent us about human behaviors.

Dan: 00:32 I guess maybe the questions aren't so weird and wonderful, so much as the behaviors are. Anyway, today's question is from Lydia. Lydia, what you got for us?

Lydia: 00:40 Hey Dan, it's Lydia from Claremont here. I've been back at the office for a little bit now, and this morning me and my workmate popped into the cafe a few doors down for a coffee. I was a little bit hungry too, so I wanted a bite. $7 for plain toast? A bit painful.

Dan: 00:56 I tell you what, $7 for toast in a cafe does feel very, very full-on. This is one of those things where even in the moment of ordering it, you kind of see the insanity of it, right? So some of the bad decisions we make, it's not till the days or weeks afterwards that we sort of reflect on it and we think, "What the hell did I do that for?" But this is one of those ones where as you are ordering it and you're looking at the menu and you see toast with condiments, $7, you're like, "I know that $7 is enough to buy the entire loaf of bread and pay for all of the electricity I need to toast all of it. This is just madness." But we go and do it anyway, right?

Dan: 01:32 When I think about the exceptionally long list of things that humans do that demonstrate that we are bat shit crazy, cafe toast has to be somewhere right up there near the top. Definitely top three, maybe even number one.

Dan: 01:45 If we want to get to the bottom of what's going on here, we need to look no further than the bias or the heuristic of mental accounting, which refers to our tendency to treat money differently, even though all money is basically the same. A 1984 study by behavioral economics legends, [inaudible 00:02:02], identified three factors that influence how we think, feel about and spend money.

Dan: 02:09 The first is where the money comes from. Really the key insight on this one is that money that's considered a windfall. So unanticipated money, money that comes from a win from a one-time bonus, from a tax return, from a government grant, from an envelope from Auntie June, right? That sort of money seems to be counted really differently as money that we just earn in our normal course of living and working, and as a result tends to be spent way more freely.

Dan: 02:35 I think if anybody here has had a great night on the blackjack tables and then gone and bought some ridiculous gear down at the casino, you know exactly me what this feels like. This is spending house money. You also know why there are so many jewelry stores at the casino.

Dan: 02:50 The second factor that influences how we regard money is the mental buckets that we tend to put things into. So again even though all money is basically the same, we tend to have these kind of separate areas that we put it in. So, we get our paycheck and we might decide that we're going to carve off $70 every week for our holiday fund, and $120 for groceries and $50 for our weekly petrol budget. So, we tend to do weird and irrational things to keep ourselves within those constraints of those buckets that we set up.

Dan: 03:20 The third factor sort of ties in a little bit to the second, and that is category limits that we seem to place on things. These really are kind of subjective arbitrary numbers that we decide is an acceptable price to pay for anything from a car to a shirt, to shot a vodka out at a nightclub.

Dan: 03:41 It's weird when you catch yourself in the middle of one of these category limits being breached. So, you might be shopping online and you see some wonderful bedsheets that cost $240 and they come with free shipping and you think, "That is perfect, I'm going to order those. They're going to be great." At the same time, you might see the identical bedsheets for $190, but you need to pay $50 for shipping, right? Same $240, and think, "That is outrageous. I'm not paying $50 for shipping, shipping's meant to be free," right? Now logical, rational people would realize that the $240 to get the bedsheets to you is the same, but these category limits cause us to consider those two options very, very differently.

Dan: 04:16 So it is behind here, door number three, that we really find the answer to our cafe toast conundrum, and that while $7 feels like a lot in the slice of toasted bread at home category, $7 by comparison is a small price to pay for the fun or the luxury of enjoying a cafe breakfast with family and friends.

Dan: 04:37 So for brands, really the key takeaways here are to, number one, if you can look for windfall spenders, right? Look for people who are spending money that they otherwise weren't planning to get. So this might be ramping up your advertising around tax return time, setting yourself up at a casino, or maybe trolling the newspaper to find recent inheritees of giant sums of wealth.

Dan: 04:59 If that is not possible or practical for you, the other thing you can think about is what is the category that you are finding yourself in, and how might you be able to stretch or break that to get people to think differently about the right price to pay for what you're selling? Because at the end of the day, who wants to be selling $3 loaves of bread when $7 slices are all the rage?

