[CASW New Horizons; Baba Shiv, Professor of Marketing, The Frinky science of the human mind]

Note that all papers on today’s talks are at sciencewriters2008.stanford.edu

Baba Shiv is the guy who did the famous study on perception of the quality of wine being intimately connected to how expensive people thought the wine was.  This talk was a fascinating tour of the mind and how it relates to product marketing.

First, why is the economy crapping out?

Well, imagine the following situation.  You’re given $20 and you can choose to invest $1 in each round, or not.  If you invest, you have an equal chance of wining $2.50, or of losing $1.  What should you do?  Rationally, the answer is obvious – invest blindly.  You’ve got an equal chance of winning more money than you would lose.  But human beings aren’t purely rational creatures.  Emotion has an important role to play.  Winning is exciting, it feels good.  Losing… not so much.  It turns out that we tend to remember the emotions associated with the most recent investment round, and negative emotions tend to win over positive ones.  So when you do the stud, you find that subjects start out investing about 100% of the time, and drop to about 50% investment rate by the 5th round.  They’re remembering the negative emotions related o the times that they lost, it turns out.  And this is what happens with the stock market as well.  When things are going well, people get greedy and keep investing.  And when things tank out, like they are now, people pull out their investments, even though rationally we know that we should invest.  So what about people who have damage to the emotional circuitry of the brain?  He gave the same sort of task to people who have brain damage and found that they did better at this investment task, investing more rationally. So, quipped Jay Leno, if you’re banging your head against the wall about the state of the economy — keep banging your head against the wall. Here’s a great article on Shiv’s work, including this study.

How does price affect our perception of a product?   

When we buy a product there are two things that go into our perception of its value – its inherent quality, and its price.  It turns out that they’re inversely proportional.  That makes sense – if someone emphasizes how cheap their product is, we think that it’s not very good quality.  Marketers always assumed that the consumer’s experience with the reality of the product would trump this perception – once they tried it and realized that it was a good product, then they’d recognize its quality.  But he wasn’t so sure that people’s prediction of the quality of a product wouldn’t affect their actual experience of the product.  If you buy Advil on sale, for example, will you think that it doesn’t work as well?  The answer turns out to be yes!  He gave subjects a Red Bull drink, and some were asked to pay full price (almost $2!) and some were told the real price, but given it at a discount.  They found that those who paid full price solved more word puzzles than those who thought they’d gotten the cheaper version.  How would that work?  Turns out that it’s related to the activity of the striatum, which plays a role in anticipation of rewards. If I tell you that I’ll give you some chocolate, the striatum will light up.  The striatum is also related to motivation, such as persistence in a task like the word puzzles.  When people think that they’re getting the discounted drink, they give up more easily.  One writer asked – but what about the rush that we get from getting a good deal?  He said that it’s true, we do get such a rush from getting a bargain, but it turns out that we use the item we get on sale less than one that we paid full price for.  Weird.

And what about that famous wine study? 

You can find out more about it online, it got a lot of press. The basic idea was that when they gave subjects a wine that was priced $90, the pleasure centers of their brain (the ventromedial prefrontal cortex) lit up more in an fMRI than when they thought the wine was $10.  So, our expectation of the quality of a product actually does affect our physical experience of that product!  One interesting aspect of this is that it suggests that blind taste tests are missing the point – our actual experience of a product requires the full context of price and branding.  Note that randomized placebo drug trials are, in essence, blind taste tests.  So, one could argue, this research should make us question how we go about determining the efficacy of drugs.  He did a study like this, too.  He gave subjects a sugar pill and told them it was pain medication, then caused them pain on their hand.  When he told them that the pill was $2.50, 85% of subjects said that they got pain relief, as compared to 61% of subjects when they thought it was 10 cents per pill.  Note that it was a sugar pill, and yet the majority of people reported pain relief, what a strong placebo effect!

The last study he told us about was what he called the IKEA study.

It was on the role of packaging and product returns.  This was dubbed the “fruit of labor study” because they found that when the consumer put a lot of effort into consuming the product, they like it more.  Obviously this relates to IKEA because there is a LOT of effort required to assemble their furniture once you take it home.  He found that those subjects who assemble the furniture themselves, instead of having it home delivered, were less willing to sell the furniture later.  What a boon to companies!  They offset their costs by making the consumer assemble the product, and the consumer likes it more.