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How Much Do We Pay for Things Numbersense by Kaiser Fung
NUMBER
SENSEHOW TO USE BIG DATA
TO YOUR ADVANTAGE
K AISER FUNG
New York Chicago San Francisco Athens London Madrid Mexico City
Milan New Delhi Singapore Sydney Toronto
Contents
Acknowledgments vii
List of Figures ix
Prologue 1
PART 1 SOCIAL DATA 17
1 Why Do Law School Deans
Send Each Other Junk Mail? 19
2 Can a New Statistic Make Us
Less Fat? 54
PART 2 MARKETING DATA 75
3 How Can Sellouts
Ruin a Business? 77
4 Will Personalizing Deals
Save Groupon? 95
5 Why Do Marketers
Send You Mixed Messages? 112
vi CONTENTS
PART 3 ECONOMIC DATA 127
6 Are They New Jobs
If No One Can Apply? 129
7 How Much Did You Pay
for the Eggs? 153
PART 4 SPORTING DATA 173
8 Are You a Better Coach
or Manager? 175
EPILOGUE 201
References 211
Index 219
Excerpt from
PART 3
ECONOMIC DATA
1 2 3 4 5 6 7 8
How Much Did You Pay
for the Eggs?
Recall when you last shopped for groceries. Do you re-
member what you purchased, and how much you paid
for each item in your shopping cart? If you bought a carton
of milk or juice, do you know if the price you paid was over
or under the average? When you answered the previous ques-
tion, what did you mean by the average? Was it the normal
price at the specific store, or the median price among several
stores in your neighborhood, or something else? Do you re-
member if the milk was one of the store’s weekly specials?
Do you remember if you redeemed a clipped coupon? Do
you remember if you picked up a new brand of juice because
of a promotional offer? Did you switch from Tropicana to
Odwalla, or from Minute Maid to SunnyD?
If you are like the average shopper, you’ll have difficulty
coming up with these answers. When it comes to remember-
ing prices, we are hopeless.
Businesses have long known—and exploited—our price
amnesia. In the late 1980s, two marketing professors, Peter
Dickson and Alan Sawyer, collaborated with a large super-
market chain to measure just how clueless consumers were
154 NUMBERSENSE
about purchases they made only 30 seconds or fewer ago. Re-
searchers intercepted shoppers immediately after they placed
certain target products—such as coffee, toothpaste, and mar-
garine—into their shopping carts. Almost everyone consented
to answering a few questions when offered a $1 gratuity for
participation. To raise the chance of finding price-conscious
shoppers, part of the study was conducted in late January,
when household budgets were stretched after the winter holi-
days. Did people know how much the stuff in their shopping
carts cost? Were they aware of any special deals that applied to
those items? The results of the 800 or so interviews conducted
at four different branches of the chain were disturbing.
After arriving at the display, the average shopper moved
along within 12 seconds, but the majority could not name
the correct price of the item they just took off the shelves.
The average error was 15 percent of the real price. One out
of five shoppers could not even offer a guess of the price.
Their awareness of special discounts was even poorer. This
supermarket chain heavily advertised specials in newspapers
and on television, using the phrase “Cost Cutter Bonus Buy”
accompanied by a scissors symbol. In addition, the manage-
ment placed bright-yellow labels with the slogan and scissors
right next to the standard black-and-white price labels on the
store shelves. And yet, three out of five had no clue if the item
in their shopping cart was on special or not; estimates of the
price reduction given by those who could suffered an average
error of 47 percent.
The jaw-dropping findings didn’t stop here. The research-
ers learned that people who shopped frequently for an item
were equally as hopeless as the rest. Finally, the professors
performed an aided brand awareness test, similar to the one
mentioned in Chapter 1, on the hunch that some shoppers
could recognize the special price label even if they could not
recall the exact price. In yet another surprise, only 54 percent
of the participants managed to pick out the correct price label
from a choice of three.
ECONOMIC DATA 155
This line of research asks deep questions of the founda-
tions of modern economics. In a market economy, prices are
supposed to capture all there is to know about supply and
demand. Producers and consumers are predicted to respond
to these prices. When a half or more of the population are
blatantly inattentive to price tags, we wonder if the economic
profession has gotten this core assumption wrong. Dickson
and Sawyer thought consumers with stronger motivation to
consider prices would perform better in their study, but it
turned out those who shopped at the inner-city store were
even more clueless about the amount they spent on groceries.
Marketing experts have long ago abandoned many economic
principles that are at odds with reality. Behavioral econo-
mists are now tackling this kind of challenge, and their in-
sights may well modernize the foundations of the discipline.
Now, take the side of the store manager. For a gallon of
milk, we require a target price of $3.50 over the next four
weeks. We can, unimaginatively, set a fixed price of $3.50.
