Monday, November 8, 2010

Will It Really Work That Way?

This weekend on Marketplace Money (American Public Media, National Public Radio), they did a story about a Cal Tech study published by Dr. Antonio Rangel in the journal American Economic Review. He gave college students some money and then tested how they reacted to prices, purchasing food from text, photo or the food actually placed in front of them. They could also keep the money. They found that students would pay up to 50 percent more for the food when it was placed in front of them, rather than having the food described to them by text or photo.

Like many academic studies, they use students as test subjects. Like many studies that I've read about regarding economics, the researchers provide the funds to the participants. These studies' authors also show how the conclusions have broader implications for other economic areas.

However, I think these types of studies have critical flaws in studying people's economic behaviors. (Some critiques of behavioral studies are denoted in Invisible Gorilla by Chabris and Simon.)

1) They typically use students, because students are readily available around the locations of the researchers' offices. They have discretionary time capacity that can be donated to research studies. However, students are typically of a certain generation. Behavioral differences between generations are already well documented, due to differences in values and outlooks on future opportunities. In this study, students might be willing to pay up to 50 percent for product they can see, touch, smell, taste and hear. Would those who are retired respond the same way...with other people's money?
2) Researchers, in order to attract participants, often provide the funds to participants so they can participate in the study. People react differently with unearned money than they do with their own money. This is obvious if you watch how kids use their parents money. They are typically more thrifty with money they earn from chores. They don't really need that candy bar, or that toy or video if they have to spend their own cash. Adults are even tempted (often succumbing) to ordering different, pricier meals if they know their dinner companions are paying. Would I keep the money or spend more for food if it's money someone freely handed me? I'm more likely to spend it. If someone makes the effort to bring the food to me, so I can see it, I might even "tip" them by paying a higher price. It's not really all that surprising. "I'm spending your money, by the way, not mine."
3) The Heisenberg Principle in physics says we can know either the speed or the location of a subatomic particle, but not both, because the observation changes the "behavior" of the particle. Likewise, it's accepted that you can change people's behavior by watching them or they suspect they're being observed. If the participants know they're in a study, they will not be reacting as they normally would. I think it would be interesting to run the experiment in a restaurant, with random tables ordering from the menu and other tables ordering from a cart. Of course, the tables would have to be separated in such a way that the cart can't be seen by the "menu" tables.

Before you apply Dr. Rangel's study's conclusion to your pricing policy, you might want to think through your customers, and their current behavior and how you might influence them.

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