Anchoring Is Back: Meet the $69 Hot Dog

Pity the summer tourist in New York, the city where everything is more expensive than it is back home. Last month, Serendipity 3, an East Side eatery popular with visitors, introduced a $69 hot dog. Call that a leading indicator: Several Manhattan restaurants introduced $100+ hamburgers prior to the 2008 meltdown, but not many have since — maybe lest the masses storm the place with pitchforks. Like the hamburgers, Serendipity 3's "Foot-Long Haute Dog" attempts to justify the price with the garnishes. The hot dog comes with medallions of foie gras with black truffles and caramelized Vidalia onions. The accompanying ketchup is said to be made from heirloom tomatoes, and the Dijon mustard is spiked with truffle shavings. Foodies are left to ponder how well the flavor of truffles and foie gras stands up to a good slathering of condiments.
Serendipity 3 is a dessert-heavy place popular with tourists wanting to see celebrities. The fanfare over the $69 hot dog was transparently a way of getting that crowd's attention. The new dish was introduced on National Hot Dog Day with a representative of the Guinness Book of World Records on hand to "certify" it as the world's most expensive hot dog. The restaurant's very busy press agent, Joe Calderone, talked up the $69 frank and the alleged celebrity clientele to anyone who would listen. ("Cher is a regular who always get the regular foot-long. Now we will offer her the most expensive one.")
Absurdly priced menu items are more than a publicity gimmick. They're an application of "anchoring," a cognitive phenomenon discovered by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just considered. In this case, the diner in a touristy Manhattan restaurant is trying to decide how much he or she can afford to spend. The familiar prices back home don't apply. That diner isn't going to order a $69 hot dog, but might happily opt for an $17.95 cheeseburger. The hot dog makes the cheeseburger appear reasonable in comparison (even though $17.95 would be a ridiculous price for a cheeseburger almost anywhere else). In scores of careful laboratory studies, price contrasts like that affect decisions. Restaurateurs and consultants believe it works on menus, too.
The hot dog isn't the most expensive thing on the Serendipity 3 menu. They have a $1000 chocolate sundae, a legacy anchor introduced before the Great Recession. Its agenda is to boost the amount spent on desserts. The $1000 price, printed in big type, convinces average folks that it's sensible to pay $15.50 for a "fruit and fudge" confection, or $22.50 for a "Cheese Cake Vesuvius." Menu anchors in the $1000 price range are in the semi-mythic category. It doesn't cost anything to have them on the menu, and Serendipity 3 even demands 48-hours notice. (How many billionaires plan an ice-cream sundae 48 hours in advance?) The Golden Opulence Sundae is said to be Tahitian vanilla ice cream lavished with edible 23-carat-gold leaf and caviar and chocolate — another dubious combination. Would Serendipity 3's chef make one if you ordered it? You bet! The profit margin must be astronomical. Does anyone order it? How often does that happen? Calderone told AOL News that that the restaurant sells about one $1000 sundae a week. If you believe that, you don't know much about how press agents make a living.

Cash and Calories

A little-noted feature of the new health care bill was inserted with no partisan rancor and the full support of industry. In the name of bending the cost curve, every restaurant chain with 20 or more outlets must hereafter post calories on its menus (and menu signs, for drive-thrus). "Nanny state" do-goodism? Not according to the National Restaurant Association, a lobbying group. The Association's Sue Hensley explained, "That growing patchwork of regulations and legislation in different parts of the country has been a real challenge, and this will allow operators to better be able to provide their information." New York City and California already require calorie information.
The point of the new regulation is to encourage healthier eating, of course. One recent study found scant evidence that New York's law had done any good. But there may be another reason why the restaurant industry likes the new law. It's more about the bottom line than waistlines.
Experiments in human decision making show that we're subject to information overload, especially where numbers are concerned. When calories are printed on the menu, the consumer has fewer cognitive resources to devote to judging prices. It's much like the "misdirection" employed by magicians. The sudden appearance of a scantily clad assistant in a puff of smoke gives the magician cover to slip a rabbit into his hat.
Above is a "Weight Watchers" menu from a popular restaurant chain. Notice that this includes not only calories but grams of fat and fiber — along with price. That's four sets of numbers for each item. (The prices are in smaller print than the nutritional data!) And of course, you have to factor in how much you like each item, too. Anyone who conscientiously tried to use all this information would need a spreadsheet. In most cases, we give up and just pick something we like. That's fine with restaurants. In that moment of capitulation, we tend to ignore price, often ordering something more expensive than we might have.

CBS News Sunday Morning

I did a segment on shopping mall and restaurant prices for CBS News Sunday Morning, set to run this Sunday. Air times are here.

