The Fallacy of Supply and Demand

Consider this: if I asked you for the last two digits of your social security number (mine are 79), then asked you whether you would pay this number in dollars (for me this would be $79) for a particular bottle of Cotes du Rhone 1998, would the mere suggestion of that number influence how much you would be willing to spend on wine? Sounds preposterous, doesn't it? Well, wait until you see what happened to a group of MBA students at MIT a few years ago.

"Now here we have a nice Cotes du Rhone Jaboulet Parallel," said Drazen Prelec, a professor at MIT's Sloan School of Management, as he lifted a bottle admiringly. "It's a 1998."

At the time, sitting before him were the 55 students from his marketing research class. On this day, Drazen, George Loewenstein (a professor at Carnegie Mellon University), and I would have an unusual request for this group of future marketing pros. We would ask them to jot down the last two digits of their social security numbers and tell us whether they would pay this amount for a number of products, including the bottle of wine. Then, we would ask them to actually bid on these items in an auction. What were we trying to prove? The existence of what we called arbitrary coherence. The basic idea of arbitrary coherence is this: although initial prices are "arbitrary," once those prices are established in our minds they will shape not only present prices but also future prices (this makes them "coherent"). So, would thinking about one's social security number be enough to create an anchor? And would that initial anchor have a long-term influence? That's what we wanted to see.

"For those of you who don't know much about wines," Drazen continued, "This bottle received eighty- six points from Wine Spectator. It has the flavor of red berry, mocha, and black chocolate; it's a medium- bodied, medium- intensity, nicely balanced red, and it makes for delightful drinking." Drazen held up another bottle. This was a Hermitage Jaboulet La Chapelle, 1996, with a 92-point rating from Wine Advocate magazine. "The finest La Chapelle since 1990," Drazen intoned, while the students looked up curiously. "Only 8,100 cases made . . ."

In turn, Drazen held up four other items: a cordless trackball (TrackMan Marble FX by Logitech); a cordless keyboard and mouse (iTouch by Logitech); a design book (The Perfect Package: How to Add Value through Graphic Design); and a one- pound box of Belgian chocolates by Neuhaus.

Drazen passed out forms that listed all the items. "Now I want you to write the last two digits of your social security number at the top of the page," he instructed. "And then write them again next to each of the items in the form of a price. In other words, if the last two digits are twenty- three, write twenty-three dollars."

"Now when you're finished with that," he added, "I want you to indicate on your sheets-with a simple yes or no- whether you would pay that amount for each of the products." When the students had finished answering yes or no to each item, Drazen asked them to write down the maximum amount they were willing to pay for each of the products (their bids). Once they had written down their bids, the students passed the sheets up to me and I entered their responses into my laptop and announced the winners. One by one the student who had made the highest bid for each of the products would step up to the front of the class, pay for the product, and take it with them.

The students enjoyed this class exercise, but when I asked them if they felt that writing down the last two digits of their social security numbers had influenced their final bids, they quickly dismissed my suggestion. No way!

When I got back to my office, I analyzed the data. Did the digits from the social security numbers serve as anchors? Remarkably, they did: the students with the highest- ending social security digits (from 80 to 99) bid highest, while those with the lowest- ending numbers (1 to 20) bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, we could see that students with social security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with social security numbers ending in the lowest 20 percent.

Comments

[joebhed]

I don't get it.
Everyone knows that people with low-ending social security numbers are cheap.
Like me.

[WIpatriot]

Truly a Marketing class experiment.

One born every minute....

[dadw5boys]

Supply side now is produce less and control the price much eaiser.

[Donkslayer]

All you did was have each student reinforce a number in their head that was "theirs", and then reinforce that their number was really money. By doing this, you essentially tricked them into subconsciously considering the fact of how much money they had, and clearly, those that had more money were willing to spend more on each product.

And, you have no idea if personal income affected the decisions because of your ultra small sample size.

So, it really has nothing to do with supply and demand, especially since you only offered one of each. If you brought forth 15 bottles of wine instead of 1, I would bet 1 billion that the average bid would have fallen from your study. Easy.