John Strassburger, the president of Ursinus College, a small liberal arts institution here in the eastern Pennsylvania countryside, vividly remembers the day that the chairman of the board of trustees told him the college was losing applicants because of its tuition.
It was too low.
So early in 2000 the board voted to raise tuition and fees 17.6 percent, to $23,460 (and to include a laptop for every incoming student to help soften the blow). Then it waited to see what would happen.
Ursinus received nearly 200 more applications than the year before. Within four years the size of the freshman class had risen 35 percent, to 454 students. Applicants had apparently concluded that if the college cost more, it must be better.
"It's bizarre and it's embarrassing, but it's probably true," Dr. Strassburger said.
That's from the NY Times. This phenomenon isn't limited to colleges. Neuroeconomists have discovered that our erroneous expectations consistently distort our decisions. Even worse, these flawed expectations tend to become self-fulfilling prophesies. Because we expect the more expensive product to be better, we often think that it really is better, even when it isn't. (Yes, this is just another variation on the placebo effect.)
Baba Shiv, a neuroeconomist at Stanford, conducted an experiment which demonstrated the way our expectations become reality. Shiv supplied volunteers with "energy" drinks that are supposed to make you feel more alert and energetic (they contain a potent brew of sugar and caffeine). Some participants paid full price for the drinks, while others were offered a discount. The participants were then asked to solve a series of word puzzles. To Shiv's surprise, the people who paid discounted prices consistently solved fewer puzzles than the people who paid full price for the drinks. He repeated this simple experiment three different times, and yet he always got the same result.
Why did the cheaper energy drink prove less effective? According to Shiv, we always get what we pay for. Since we expect cheaper goods to be less effective, they generally are less effective, even if they are identical to more expensive products. This is why brand-name aspirin works better than generic aspirin, or why wine tastes better when it comes from an expensive looking bottle. "We have these general beliefs about the world - for example, that cheaper products are of lower quality - and they translate into specific expectations about specific products," said Shiv. "Then, once these expectations are activated, they start to really impact our behavior."
wow! that's nuts! (well the college thing that is..)
Not surprising.
I have heard of a study by a software company quite a few years ago that showed sales of software with a "high" price increasing as the price went down, and then decreasing again as the price continued to go down past a certain point. There was a sweet spot in price. It is also consistent with the experience of a friend who had an old pickup truck for sale. A man said he wanted a pickup. My friend said, "I have one for $500" They man said he was looking for one at around $1500. My friend said, "I have one for $1500." So he sold it - "it" being, of course, the same truck.
If every artist or arts-and-crafts-type person I know gave me a cut from their increased sales when they raised their prices, I could call myself an artist's agent.
I've often wondered how tied this phenomenon is to people's own perceptions of how well they judge quality. If they really can't tell the difference between THIS $foo and THAT $foo, but THAT $foo costs twice as much, then maybe that means it's twice as good (whatever "good" means in the context of $foos).
Thanks for making that connection to placebo effects. Interesting that when economists study something like this, it's about expectations for expensive products. When doctors study placebo effects, it's about mind over body. When psychologists study it, it's called subconscious priming (I'm thinking of the studies reported in Blink measuring implicit racism, or making people behave like they're weaker or ruder). Is it all just the same phenomenon? I wonder how it really works.
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