But a good portion of our customers love the game of cou-
pons and deals. We can, for example, charge a normal price
of $3.60, and one day a month, run an irresistible bargain
price of $1.50. Alternatively, we can advertise a weekly spe-
cial of $3.00 on a regular price of $3.60. All three pricing
schemes produce an average price of $3.50. Which strategy
would yield the most revenues? The winner depends on how
our customers respond to discounting. That in turn depends
on how they process the prices. Here are a number of pos-
sibilities to consider:
• Availability: People take what comes to mind first. Behav-
ioral psychologists Daniel Kahneman and Amos Tversky,
whom we met in Chapter 5, are champions of this theory.
• Recency: Perception is affected by the most recent price
encountered.
• Frequency: Customers remember the price that appears
most often.
156 NUMBERSENSE
• Average: Customers have a mental image of the average
price. This suggests that they intuitively sense the aver-
age value of a set of numbers.
• Median: Customers have a mental image of the median
price. This requires that they spontaneously discard ex-
treme values.
• Extremes: Perception is swayed by unusually large or
small numbers.
• Losses: Customers pay undue attention to price increases
because they regard price increases as financial losses.
• Numerosity: Customers perceive a better deal when sav-
ings are divided into numerous small installments rather
than applied in total to a single purchase.
There is as yet no definitive research on how consum-
ers perceive prices. It’s not even clear that everyone favors
the same set of heuristics. The decision criteria may vary by
the type of purchase. For durable goods not replaced often,
like stoves and ovens, it’s irrelevant to talk about frequency,
average, median, or numerosity. Big-ticket items and petty
spending surely are not given equal consideration. Perhaps
Kahneman and Tversky’s perspective is the broadest: All the
other criteria pinpoint which price becomes “available.”
Copyright © 2013 by Kaiser Fung. All rights reserved. Except as permitted under the United
States Copyright Act of 1976, no part of this publication may be reproduced or distributed in
any form or by any means, or stored in a database or retrieval system, without the prior written
permission of the publisher.
ISBN: 978-0-07-179967-6
MHID: 0-07-179967-2
The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-179966-9,
MHID: 0-07-179966-4.
All trademarks are trademarks of their respective owners. Rather than put a trademark symbol
after every occurrence of a trademarked name, we use names in an editorial fashion only, and to
the benefit of the trademark owner, with no intention of infringement of the trademark. Where
such designations appear in this book, they have been printed with initial caps.
McGraw-Hill Education eBooks are available at special quantity discounts to use as premiums
and sales promotions or for use in corporate training programs. To contact a representative,
please visit the Contact Us page at www.mhprofessional.com.
This publication is designed to provide accurate and authoritative information in regard to the
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is engaged in rendering legal, accounting, or other professional service. If legal advice or other
expert assistance is required, the services of a competent professional person should be sought.
—From a Declaration of Principles Jointly Adopted by a Committee of the
American Bar Association and a Committee of Publishers and Associations
TERMS OF USE
This is a copyrighted work and McGraw-Hill Education and its licensors reserve
all rights in and to the work. Use of this work is subject to these terms. Except as
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How Much Do We Pay for Things Numbersense by Kaiser Fung

  • 2. NUMBER SENSEHOW TO USE BIG DATA TO YOUR ADVANTAGE K AISER FUNG New York Chicago San Francisco Athens London Madrid Mexico City Milan New Delhi Singapore Sydney Toronto
  • 3. Contents Acknowledgments vii List of Figures ix Prologue 1 PART 1 SOCIAL DATA 17 1 Why Do Law School Deans Send Each Other Junk Mail? 19 2 Can a New Statistic Make Us Less Fat? 54 PART 2 MARKETING DATA 75 3 How Can Sellouts Ruin a Business? 77 4 Will Personalizing Deals Save Groupon? 95 5 Why Do Marketers Send You Mixed Messages? 112
  • 4. vi CONTENTS PART 3 ECONOMIC DATA 127 6 Are They New Jobs If No One Can Apply? 129 7 How Much Did You Pay for the Eggs? 153 PART 4 SPORTING DATA 173 8 Are You a Better Coach or Manager? 175 EPILOGUE 201 References 211 Index 219
  • 6. 1 2 3 4 5 6 7 8 How Much Did You Pay for the Eggs? Recall when you last shopped for groceries. Do you re- member what you purchased, and how much you paid for each item in your shopping cart? If you bought a carton of milk or juice, do you know if the price you paid was over or under the average? When you answered the previous ques- tion, what did you mean by the average? Was it the normal price at the specific store, or the median price among several stores in your neighborhood, or something else? Do you re- member if the milk was one of the store’s weekly specials? Do you remember if you redeemed a clipped coupon? Do you remember if you picked up a new brand of juice because of a promotional offer? Did you switch from Tropicana to Odwalla, or from Minute Maid to SunnyD? If you are like the average shopper, you’ll have difficulty coming up with these answers. When it comes to remember- ing prices, we are hopeless. Businesses have long known—and exploited—our price amnesia. In the late 1980s, two marketing professors, Peter Dickson and Alan Sawyer, collaborated with a large super- market chain to measure just how clueless consumers were
  • 7. 154 NUMBERSENSE about purchases they made only 30 seconds or fewer ago. Re- searchers intercepted shoppers immediately after they placed certain target products—such as coffee, toothpaste, and mar- garine—into their shopping carts. Almost everyone consented to answering a few questions when offered a $1 gratuity for participation. To raise the chance of finding price-conscious shoppers, part of the study was conducted in late January, when household budgets were stretched after the winter holi- days. Did people know how much the stuff in their shopping carts cost? Were they aware of any special deals that applied to those items? The results of the 800 or so interviews conducted at four different branches of the chain were disturbing. After arriving at the display, the average shopper moved along within 12 seconds, but the majority could not name the correct price of the item they just took off the shelves. The average error was 15 percent of the real price. One out of five shoppers could not even offer a guess of the price. Their awareness of special discounts was even poorer. This supermarket chain heavily advertised specials in newspapers and on television, using the phrase “Cost Cutter Bonus Buy” accompanied by a scissors symbol. In addition, the manage- ment placed bright-yellow labels with the slogan and scissors right next to the standard black-and-white price labels on the store shelves. And yet, three out of five had no clue if the item in their shopping cart was on special or not; estimates of the price reduction given by those who could suffered an average error of 47 percent. The jaw-dropping findings didn’t stop here. The research- ers learned that people who shopped frequently for an item were equally as hopeless as the rest. Finally, the professors performed an aided brand awareness test, similar to the one mentioned in Chapter 1, on the hunch that some shoppers could recognize the special price label even if they could not recall the exact price. In yet another surprise, only 54 percent of the participants managed to pick out the correct price label from a choice of three.
