Cheap (13 page)

Ariely learned from his experience as a burn victim that expectations are powerful mediators of perception, and he says these expectations are easily manipulated by price. In one extraordinary experiment, he tested this theory on painkillers. He began the study by measuring pain thresholds in a large group of subjects; then he broke the subjects into two groups and offered one group a painkiller at full price and the other group the same painkiller at a 25 percent discount. The discounted painkillers had a far less powerful effect on pain. “The cheap price seemed to reduce the secretion of opioids in the brain,” Ariely said. “This is very worrying, because what does that tell us about the effectiveness of generic drugs? The only way to eliminate this effect is to remind people before they take the pill that the price should have no effect—but this, of course, is impossible for a doctor to do.” Airely, who endured as a young man more pain than most of us could bear in a lifetime, said that generic painkillers may be no bargain.

 

 

 

THE IMPACT
of price, then, goes far deeper than the pocketbook. How deep is growing increasingly clear as scientists use new tools to get beneath what people say they think and into the brain structures that do that thinking. Chief among these is functional magnetic resonance imaging, or fMRI, which uses a powerful magnet and radio signals to monitor and map fleeting fluxuations in oxygen levels in the brain. It has been known for over a century that blood flows to certain areas of the brain when those areas are active. The more active the brain cell, the more oxygen it consumes and stores in hemoglobin, which is oxygenated with air from the lungs. Oxygenated and deoxygenated hemoglobin have different magnetic properties, and by measuring these differences, the fMRI determines which part of the brain is involved in various modes of thought. Among the more interesting things fMRI has taught us is that what sometimes appears to be irrational behavior reflects an entirely predictable brain response.

Brian Knutson, a neuroscientist at Stanford University, is an expert on the neural basis of emotion. His focus is not on the “thinking” part of the brain but on the more primitive structures that operate just beneath our conscious control. Among these is the nucleus accumbens, a tiny organ buried deep behind the eyes. The nucleus accumbens plays a central role in the brain’s reward pathways by regulating the ebb and flow of two well-known neurotransmitters: dopamine, which promotes desire, and serotonin, which promotes satiety and inhibition. The thrill of most pleasurable human experiences—getting high on psychoactive drugs or luxuriating in a great cigar—has at its core the nucleus accumbens. Within that nucleus the dopamine system motivates us to eat, drink, and have sex while we can. Evolution created the dopamine system for a very good reason: Given the short, brutish lives of our early human ancestors, delaying gratification raised the probability that there would be no gratification at all. When confronted with matters that were dangerous, edible, or sexual, primitive man knew instinctively that it was safer to act now and think later. Today, those of us more genetically inclined than others to react impulsively are likely to have particularly sensitive dopamine pathways: The more impulsive we are, the more we are driven to action by a danger or incentive—or perhaps more accurately, by the
prospect
of a danger or incentive.

Filmmaker Alfred Hitchcock once wryly observed that “there is no terror in the bang, only in the anticipation of it.” Hitchcock was a maestro of suspense and built his masterpieces on the underlying presumption that pleasure and pain are most keenly felt in their expectation, not their execution. In a 1939 lecture he delivered at Columbia University, he explained how he used expectation to raise suspense: “We have a name in the studio, and we call it the ‘MacGuffin.’ It is the mechanical element that usually crops up in any story. In crook stories it is most always the necklace, and in spy stories it is most always the papers.” The MacGuffin—the necklace and secret papers—were proxies; their pursuit provided the real drama.

Hitchcock was a fabulist, a maker of entertainments, but he was also prescient. Scientists now know that anticipation is an incredibly powerful driver of human behavior. Hard evidence of this surfaced not long ago when Knutson and other researchers used fMRI to map the brains of volunteers engaged in games of chance. For most subjects the
possibility
of winning or losing even $5 set off frantic activity in the brain, but
actually
winning or losing this amount had almost no effect. It was the anticipation of the payoff that excited: the moment the $5 was won or lost, the nucleus accumbens went quiet. As Hitchcock knew intuitively, the reflexive, primitive area of the brain responds more powerfully when confronted with what
may
happen than with what
does
happen.

