The Iowa Gambling Test
The Iowa Gambling Test was conducted by the researchers at the University of Iowa and was designed to simulate real-life decision-making. The participants had been shown four decks of cards. They were told that choosing some cards would win them money, and some other cards would lose them money. The aim of the picking was to collect as much money as possible. They didn’t know that the first two decks were “bad decks” and would lead to long-term losses. The other two decks were “good decks” which would lead to long-term gains.
Their physiological measurements were registered while they made their choices. The data showed that the participants realized the winning or losing quality of the decks after choosing about 40-50 cards. They could explain why picking cards from the last two decks was a better idea. But the participants had another mental process measured apart from the previous one.
They showed stress responses (higher skin conductivity, more sweat on their palms) after picking only 10 cards from the “bad decks”. Subconsciously, they foresaw the punishment that would follow the bad pick 30 or 40 cards before they could logically explain it. Their subconscious mind figured out the game long before their conscious one.
The human mind doesn’t work on rational deliberation only. It is a mish-mash of emotional and rational decisions.
Emotional responses usually are automatic and heuristic-based. Emotional decisions are fueled by intuition. Intuitive responses come naturally and quickly, even if there is not enough information to comprehensively jump to a conclusion. These types of decisions are subconsciously made. The vocal manifestation is preceded by biological ones such as sweating, increased heartbeat, and skin conductivity.
Rational answers, as opposed to emotional ones, are conscious. However, they are slow and require effort. Logical and rational responses are much harder to make, and therefore many people automatically rely on their intuitive gut answers.
When it comes to purchasing decisions, buyers are more inclined to take out their credit cards due to emotional processing. They make a decision based on how they feel about the product, not on whether or not the object in question is needed or worth the price. Sellers know this and take advantage of it. Marketing is a discipline built upon your brain’s natural, evolutional weakness. If survival depended on logic, our brain would think logically much quicker by nature. But we are instinctual beings, so emotions kick in first. Marketing aims to catch and force a decision out of us in this instinctual phase rather than let us think things through and come up with a rational choice.
Emotions vs. Rationality
The brain has two sides: a right and a left hemisphere. The right side of the brain is the intuitive, subjective, artistic side. The left is the logical, analytical side. One important fact, however, is always missed: there are no black or white cases. Even if you think you are more logical than emotional it doesn’t mean that emotions won’t affect your decision-making. This is even more so true when it comes to buying decisions. You’re not a 24/7 ROI (return on investment) analyzing machine. You can’t make a purchase based on pure logic.
For example, when deciding on buying a car what should people go for based only on logic? One would think of the cheapest and safest option out there, something that takes them from A to B and has the highest security. Yet some people still buy a Bugatti. Why? There are safer cars out there, and certainly cheaper ones. Everything that extends from practical, economical, and safety-based reasoning is an emotional decision. The car’s color, its status, its horsepower, aerodynamics, and shape are all choices made in the right side of the brain. Buying a Bugatti means the left and right sides of your brain cunningly conspired against your purse.
When we buy something due to detailed rationalizing, we think that our decision to purchase it is well-founded. We imagine ourselves with all the perceived benefits that object will give us. We like to fantasize about our gains and benefits followed by the purchase. What we don’t think about is that sellers know this, and they’ve already primed us with a commercial. Using a few ego-stroking words that appeal to us, a cool TV commercial is enough to distort our judgment. Whenever we think our decision is unbiased and rational, chances are we are already commercial-infected. Sellers highlight all the benefits you as a buyer will receive. They usually use words such as “never” (look sloppy again), “always” (be in top shape), the “best,” the “only” product for “smart,” “conscious,” “stylish” people (like yourself), and so on. Feels good, right? They make you feel special, stylish, and connected to the product, which is just as amazing as you are, or is so amazing that it will turn you into whoever you want to be.
You’ll feel obliged to buy such a product, otherwise you’ll feel that you are not smart, conscious, and stylish.
The catchiest marketing strategies, however, are not focused on future benefits. They state that their product will offer a quick and easy solution to your problems. Why? It is much easier to recall and relate with a currently disturbing state (your pain point) than it is to imagine a yet-nonexistent future happiness. Imagining that you will no longer suffer is a much more powerful motivation to buy a product. Once you, the customer, have the conviction that the seller understands your problems and can fix them, chances are you’ll be this guy.
