When do consumers buy products that improve their chances of success?
Often, people buy products not because of the product's intrinsic value, but because they hope that the product can improve their chances of attaining some goal. For example, people buy fertility drugs to increase their chances of conception, not because they intrinsically like fertility drugs. It is hard to decide how much to spend in this circumstance, because the decision depends on many more factors than one's intrinsic valuation of the product. However, in hindsight, people usually deem this kind of expenditure to be justified when they meet their goal, even if the expenditure itself doesn't make any difference. Consequently, people tend to overspend on products that increase their chances of goal attainment, especially when (1) their chances were high to begin with, and (2) when the stakes are high but the impact of the product on the chances of success is very low. My job market paper documents these findings in more detail, and you can find it by clicking the following link: Lewis and Simmons 2019, invited for minor revisions at JEP:G.
Often, people buy products not because of the product's intrinsic value, but because they hope that the product can improve their chances of attaining some goal. For example, people buy fertility drugs to increase their chances of conception, not because they intrinsically like fertility drugs. It is hard to decide how much to spend in this circumstance, because the decision depends on many more factors than one's intrinsic valuation of the product. However, in hindsight, people usually deem this kind of expenditure to be justified when they meet their goal, even if the expenditure itself doesn't make any difference. Consequently, people tend to overspend on products that increase their chances of goal attainment, especially when (1) their chances were high to begin with, and (2) when the stakes are high but the impact of the product on the chances of success is very low. My job market paper documents these findings in more detail, and you can find it by clicking the following link: Lewis and Simmons 2019, invited for minor revisions at JEP:G.
Are consumers averse to making extreme judgments?
People are often averse to making extreme judgments, and this bias helps to explain "anchoring effects". For example, consumers are reluctant to give a valuation of a product that is too far from an irrelevant-but-salient anchor value (such as a list price), because such a judgment would feel extreme. In addition, people are particularly averse to making judgments towards the edges of (or outside of) arbitrary ranges. Thus, marketers could potentially increase purchases at sales prices by indicating a range of higher Recommended Retail Prices (RRP) rather than a single RRP. For example, telling customers, “RRPs range from $100-$110, but you can get it for $50!” may be more effective than telling customers, “The RRP is $110, but you can get it for $50!”. My paper on this topic was recently published in Psychological Science, and you can find it by clicking on the following link: Lewis, Gaertig, and Simmons 2019, Psychological Science.
People are often averse to making extreme judgments, and this bias helps to explain "anchoring effects". For example, consumers are reluctant to give a valuation of a product that is too far from an irrelevant-but-salient anchor value (such as a list price), because such a judgment would feel extreme. In addition, people are particularly averse to making judgments towards the edges of (or outside of) arbitrary ranges. Thus, marketers could potentially increase purchases at sales prices by indicating a range of higher Recommended Retail Prices (RRP) rather than a single RRP. For example, telling customers, “RRPs range from $100-$110, but you can get it for $50!” may be more effective than telling customers, “The RRP is $110, but you can get it for $50!”. My paper on this topic was recently published in Psychological Science, and you can find it by clicking on the following link: Lewis, Gaertig, and Simmons 2019, Psychological Science.
Do people use information about charitable impact to donate more or less efficiently?
When people see cost-effectiveness information about a charitable donation that is framed in terms of “cost per item” (e.g. $2 provides one mosquito net), they inefficiently donate less when the cost is lower. This result arises because people want their donation to have a tangible impact, and when the cost of such an impact is cheaper, people can achieve it with a smaller donation. A remedy for this inefficiency is to express cost-effectiveness in terms of “items per dollar amount” (e.g. 5 nets provided per $10 donated), and leave the cost of providing one net unstated, rendering it less salient as a target donation amount. I am in the process of collecting field data for this project, but you can read the full working paper at the following link: Lewis and Small, working paper.
When people see cost-effectiveness information about a charitable donation that is framed in terms of “cost per item” (e.g. $2 provides one mosquito net), they inefficiently donate less when the cost is lower. This result arises because people want their donation to have a tangible impact, and when the cost of such an impact is cheaper, people can achieve it with a smaller donation. A remedy for this inefficiency is to express cost-effectiveness in terms of “items per dollar amount” (e.g. 5 nets provided per $10 donated), and leave the cost of providing one net unstated, rendering it less salient as a target donation amount. I am in the process of collecting field data for this project, but you can read the full working paper at the following link: Lewis and Small, working paper.
Why are consumers more sensitive to discounts off of lower prices?
People are generally more willing to travel across town to save $5 off a (cheap) $15 purchase rather than to save $5 off an (expensive) $125 purchase. Prospect Theory purports to explain this phenomenon via diminishing sensitivity to losses, but my research suggests that people do not consider these payments to be losses at all. Instead, a $5 gain feels smaller relative to a reference price of $125 than a reference price of $15. Contrary to Prospect Theory, all $5 gains are not the same – and marketers can count on consumers to exhibit diminishing sensitivity to price whether or not they consider their payment to be a loss. My paper on this topic is under review at Journal of Marketing Research, and you can read it here: Lewis, Rees-Jones, Simonsohn, and Simmons, under review at Journal of Marketing Research.
People are generally more willing to travel across town to save $5 off a (cheap) $15 purchase rather than to save $5 off an (expensive) $125 purchase. Prospect Theory purports to explain this phenomenon via diminishing sensitivity to losses, but my research suggests that people do not consider these payments to be losses at all. Instead, a $5 gain feels smaller relative to a reference price of $125 than a reference price of $15. Contrary to Prospect Theory, all $5 gains are not the same – and marketers can count on consumers to exhibit diminishing sensitivity to price whether or not they consider their payment to be a loss. My paper on this topic is under review at Journal of Marketing Research, and you can read it here: Lewis, Rees-Jones, Simonsohn, and Simmons, under review at Journal of Marketing Research.
Are people too likely to buy high priced goods?
Previous research on anchoring effects (wherein people make judgments that are too close to salient-but-irrelevant values, or “anchors”) attribute them to the extent to which people adjust their judgments from these anchors. However, I find that the direction of adjustment is a contributing factor. People are too likely to adjust upwards from high anchors and downwards from low anchors. I also find that prices act as anchors on consumers’ valuations. Consequently, consumers are too likely to buy goods at high prices due to disproportionately adjusting their valuations upwards from these high-price anchors. My paper on this topic is under review at Management Science, and you can read it here: Lewis and Simmons, under review at Management Science.
Previous research on anchoring effects (wherein people make judgments that are too close to salient-but-irrelevant values, or “anchors”) attribute them to the extent to which people adjust their judgments from these anchors. However, I find that the direction of adjustment is a contributing factor. People are too likely to adjust upwards from high anchors and downwards from low anchors. I also find that prices act as anchors on consumers’ valuations. Consequently, consumers are too likely to buy goods at high prices due to disproportionately adjusting their valuations upwards from these high-price anchors. My paper on this topic is under review at Management Science, and you can read it here: Lewis and Simmons, under review at Management Science.
