This article was taken from the August 2011 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online.
You're not stupid, but you can be fooled. For millennia, the best salespeople have known how to exploit the vulnerabilities of the human mind. In the burgeoning field of behavioural economics, we've begun to give precise names to the mental weaknesses that make us all susceptible to a well-crafted pitch. Drawing on the insights of psychology, behavioural economists have explained why we buy more stuff at 99p than at £1 (the "left-digit effect"), why we commit to gym memberships we'll never use ("optimism bias"), and why we don't return things we buy as often as we should ("post-purchase rationalisation"). The giants of the web, from Amazon to Zynga, use similar tricks to keep us coming to their sites, playing their games and buying their goods. In fact, that's how they became giants in the first place.
Here's how they game us -- and how, in some cases, we wind up gaming ourselves.
Amazon
Eliminating small frictions can radically alter one's decisions.
An elegant demonstration of this comes from research by US psychologists Eric Johnson and Dan Goldstein, who asked people whether they wanted to opt out of organ donation (starting with the choice preset at "donate"), instead of asking whether they wanted to donate (presetting at "don't donate"). That switch caused the pro-donation response to rise from around 40 percent to more than 80 percent. This is the power of defaults: we have a marked tendency to take the path of least resistance.
For many of us, Amazon functions as a default because it has all our credit cards and addresses on file. If we asked people how much they would pay to save the time needed to retype that information on another site, they'd most likely say, "Not much." Most of us don't value our time so highly. But during the few seconds in which we make our buying decisions, when we are not thinking very deeply, the barrier to entering that data seems too forbidding and we default to Amazon.
Amazon also created two smart solutions to the problem of shipping cost, one of the biggest psychological hurdles to buying online. The first is Super Saver Shipping, which, for US shoppers, sets a $25 threshold to qualify for free delivery. Super Saver is currently free in the UK but a £25 threshold applies when dispatching to international destinations. This option tempts a lot of people into adding an extra book or CD just to avoid shipping costs.
The more interesting mechanism is Amazon Prime, which, for an upfront fee of £49 a year, gives you free one-day shipping on almost all orders. I suspect that Amazon Prime causes shoppers to buy considerably more, and for three reasons. First, knowing that one store has free shipping makes us less likely to search for another place to buy. Second, once on Amazon, the cost of shipping is no longer a barrier, so impulse shopping is less inhibited.
Third, because we've essentially paid shipping in advance, it becomes a sunk cost -- so to make it a good deal, we try to amortise our investment by making more purchases on the site.
Apple
If you're an Apple customer, you might have noticed something about your iTunes and App Store purchases: there's often a lag of hours, even days, before you get your receipts via email. This is probably because Apple is trying to batch-process your credit-card transactions to reduce its interchange fees. But there's a fringe benefit for the company: the delay reduces what economists call the pain of paying.
Imagine I own a restaurant, and I calculate that a £20 entrée contains 20 bites -- a pound a bite. But I offer you a deal: I'll charge you 50 pence for a bite, and you don't have to pay for what you don't eat; I'll just watch and count as you chew. It's a good deal, but how much fun will the meal be? Most of us would rather pay under the normal pricing structure, because when payment and consumption take place in the same time frame, we enjoy the experience much less. App Store purchases are like paying by the bite. But the mechanism of the transaction, where the money flows automatically from your credit card and you don't get a receipt until later, decouples payment from consumption and reduces the pain of paying.
Although the delay in charging is good for Apple, the company made a mistake on pricing: it lets the apps sell too cheaply.
There's an economic phenomenon called anchoring, in which the amount that shoppers are willing to pay is constrained by the first price presented to them. Once a price-point is set, it's hard to dislodge the anchor. On the App Store, the expectation now is that they can't cost more than about £2.99 -- and that most should cost 59p.
Apple shouldn't have allowed any apps to be free. Even a minimum price of six pence would have been better. The pull of free is just too strong -- dragging down what people will pay for everything else.