Decoding Fast-Food Menus

Fast-food menus are among the most rigorously tested products of our consumer culture. Because the decision of what to order for lunch isn't that important in the grand scheme of things, we don't spend much time or thought on it. Instead, we rely on cues in the environment. If your friend mentioned having a barbecue sandwich yesterday, you're more likely to try it today (assuming you like barbecue, and the friend). Memories are short, so the most powerful source of cues is the menu. The prices are designed to get consumers to order more than they might have otherwise.
• The most common trick of fast-food menus is the "combo meal." As everyone understands, the combo meal offers an incentive to order something extra. The burger plus fries plus soda combination costs just pennies more than burger plus soda à la carte. You might as well get the fries — it seems like you're throwing away money not to order it. For most consumers, this is irresistible.
There's another reason fast-food places offer combo meals. They foster confusion. It’s hard to be sure how much the burger costs, and how much the drink costs—and whether it’s too much. So consumers are a bit less price-sensitive with combos. Of course, eventually repeat customers become familiar with the prices of their favorite combos. For this reason, fast-food menus are an ever-changing caloric kaleidoscope. New entrees are offered, and old ones change or vanish. Combos can be super-sized. Do you want curly fries? You can’t buy exactly the same thing you did last time (neither can you compare prices, exactly).
• The Starbucks menu uses the "rule of three." The menu offers three sizes of coffees, given the enigmatic names of Tall, Grande, and Venti. (They're 12, 16, and 20 ounces respectively; 24 ounces for cold Venti drinks, to allow for ice.) Since Starbucks newbies won't know what they're getting, they tend to order the middle choice, Grande. In the psychology literature, this is known as "extremeness aversion" — people instinctively favor a middle choice, figuring it's safer. Guess what? You've just ordered two cups of expensive coffee. The Grande's sixteen ounces is two regular cups. Here's a secret: Most Starbucks will serve you eight ounces of coffee, but you have to ask for a "Short" coffee (which isn't listed on the menu). You have to remember that password "Short": Company policy says that a customer who asks for a "small" coffee is to be given a "Tall" one.
• Anyone who doubts the power of prices ending in 9 should check out a fast-food menu. The menu above, at a Los Angeles Pollo Loco outlet, has 75 prices, and all but one end in the digit "9."
• The exception: a deal offering 10 buffalo wings for $5. Quick: How much is that per wing? It takes most of us a moment to do the math. And that's the point: not many people bother, not with kids screaming in the back seat. But "10 wings for $5" sounds like a better deal than "50 cents a wing."
• Critics have blasted the nutritional value of fast food, causing both the industry and government to take action. Since 2008 New York City has required fast-food places to post calories—in large fonts—on menus. This may or may not have promoted healthier eating. It probably hasn't hurt chain profits, though. The reason is that consumers now have two sets of numbers to juggle: calories and dollars. As many experiments have shown, the human mind has a finite capacity to deal with numerical information. By encouraging diners to pay more attention to calories, the new menus prompt them to pay less attention to prices. That gives chains scope to charge a little more. (Not only that, the salads are among the most expensive things on McDonald's menus, anyway.)

SEE ALSO
Poundstone, William. "Menu Mind Games." New York, December 14, 2009.
Poundstone, William. "Menu Psych." YouTube, 2009.

Why We Don't Always Order the Gnocci

Take a look at the menu above (click for a larger version). It's a prix fixe meal recently offered at a Tel Aviv restaurant. The prices are quoted in New Israel Shekels (NIS), worth about as much as an American quarter. The three-course meal costs 115 NIS, or around $30. You've got a choice of five entrees. Which would you choose?
The menu is from an experiment by behavioral economists Ori Heffetz and Moses Shayo, of Cornell and Hebrew University, Jerusalem. They got a fancy Tel Aviv restaurant to play along as they manipulated the menu prices, specifically the little prices in parentheses telling how much the entrees would have cost a la carte. They wanted to test whether more people would pick an item just because it was more expensive. (Did you choose the shrimp gnocchi?) Those who pick up many checks on dates might swear it works that way, but Heffetz and Shayo showed it didn't. The a la carte reference prices did not affect diners' choices.
“Maybe, sometimes, old-fashioned economics is just about right,” Shayo told The New York Times' John Tierney. “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.” The Times article picks up on that thought, offering the research as a corrective to the current wave of Homo economicus-bashing.
Well, kind of. Nobody disputes that taste can trump money, especially when money isn't truly at stake. More generally, it's long been known that reference prices affect estimations of prices — but choices are a whole different matter. In the late 1960s, Sarah Lichtenstein and Paul Slovic demonstrated this in some classic experiments. Volunteers were required to assign prices to wagers and, separately, to choose between pairs of wagers. Their choices and prices were often contradictory. That is, the volunteers would insist that wager A was worth more than wager B… but when given a free choice of the two, they would consistently chose wager B. This was especially paradoxical because the volunteers were simply trying to maximize money (not balance a taste for stuffed artichokes against a desire to get the best "deal").
Obviously, both choices and prices are important in the real world. There is now a applied science of menu design, based at least loosely on psychological principles. The practical restaurateur is mainly concerned with nudging diners to select high-profit items. One trick is this: If a restaurant wants to push a $30 steak, it will put it on the menu next to a $80 Kobe steak. The latter, even if no one orders it, makes the $30 steak seem reasonable in comparison. And it causes more diners to choose the $30 steak rather than something else, or so menu consultants believe. The Heffetz-Shayo menu was unusual in that it gave prices that don't apply (you're going to pay the prix fixe no matter what you choose). Conceivably, some diners might have picked the most expensive item, to get maximum value (the hypothesis Heffetz and Shayo were testing), while others might have momentarily forgotten about the prix fixe and picked something inexpensive, to get a bargain (as the menu design trick supposes). It's even possible that the two effects canceled out, contributing to the null result. It might be interesting to see more rigorous testing of the tricks used by menu designers.
News to me: that shrimp, pork, and sausages are popular entrees in Tel Aviv.