The flip side of anticipation is dread, the sickening feeling when confronted with future dangers or disappointments. Parents sitting vigil in their bathrobe at 4 a.m. on a Saturday morning waiting for a tardy teenager to walk through the door know the psychic torture of dread. Scientists do, too. In one study, volunteers were put into an fMRI machine and given a series of electric shocks to the foot. The shocks varied in intensity from barely detectable to the pain of a needle jab. Prior to being shocked, subjects were told how strong the feeling would be and how long the wait for it would be, from one to twenty-seven seconds. Later, participants were given a series of choices: Would they prefer their medium jolt in five seconds or in twenty-seven seconds? What about a mild jolt in twenty seconds versus a sharp one in three seconds? Surprisingly, volunteers almost always chose to have the shock as quickly as possible, and a significant number—fully 28 percent—chose to endure a shock at the highest voltage in exchange for getting it over quickly.

This seems to make no rational sense. More pain is more pain, whether administered now or later. Why should dread even enter into this calculation? Scientists believe the answer is that dread of pain
is
a sort of pain. fMRI scans of the subjects showed activity in brain areas governing pain
befor
e the subjects were shocked. “Anticipation of pain seems to be a source of misery,” Carnegie Mellon psychologist George Lowenstein wrote in an accompanying review of the study.

The brain’s chemical response to the prospect of good and bad, called by Antonio Damasio and other neuroscientists the “beacon of incentive,” is part of our evolutionary endowment, designed to motivate us to do whatever is necessary to stay alive and reproduce. In prehistoric times the actual taste of fruits and berries was not what got early man out of his cave and foraging. It was the anticipation of that taste. Actually being eaten by a saber-toothed tiger was not what got early man running; it was the dread of being eaten by that tiger. Modern humans benefit from this legacy because it is not failure per se but the fear of failure, not success per se but the prospect of success, that gets us out of bed in the morning. And when it comes to discounts, it is not necessarily the object per se but the anticipation of getting a good deal on that object that motivates us to make a purchase.

Some of us more than others are susceptible to the allure of discounts, but none of us is immune. It is for this reason that retailers work hard to frame prices as a good deal even when they are an ordinary deal—or no deal at all. The thrill of anticipation is often all it takes to block out any negative feelings about the transaction. No matter that the color is off, the pattern peevish, the fit less than perfect; the prospect of getting a good deal sets our nucleus accumbens aquiver. And scientists have found the evidence to prove it.

Knutson peered into the brains of people as they contemplated making a purchase and found distinct brain circuits anticipating gain and loss. Twenty-six adults participated, each given $20 to spend on a series of products. If no purchase was made, subjects were allowed to keep the money. The products and their prices appeared on a computer screen that the participants viewed while under fMRI. Knutson and his coauthors found that merely viewing the products activated the nucleus accumbens. When the subjects were presented with prices the subjects considered excessive, however, the insula, a brain region associated with social emotions such as empathy, guilt, humiliation, and pride, lit up while the prefrontal cortex, a part of the brain associated with weighing gains and losses, went silent. Knutson said he could predict whether the study participants would decide to purchase each item by looking at how their brains reacted: When the nucleus accumbens and prefrontal cortex lit up, they would buy; when the insula lit up, they would pass. Confronted with discounts, the accumbens lights up like a Christmas tree.

“People treat money as a good,” Knutson said. “Having to give it up is a bad. A sale sign reframes the loss as a gain. You aren’t just saving money, you are turning a loss into a positive. What I find amazing is that you can scan the brain and find an activator that will actually predict what you will do and that this is predicted by phylogenetics—chemical changes in ancient brain structures. If you want to predict what people are going to do or what they would be willing to pay, look at what they anticipate doing, not how they feel after they’ve done it.”