For example, you’d be more eager to buy a product that could make your pimples disappear in two days as opposed to one that will make your skin look flawless in the long-term-in the future.
Another magic word we buyers constantly fall prey to is the good old “sale,” which we already talked about. Our left brain gets shot down and imprisoned in the deepest hole of our subconscious mind. Seeing the red sign with four letters (which are not “l-o-v-e”), we go crazy. This little word snaps us from spending approach to saving approach. When something is discounted to half-price, we start rationalizing from the saving end of the thread. We focus on how much we save by not having to pay full-price. “Oh, I saved $10 on this shirt,” instead of realizing that we spent $10 on a shirt we wouldn’t have considered buying if it was full-price.
Sales are the best proof of the customer benefit-focused approach. They make us believe that we’ll get a real deal with the purchase. At home we realize that we never have bought these thing at full price. Even if we realize this, we’re still stuck with the products, namely because discounted products have another remarkable quality: they are often non-refundable.
This being said, sales are not all bad. It just depends how we use them. I used to live with hatred in my heart toward them because I often sabotaged my tiny budget. And even though I could still save at the end of the month, giving in to the spell of sales made me unable to buy salami, and thus I had to eat bread with only bread for a month.
However, I realized that it was no one’s fault but my own. Marketers never oblige you to buy something. They just do their jobs, often too well. It’s you who walks into the trap. Sales can be a great thing in one case: when you want to buy something that you need. If you know that this item, that you would buy anyways, will be on a 20% sale, then indeed you’ll save some money. They think they will exploit you, but in fact, you exploit them. Isn’t it a great feeling?
Jokes aside, be smart about sales. Use them to your benefit. Wait for the sales season when you want to buy something, and then go straight to the product you are interested in. Be like a horse with blinders on. Just go to your destination. No peeking left or right. I know it is kind of silly, but this is how I encourage myself in order to stick to just the items I want to buy: “They wanted to trick me, but I tricked them, mwahaha.” Sure enough, they don’t give a flying f… about me, and I won’t trash their business with my cunning timing to buy the orange juicer (my latest purchase) on sale, but it makes me feel good. So why not approach my shopping like this?
Assessing Value
Assessing value is more or less the same thing as considering opportunity cost. In fact, value should reflect the opportunity cost. Value is the collective understanding of how much something is worth. It is an important tool of comparison. In an ideal world, we would think that the value of an iPhone equals five years of unlimited Netflix membership, or 10 dinners with your family, or a long weekend trip to the mountains. If we knew nothing about what things cost, or what are people willing to pay for them, how could we know what to pay for something? Who sets the prices? One of the greatest (or worst) deals ever was made between Native Americans and the colonizers. The former sold Manhattan for a few beads and guilders. Today, billions of dollars get created and exchanged on this piece of land, not to mention how much it would cost to buy even a square meter of its territory. But how could Native Americans assess their decision when they’d never sold property before, weren’t even sure what property meant, and had zero context for the entire process?
Why does an iPhone cost as much as it does? Why do we accept certain prices?
In San Francisco’s financial district, a napkin-sized studio apartment costs about $3000 per month. Nobody says a thing. Yet the price of sugar rises 5% (a few cents), and there is a national tantrum about it. Why?
Finally, if we’d behave as rational consumers, we’d ask questions like, “Is this product worth it to me? What am I sacrificing to get this item? What are the three greatest opportunity costs I will experience as a result of this purchase? Am I willing to pay for it?” If we would be strictly rational, we would realize that money equals opportunity cost, which equals value. But we are not rational, and our shopping decisions are led by mental quirks that are not even connected to assessing real value at all. Rather, we make decisions based on how valuable something is to us. How would it happen otherwise that some people gladly pay $200 a month for a gym membership while others would never pay a penny for the same service? We think that our value assessment is strongly correlated to real value. In some cases, this might be true, but very often we fall prey to some value tricks (mostly implemented by marketers) that are incorrect, misleading, or outright manipulative. These tricks make us believe that a shoe made by a dude called Jimmy Choo is indeed worth $3000.
We don’t make bad spending decisions deliberately. It is hard to assess opportunity cost and value when entire industries are specialized to trick our brain, which is easily gullible. Why do marketers do this? Because it is profitable for them, of course.
