There is a dark side to psychology:

“You inched towards the dark side,” joked one behavioural economist after he read a recent column in which I hinted that his field has some merits. It was a quip that got me thinking, because behavioural economics does indeed have a dark side. Behavioural economists study the psychology of economic decision-making, and if they are any good at their task they will discover something the unscrupulous salesman could use to his advantage.

A behavioural economist turned rogue would exploit the “endowment effect” – a tendency for people to put a higher value on something that they feel they already own. He or she would also try to create the sense that consumers would lose out if they did not buy, because people seem to hate the idea of losing £5 much more than they like the idea of gaining £5.

Third, our rogue economist would attempt to suggest an “anchor” value that was much higher than the asking price, which would make the product seem cheap. It doesn’t seem to be hard to create such anchor values: they can be produced by inviting experimental subjects to write down the last two digits of their social security number.

Fourth, he or she would make the pricing as complex as possible so that people struggled to compare one offer with a rival offer. Fifth, he or she would try to create a sense of social approval – everyone is buying this.

Finally, a rogue economist would throw in something free. Many unscrupulous salesmen have figured this advice out for themselves already. Think of infomercials. “The TimCo smokemaster doesn’t retail for £200; it doesn’t retail for £100; it doesn’t retail for £50 … ” (anchoring to a price of £200) … “if our lines are busy, please try later” (social approval) … “the smokemaster is not available in regular stores” (loss aversion) … “but wait! When you buy the TimCo smokemaster you get the TimCo soup knife absolutely free” (complex pricing and use of “free”).

Continue Reading