Wednesday, 22 January 2014

Celery sticks, yoga classes and all time best movies

One of my "favourite" heuristics (rules of thumb) that normal people use is the "availability heuristic".  This explains that people will use whatever is available, whether that's physically available or mentally.

Sometimes I call this the "coffee book" or "bump into" effect. If you put something on a coffee table, like a newspaper, a magazine, or brochures for yoga classes, it's highly likely that you will pick it up and have a look.

If you want celery sticks, don't leave out the chocolate

The same happens if you put a bowl of M&Ms on the kitchen bench, or a plate of celery sticks.  If it's there, you'll most probably eat it.

Having just left the Christmas season behind us, I'm sure you can recognise the lure of the little bowls of peanuts/potato chips/jelly beans etc. If your Christmas is anything like ours, there weren't any plates of celery sticks! They were hidden away in the fridge, inside the vegetable crisper requiring the average person to 1. go to the fridge 2. open the fridge, 3. open the crisper 4. take the celery out of the bag. That's a lot of steps compared to grabbing a handful of sweets as you walk past.

Likewise, if you want to read a book or a magazine article, leave it out on the bench. Yes, I know it might be a challenge for clean freaks, but you don't read what isn't available. Think of how many times you will pick something up, just because it's there.

So, if you want to sign up for yoga, leave the brochure lying around. This is also an effective way to influence others in your house.  Just leaving material lying around sharply increases the chance that it will be read, and therefore acted upon.

The best movies are the ones you can remember

Have you ever tried to compile your list of the best movies, best songs, or best footballers. Typically, the experts, such as the American Film Institute, will compile a list that covers many decades and treats each movie with an equal chance of being selected. In fact, the AFI's 2005 list doesn't have one movie in its top 10 that is less than 10 years old. (

In contrast, take a few lists compiled by a popular vote by non experts. The Empire poll has 20% of its top 20 from the last 10 years ( and 35% of the Lifehack list by a populist writer were in the past 20 years (

Of course, these stats aren't at the level of statistical purity that we can be sure they prove the point, but then again, they are consistent with what we know about availability, and they help to illustrate the principle. If a movie is old, like Citizen Kane, which is no. 1 on the AFI list, it is often left off the other "all time" lists because of a lack of mental availability.  In contrast, the number of dubious modern selections on all of these "all time" lists makes the principle of the availability heuristic easy to identify!

Caddyshack, really, in the top 20 films of all time??

Watch the chocolates and the lists

If you don't pay attention to what is available to you, physically and mentally, you aren't taking notice of the effects of the availability heuristic.  Put the things you want to attend to front and centre. If you want to eat chocolates, make them accessible. If you don't, then hide them away AND replace them with celery sticks.

If you want to compile a list, be aware that the lazy system of your brain will grab the most recent items it can remember and convince you that is the list. It almost certainly isn't, so put in strategies to work around that bias.

...and my top movie, The Usual Suspects.
OK, so it isn't really, but American Hustle reminded me of it (availability) and Keyzer Soze is sooo much better a character than anyone in this year's Golden Globe winner!!

Let me know what you think

Mark S

Sunday, 19 January 2014

The famous Christmas mineral water experiment

Here's the setting. It's Christmas 2012 and our family are all sitting around the table. There's turkey, ham, salads, a few beers and wines, and party hats. There is also our star of the evening - mineral water!

Price as the cue to set expectations

Option 1 for mineral water was priced at $4.41 per litre.
Option 2 was priced at $0.70 per litre

Which do you think would taste better?

Most people are conditioned by the price, to expect that the more expensive product will be better.

Don't forget about the brand

In addition to price, products like mineral water have brands.  We didn't have the opportunity to do a controlled test that isolated price and brand, so the reality is that we were testing a combination of price and brand, which is, of course, the real-world scenario.

Option 1 was the imported, Italian brand, San Pellegrino

Option 2 was the private label version from Australia's second largest supermarket, Coles

The great Christmas experiment

Well, the debate was on.  Deon claimed that nobody could tell the difference.  Some of us (including me) disagreed, and argued in favour of the expensive liquid.  This set the scene for our very own behavioral economics experiment! Claire was in the San Pellegrino camp, but nevertheless she was entrusted to run the controlled trial.

The glasses of fizzy water were carefully prepared. Glass A was sipped with the care of a fine French champagne. Glass B was tasted likewise.

Deon gave his verdict. Glass B was definitely the more expensive, San Pellegrino.
I thought and thought, and tasted again, and finally conceded - nope, I can't tell the difference! A win for Deon!
And then Claire announced - Glass B was the Coles $0.70 option, so Deon had proved his own point as well.

The aftermath

So, we all went to our own homes, having had our expectations shattered (except for Deon, whose expectations were confirmed). Did anything change?

Well - yes.  We've become Coles mineral water loyals! Claire doesn't buy San Pellegrino anymore. Deon never did.

How does this happen? The very personal experience of sensing, tasting and feeling facts that contradict your prior expectations is sufficient to break those expectations.

Whether your expectations will change or not will depend on the strength of your prior expectations, the new facts you encounter and the power of this information to the old part of the brain.  Those prior expectations aren't purely logical, so they can't be overridden by pure logic, you need to feel that they are now invalid before you can discard them, you can't just think that they are invalid.

John Kenneth Galbraith summed up how tough it is to discard those prior expectations with this quote:
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.
But, the great mineral water experiment of Christmas 2012 shows that it actually does happen quite often, given the right conditions.

Let me know what you think

Mark S

Wednesday, 15 January 2014

Why a house isn't worth what an owner thinks it is

There's a house for sale near my place that has been on the market for months while everything around it has sold. This is a classic case where Behavioural Economics (BE) can explain why.

Here is the house at 237 Princes St Port Melbourne as it actually is.

And here is the house as the owner sees it, after the new owner buys it, knocks it down, and builds to the approved plans that the owner has paid a substantial sum for.

Two BE principles at play

There are two main BE stories here: sunk-cost bias and the endowment effect.

Sunk cost bias:

The owner has spent money on getting these plans prepared and approved. He wants to get a return on that spend. The problem is that this is now a sunk cost.

Let's imagine that he instructed his architect and town planner to design an 8-storey tower on the block for 4 separate apartments. And let's say that the architect and planner told him he was completely mad and it would never be approved, yet he insisted they do the work. So, $50,000 later and the proposal is rejected. That $50,000 is clearly a sunk cost. It's never going to be recovered, much like backing a loser at the racetrack.

In this case, though, it's a bit more subtle. The work was done, the approvals have been achieved, and there is some value in that. Yet, it's still a sunk cost. It's been spent. Any focus on what's been spent has no bearing on what the market will pay. The owner is still fixated on the past. The buyers are only interested in the present and future.

The endowment effect:

This is even more emotional, and has a substantial impact on the owner's state of mind. He has owned this property for some time and has put in a lot of effort (that he "owns") to ready it for sale. BE research shows that his value on the property is much higher than a potential buyer's value. In some studies by a factor of 14!

No deal!

So, we have a situation where the owner feels that the property is worth $850k or more and the buyers clearly do not. No deal will be done here until the owner can rid himself of the sunk cost bias and endowment effect. The buyers will not shift their view.

Of course, there are a lot of other complicating factors in a real estate market but this case shows how important the BE factors are. And they impact on everyone, on major commercial deals worth hundreds of millions a single house like this or even the purchase of a new kettle.

This new blog, Behavioural Economics Australia will explore these fascinations.

Let me know what you think

Mark Solonsch