Groupon
To my mind, the thing that is most revolutionary about social-buying sites such as Groupon isn't the hefty discounts they're able to offer. It's the fact that they've taken the embarrassment out of coupon-shopping for their target demographic. Survey Groupon's customers about their views on clipping coupons from the newspaper and I suspect most of them would look down on it.
In fact, the stigma of coupon use is real and broad-based. A 2008 paper in the Journal of Consumer Research found that shoppers would describe people standing near coupon users, not to mention the coupon users themselves, as "cheap" or "poor". With Groupon, by contrast, the social acceptability is baked into the premise -- into the name, even.
The perception of crowd behaviour can be a powerful motivator when it comes to modifying people's behaviour. Noah Goldstein, UCLA assistant professor of HR and organised behaviour, headed up a 2010 study on how to encourage towel reuse among hotel guests. In one experiment, two different signs were tested in rooms. The first was an appeal saying that towel reuse is good for the environment; 35 percent of guests complied. The second sign added a social cue: "Almost 75 percent of guests who are asked to participate...do help by using their towels more than once." The result: 44 percent compliance.
Groupon's time constraint is its other secret weapon. Consumers have one day to decide whether to buy a coupon. Usually, when we don't buy something, we can go back and get it later. But with Groupon, our choice becomes explicit. It's not just that we're not buying the coupon; we're choosing never to be able to buy it.
Presented with that choice, many customers will consider how much they might regret the choice not to buy. And because people hate feeling regret, they become more inclined to buy it now.
Zynga
A couple of years ago, I co-authored a paper about the way we value goods. My colleagues and I asked participants to make origami animals.
Then we had them bid on their own creations, as well as on origami made by others -- much of it of a much higher quality. We found that participants placed an irrationally high value on their own creations -- and that value was proportional to how long they had worked on it. We dubbed this the Ikea effect, in honour of how your rickety bookshelf seems perfect after you've put hours of labour into assembling it.
This goes some way to explaining the appeal of games such as Zynga's FarmVille. People invest time and effort into building a farm -- the more complex the process is, the more we love and value our creation.
The social element adds another kind of compulsion. A lot of these games are about reciprocity: people give you things and you're expected to respond in kind. Reciprocity is a powerful motivator. Economist Ernst Fehr worked on what's called the trust game, where one player is asked to choose between pocketing, say, £5, or giving £20 to a second player -- with the understanding that the other player can either keep all the money or split it 50-50 with player one. In rational terms, the second player should choose to keep it all -- and, knowing this, the first player should keep the £5. But we like to return the favour. In FarmVille that translates into spending more and more time playing the game.
I teach 800 college students, almost all of whom use Facebook obsessively -- often during class. A few have told me that before exam week, they hand their computer to a friend and ask them to change their Facebook password and keep it a secret until after their exams.
It seems clear that Facebook actively develops features that challenge our limited ability for self-control, since that is what will get us to come back again and again. Much of the site's genius revolves around the Wall: a public space that we curate but that other people can add to. Within the universe of the site, where everyone is a "friend", you feel a special compulsion to respond to Wall posts -- to comment on others' posts to yours and to reciprocate by writing on theirs.
We want our Walls to reflect ourselves. Psychologist Sam Gosling says you can learn more about people from their possessions than from spending time with them. Walls are basically the same -- a storefront window to the self. Users want to display a self that is somewhere between their real self and how they would like to be perceived, which creates a motivation for constant monitoring and upkeep of the Wall.
But perhaps Facebook's most addictive feature is that it allows us to enhance our status in ways that are relatively cheap. When Facebook started its now-defunct Gifts service, people questioned why anyone would spend actual money on sending a virtual gift to a friend. But in the first 10 months of the programme, more than 24 million gifts were sent. Why? Because we get tremendous social capital from being seen both as generous and as someone whom other people buy gifts for. In terms of status-per-pound, it was a bargain.
This article was originally published by WIRED UK