Dan: 05:18. So Lydia, I hope that answers your question on why cafes are charging, and probably better, why people are paying $7 for a slice of toast. If you have got any other weird and wonderful questions about the things that we do, please send them through to me at askdan@hardhat.com.au, or you can find me all over the internet at Dan Monheit. See you for the next installment in a couple of weeks. Peace out.

Mini Episode 6 - Why won’t anyone pay me what my car is actually worth?

Sophia in Glenelg wants to know why nobody seems willing to 'pay the cost to be the boss' of her "really awesome little Mazda".

Dan: 00:17 Hey, and welcome to Bad Decisions. Mini episode six, I'm your host, Dan Monheit. And if you're new to this format of the show, this is where I do my best to get to the bottom of your wild and wonderful questions about why we do the things that we do. Today's question is from Sophia. What do you got for us?

Sophia: 00:35 Hey, Dan, Sophia here tuning in from not so sunny, Glen Elk. So I've been working from home for a while now and with what I've been doing, I've realized that I don't really need my car anymore. So I've been trying to sell it. It's a really awesome little Mazda, but nobody wants to pay what it's actually worth. I mean, what I'm pretty sure it's worth. Got any ideas?

Dan: 00:55 All right. So, so Sophia, let me just start here by saying, I really do. I feel you on this. I've had my heart broken so many times selling things from my first Jeep Wrangler to a as new iPhone 11 to my never dropped, never crashed, never raced carbon foam road pie. It doesn't seem to matter what it is. The process is the same, right? We come to the, to the tough decision that it's time for us to part ways. We then go and spend hours doing the research. We crop the photos. We write the spectacular copy. We decided on a fair and reasonable price. We put it up on whatever our website of choice is. And then nothing. You know, if we're lucky, we might get to waste a couple of hours with some tie kickers, maybe even get our egos bruised with a couple of offensive today only.

Dan: 01:47 Cash only, low ball offers, but at the end of the day, nothing ever really seems to go to plan what is going on here? I think what's going on here is something called the endowment effect. Which is our tendency to believe that something is worth more simply because we own it, right? We think we're pretty awesome. If we own this thing, it must be worth quite a bit. Right? And what that means is that whatever we think something is worth, is precisely that what we think something is worth. There's a bunch of research done into the endowment effect through the mid 1990s, by the dream team of Conaman Niche and Thaler. And they ran a series of experiments that took a really similar format. What they would typically do was go into a university lecture, randomly split the room into two groups, assign one group as the buyers and the other group as the sellers. Though, then give half of the room as sort of inanimate objects.

Dan: 02:39 So it might've been a pen or in the example, I'm going to talk to you about today. It was a mug, right? So half of the room gets mugs. The other half of the room gets bupkis. Right now, they get to hang onto the mugs for a little bit of time. And then they go and survey the students to the students who have received the mugs. They are asked, what is the minimum price you would accept to part with that mug that you now have in your possession? To the group that didn't get the mugs they will ask, what is the maximum price you would pay to obtain one of those shiny mugs that your lucky colleagues received that you didn't? What they consistently found was that the price people wanted to receive in exchange for their mug was around twice as high as what people were willing to pay to get one.

Dan: 03:23 So in one particular example, the average highest buy price was $4.20. In the same study, the lowest average sell price was $8.40, right? A two to one ratio. We value something twice as much simply because we've owned it. Now, this makes sense from an evolutionary perspective, I guess for most of human history, most resources were scarce or difficult or dangerous to come by. So valuing or protecting what we have undoubtedly kept us safer for longer. And while today, most things are not that scarce and not that dangerous to get, you know, we live in a wonderful world of abundance. That the bias of wanting to overvalue, what is ours seems to have endured. And that is why nobody's willing to pay you precisely what you think your car is worth, right? Because they don't own it yet. You do. I guess for brands, the key takeaway here is to try and make it easier for people to feel like something is theirs before it really is.

Dan: 04:18 So this could come from things like free trials, test drives, light versions, co-design whatever it is. Just know that if you can get somebody to feel like this is already theirs, walking away from the opportunity to buy it is going to feel far more painful and be far more difficult than if it never felt like it was theirs in the first place. So I hope that answered your question, Sophia. I hope you get a cracking price for that car of yours and you put the money to good use haggling, somebody else down on something else that they clearly think is worth way more than it is. And if you guys got any more questions about the weird and wonderful things that we do, please shoot them through to either ask dan@hothat.com that I, you, or you can find me on the internet at them on hot. It's been real, and we'll see you for the next question in a couple of weeks. See ya.