Those of us without ready access to a brain-scanning machine know that anticipating buyer reactions is a delicate and frustrating exercise, especially if we have something to sell. Setting too high a price is obviously a bad tactic, but setting too low a price can be equally counterproductive. Like many of you, I learned this tenet through personal experience. My lesson involved a 2004 Honda CRV. I enjoyed but no longer needed the car, and it was sitting idle in the driveway consuming money in insurance and depreciation, like a taxi stalled in traffic with the meter running. I decided to sell it and advertised in all the usual outlets. Because I wanted the sale to be quick and painless, and because I hate to haggle, I cunningly priced the car below other Hondas of similar make, mileage, and vintage. To my surprise I received few calls, and the handful of potential buyers who came to look at the car were hypercritical. One actually drove nearly 75 miles to my home, got out of his car, took a quick look, and spotting superficial scratches on the front side door, returned to his car and drove 75 miles back home. This was all very disconcerting. The Honda was
mine,
a great car in great mechanical condition and at a price with which no one could—or did—quibble. Like so many sellers of unloved merchandise, I was beginning to regard this experience as a personal rejection. Did people think I was trying to rip them off, or what? I lowered the price further, figuring I’d get deluged with calls. But, if anything, inquiries grew fewer, no-shows increased, and the only potential customer was a shady guy who left with a shrug after I declined to let him test-drive the car without me in it. Winter was coming, and I began to wonder whether it was “’til death do us part” with this car and me. I consulted a number of friends and colleagues and also a neighbor who by odd coincidence had sold her daughter’s Honda CRV earlier that year. She suggested I raise the price. I told her she was nuts: who would pay more for a car no one seemed to want? But after a couple more weeks of no-shows and crank calls, I figured I had nothing to lose and raised the price by nearly a thousand dollars. Within a week the car—scratches and all—was sold to a young architect.

Pricing is rife with paradoxes of this sort. We all believe we want low prices, but when actually confronted with them, how we respond depends largely on the context.

Most of us like to think of ourselves as unbiased, rational consumers who make decisions based on evidence. Psychologists call this belief the “illusion of objectivity.” Lowenstein once observed, “The conscious mind plays a less active role in controlling behavior than it does in making sense of that behavior after it occurs. In other words, post hoc rationalization is a vibrant and ubiquitous component of the human psychological repertoire. We believe what we want to believe. After the age of three or so, though, we don’t like to admit this to ourselves and attempt to rationalize our decisions by unconsciously adjusting our attitudes to justify our actions.

Behavioral psychologists say that discounted prices provoke two diametrically opposed responses depending on the expectations of the buyer. From what is called an “attribution perspective,” a low price signals low quality, because the buyer attributes the steep discount to some deficiency in the product. Assessing the object through this lens, the buyer takes particular notice of every flaw, both real and imagined, and tends to overlook most virtues. The guy who drove 75 miles—wasting all that time and burning all that gas!—to view my perfectly good car, only to turn around and drive 75 miles back home—probably believed he was justified in this action. The low price predisposed him to suspect the car was a lemon, and the scratches merely confirmed this belief. The architect, by contrast, was motivated to buy the car even before he saw it. A new father who could no longer rely on public transportation to get to work, he needed a safe, reliable vehicle, and he needed it fast. When I pointed out the scratches, he seemed impatient, as though he didn’t want to be persuaded that the car was not a good buy. If he had asked, I would gladly have lowered the price, but predisposed to want the car, he didn’t haggle. Like all highly motivated buyers, his inclination was to overvalue virtues and overlook defects. Motivated buyers are far less likely to be suspicious of low price. If I had offered the architect a “deal” by, say, throwing a roof rack or child seat into the bargain, chances are he would have been all the happier. But because he was so motivated, he probably preferred not to tip the deal by asking.

Erica Dawson, a psychologist at Yale School of Management, is an expert on motivated reasoning, which she roughly defines as how people sift through evidence that bears on things they care about. Our desires, she said, shape the way in which we access and consume information. Most of us are motivated to hang on to existing self-enhancing beliefs, and willing to exert significant cognitive effort to maintain these beliefs. We are also willing to accept flawed information and flawed evidence if it supports our beliefs. We all rely on cues to make decisions—signals that tell us how to respond. A discount is often interpreted as a negative signal unless it is countered by a signal of quality, such as a celebrity endorsement or a designer label or an expert opinion. Note that the operative phrase is “signal of quality,” not quality per se. The trick for retailers—and certainly low-price retailers—is not necessarily to ensure that their products are the best they can be but to associate the product with quality in consumers’ minds. Once quality is assumed—as it is for many branded products—a lower price is a plus. When quality is in dispute, as it is when we buy things we know nothing about at flea markets or eBay, low price can be a negative.