Friday, April 3, 2009

Mr. Whipple Was Wrong

The worst marketing pitch of all time? It might be "Please don't squeeze the Charmin!" suggests Time magazine's Sean Gregory. He's writing about an upcoming study of the instant endowment effect, to be published in the Journal of Consumer Research. In the endowment effect (a term coined by Richard Thaler in the 1980s), people place a higher value on things they own than on things they don't own. A familiar example is the elderly couple selling the family home, "full of memories." They place an unrealistically high price on it and can't understand why no buyer is interested. There is at least an emotional logic to that. Much stranger is the "instant endowment effect" in which merely touching something raises people's stated prices. Most economics students experience the classroom demonstration of this effect: Coffee mugs from the campus store are distributed randomly to half the students. The people with mugs are encouraged to bargain with the have-nots and sell their mug at a mutually agreeable price. You might expect (and economic theory predicts) that half the mugs would be sold. That is, half the owners would find a buyer who happened to value the mug more than they did. After all, the mugs were passed out randomly, without any regard to who actually wanted a mug and who could have used some easy cash. But the experiment's usual result is that few mugs sell. The people who have the mugs find that no buyer is willing to pay what they think they're worth.
The instant endowment effect has always had an air of mystery. Day after day, a bag of beef jerky sits at the elbow of the guy at the 7-11. He’s spent more time in proximity to that dried meat snack than he has with his latest girlfriend. Does the instant endowment effect cast its spell on that checker, causing him to demand an inflated price to part with a humble sodium-laden treat? Surely not. Daniel Kahneman proposed that, when you're in the business of selling something, you become immune to endowment effects. Beef jerky does not register as "mine" when it's part of a stock in trade. This plausible hypothesis raises as many questions as it answers. There has been much debate over how, and whether, instant endowment effects apply in marketing.
In the new study, by the University of Wisconsin's Joann Peck and UCLA's Suzanne Shu, coffee mugs and Slinkys were set in front of 241 Wisconsin undergraduates. Half the students were allowed to touch the items; the other half could only look at them (as window shoppers, more or less). The students who touched the products were willing to pay more for them than the window-shoppers. This augments the growing case that instant endowment effects are robust and would apply in the real world. Indeed, Peck and Shu cite the Apple Store as a good application. For fanboy looky-loos, touching is buying.
(Time's Sean Gregory may be a little hard on Mr. Whipple. I imagine Procter & Gamble was counting on reverse psychology. Telling shoppers not to fondle the toilet paper made them do so — in the commercials, and probably in real life).


  1. I don't find these experiments compelling - what about transaction costs? As we've seen during the "financial crisis", trading even with familiar partners carries its own risks. I for one am discouraged from posting on craigslist for items that have a positive value, because I don't know who might respond. Do these students in these experiments worry about disappointing the buyers? Such worries might overwhelm any impulse to make a couple of bucks.

  2. Indeed. Experiments such as these frequently ignore the very real - and very rational - reasons people have for behaving in what seems to be an irrational way.

    Another one I read about (some Economist article a while back) was that people were more motivated to avoid a loss in pay than they were to pursue a gain in pay, even when the dollars ended up the same. Therefore, the store claimed, sticks are better than carrots for motivating employees. But in the real world, if you fail to earn a bonus you are not likely to be in jeopardy of losing your job - if you suffer a pay cut for nonperformance you are.