The Tycoon Report

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"Man is not truly one, but truly two."
-- Robert Louis Stevenson, "Dr. Jekyll and Mr. Hyde"

"Every man, wherever he goes, is encompassed
by a cloud of comforting convictions,
which move with him like flies on a summer day."
-- Bertrand Russell

Last week, we looked at how Zero (Perceived) Cost can wreak havoc on standard economic theory (briefly summarized as "What do I get?" vs. "What do I give up?" Continuing in that vein ...

Upside-Downside

When it comes to life's choices, we generally tend to weigh the pros and cons (whether objectively or subjectively, whether real or perceived). But when we are faced with the notion of getting something for nothing, something in our brains goes haywire and we will readily accept the offered item.

We also tend to think of it as more valuable than it really is, because we get it for free.

Like Jack Handey said in the old "Saturday Night Live" skit "Deep Thoughts":

"If you ever fall off the Sears Tower, just go real limp, because maybe you'll look like a dummy and people will try to catch you because, hey -- free dummy."

Why is this? Why does the idea of getting something free so entice us?

The Most-Sought-After Discount: 100%

I think part of the reason is because there is no consequence to accepting a free item -- no chance of making a bad decision, no risk of loss. 

And we humans are afraid of loss. In fact, we run from it. Some sense of stability, of security, of predictability is what we seek. We labor to tame the gods.

A real-world example: Amazon.com (AMZN) came up with this reduced shipping deal in France where, if you bought 125 francs (about $25) worth of stuff, you could get is shipped to you for one franc (about 20 cents). This, however, did not significantly increase online sales.

Then they changed the policy to conform with most of the rest of their worldwide customers: Spend 125 francs and get FREE shipping. Sales skyrocketed. (I admit to adding that extra item to my cart just to get the free shipping, how about you?)

When it comes to free, the same idea that works for price applies to:

Time

Standing in line for 45 minutes for a free 10-minute massage or taking a half-hour to fill out a rebate form that'll net you $1.50 (before the stamp).

Health

Want to reduce illness? Offer free colonoscopies, free mammograms, free cholesterol screenings as preventive measures (Wouldn't we save more in the long run?);

The Environment

Encourage the purchase of more fuel-efficient cars by offering free registration and licensing fees for three years.

On the flipside, thinking in terms of social norms as opposed to market norms, professionals (like attorneys) are more likely to offer pro bono services than to take a reduced fee, since there is distinct line that is crossed once money enters the picture. 

That is, thinking about money makes one frame their perspective in light of market considerations. As Dan Ariely, a professor of behavioral economics at Duke University, puts it, in reference to a test group who were unknowingly primed to think about money,
 

"(T)he participants ... showed many of the characteristics of the market: They were more selfish and self-reliant; they wanted to spend more time alone; they were more likely to select tasks that required individual input rather than teamwork; and when they were deciding where they wanted to sit, they chose seats farther away from whomever they were told to work with.

"Indeed, just thinking about money makes us behave as most economists believe we behave -- and less like the social animals we are in our daily lives."*

Pro-cras-ti-na-tion - It's Makin' Me Wait

Procrastination, simply put, is giving up long-term goals for immediate gratification. In attempting to overcome its accompanying inertia, it seems that external deadlines improve our performance best. Even self-imposed ones help to get us off our duffs.

Honda (HMC) found that posting a maintenance schedule for their vehicles, with specific intervals, greatly increased the number of people who brought their cars to the dealer for servicing.

The current health care debate could learn a thing or two from Honda.

What if medical tests were bundled to make it easier for the patient to know when to go in for what? In spite of individual differences, surely having people see the doctor on a schedule is better than their not seeing one at all.

Remember, prevention is cheaper than remedy. (What if the doctor required a $100 deposit for your cholesterol test, fully refundable when you show up at the appointed time?)

And here we get back to the crux of the matter: "What do I get?" vs. "What do I give up?"

The High Cost of Ownership

We are biased in favor of our biases. This may seem tautological, but it's profoundly troubling to me. Speaking in terms of the material first, Ariely posits these irrational quirks surrounding ownership:

Do you have season tickets to a sports team? How long have you had those seats? What are they worth to you? We tend to overvalue items that have a value beyond their face value -- Uncle Joe's old mandolin, the Johnny West I grew up with, even Grandma's old ashtrays -- it's a natural thing to form an instant attachment to what we have.

Again, we're afraid of loss, whether it's a lost experience (of being at that one historic game -- the "Immaculate Reception," anyone?), or a lost keepsake, or an old VW bus that finally gave up its ghost. Under the influence of strong emotion, monetary recompense holds little luster.

"You see the way the light floods this room? It's glorious. This house is surely worth our asking price and not a penny less." This is magnified if, for instance, you put a lot of work into the home to make it more comfortable, more modern, more charming, or bigger.

Have you ever had your heart set on an eBay (EBAY) item? Have you ever bid more than your "maximum price" because you couldn't imagine someone else getting it?

A prime example of this is the cable TV offerings. "Upgrade from basic cable for just $39 a month for six months!" The company knows that you'll get used to the upgrade and be unlikely to drop back to basic cable after the price goes back to the normal $59 a month.


Striving for Objectivity

The above examples pertain to goods. The part that is troubling to me is the fact that they also apply to the way we think about things, to our points of view on everything from politics to sports. We tend to seek out information that supports our point of view, instead of trying to arrive at a balanced perspective.

Why is this a danger? Because once an idea is "owned" by us, as Ariely writes,
 

"We love it perhaps more than we should. We prize it more than it is worth.

"And most frequently, we have trouble letting go of it because we can't stand the idea of its loss.

"What are we left with, then?

"An ideology -- rigid and unyielding."

 

I'll leave you with one more quote, this time from Jack Hough, a writer for a financial magazine that I'm not at liberty to mention. He summarizes some of the principles we've explored so far in this series, and adds credence to the ideas I've been espousing by his practical insight into the current state of the market:
 

"People demonstrate a tendency to anchor beliefs in benchmarks that aren't based in logic, like when they view a stock that once went for $80 as a bargain at $12 without considering how its financials have changed.

"They also tend to ascribe greater statistical importance to recent events than historical averages, as did the house buyer in 2006 who assumed prices would soar because they had the few years before. Investors placing expensive bets on recoveries for the past decade's high-fliers seem unwilling to let go of the way things were and embrace the way they are.

"We've got to be ready to shift our stance, to change our perspective, in order to get a good look at what is really happening, so that we don't miss out on experiencing each moment as honestly and as truthfully and as deeply as possible, whether in our financial lives or in the lives of our loved ones."