  • 8. ECONOMIC DATA 155 This line of research asks deep questions of the founda- tions of modern economics. In a market economy, prices are supposed to capture all there is to know about supply and demand. Producers and consumers are predicted to respond to these prices. When a half or more of the population are blatantly inattentive to price tags, we wonder if the economic profession has gotten this core assumption wrong. Dickson and Sawyer thought consumers with stronger motivation to consider prices would perform better in their study, but it turned out those who shopped at the inner-city store were even more clueless about the amount they spent on groceries. Marketing experts have long ago abandoned many economic principles that are at odds with reality. Behavioral econo- mists are now tackling this kind of challenge, and their in- sights may well modernize the foundations of the discipline. Now, take the side of the store manager. For a gallon of milk, we require a target price of $3.50 over the next four weeks. We can, unimaginatively, set a fixed price of $3.50. But a good portion of our customers love the game of cou- pons and deals. We can, for example, charge a normal price of $3.60, and one day a month, run an irresistible bargain price of $1.50. Alternatively, we can advertise a weekly spe- cial of $3.00 on a regular price of $3.60. All three pricing schemes produce an average price of $3.50. Which strategy would yield the most revenues? The winner depends on how our customers respond to discounting. That in turn depends on how they process the prices. Here are a number of pos- sibilities to consider: • Availability: People take what comes to mind first. Behav- ioral psychologists Daniel Kahneman and Amos Tversky, whom we met in Chapter 5, are champions of this theory. • Recency: Perception is affected by the most recent price encountered. • Frequency: Customers remember the price that appears most often.
  • 9. 156 NUMBERSENSE • Average: Customers have a mental image of the average price. This suggests that they intuitively sense the aver- age value of a set of numbers. • Median: Customers have a mental image of the median price. This requires that they spontaneously discard ex- treme values. • Extremes: Perception is swayed by unusually large or small numbers. • Losses: Customers pay undue attention to price increases because they regard price increases as financial losses. • Numerosity: Customers perceive a better deal when sav- ings are divided into numerous small installments rather than applied in total to a single purchase. There is as yet no definitive research on how consum- ers perceive prices. It’s not even clear that everyone favors the same set of heuristics. The decision criteria may vary by the type of purchase. For durable goods not replaced often, like stoves and ovens, it’s irrelevant to talk about frequency, average, median, or numerosity. Big-ticket items and petty spending surely are not given equal consideration. Perhaps Kahneman and Tversky’s perspective is the broadest: All the other criteria pinpoint which price becomes “available.”
  • 10. Copyright © 2013 by Kaiser Fung. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ISBN: 978-0-07-179967-6 MHID: 0-07-179967-2 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-179966-9, MHID: 0-07-179966-4. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill Education eBooks are available at special quantity discounts to use as premiums and sales promotions or for use in corporate training programs. To contact a representative, please visit the Contact Us page at www.mhprofessional.com. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. —From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations TERMS OF USE This is a copyrighted work and McGraw-Hill Education and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill Education’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS.” McGRAW-HILL EDUCATION AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USINGTHEWORK, INCLUDINGANYINFORMATIONTHATCAN BEACCESSED THROUGHTHEWORKVIAHYPERLINKOROTHERWISE,ANDEXPRESSLYDISCLAIM ANYWARRANTY,EXPRESSORIMPLIED,INCLUDINGBUTNOTLIMITEDTOIMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill Education and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill Education nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill Education has no responsibility for the contentofanyinformationaccessedthroughthework.UndernocircumstancesshallMcGraw-Hill Education and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.