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Hyundai’s marketers have already shown that they understand behavioral economics. They are at it again with this commercial, capitalizing on our aversion for ambiguity. The basic idea is that people show a preference for known risks instead of unknown risks. The original experiment illustrating ambiguity aversion is the Ellsberg paradox. A version of this paradox is a situation featuring an urn with 50 red balls and 50 black balls, and another urn that also has 100 balls but where the exact number of each color is unknown. Most people prefer the urn with the known probabilities of pulling a red or a black ball.

So how has Hyundai adapted that idea to sell cars? A used car is worth less than a new car. That’s obvious. But how much less? Most customers have no idea, and finding out would take a lot of work. They are facing an ambiguous urn. Hyundai, however, has a lot of data about their cars. They also have a lot of smart statisticians who can forecast future used car values. Hyundai’s urn is less ambiguous. Although it could try to turn its knowledge of the used car market into a urn with known odds, the company decides to go a step further. It just tells consumers exactly what the outcome will be.

As the commercial says, “Nobody likes what happens to the value of that new car when they drive it off the lot.” With or without the program, the value of a new Hyundai is going to drop by some amount. Customers know that and accept it – even if they don’t like it. So Hyundai can make the present purchase decision easier by eliminating the future uncertainty about the size of that drop. The company has cleverly swapped an unknown risk for an absolute certainty, and made the new car “gamble” more attractive.

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If you want to sell more subscriptions, include a voucher that someone can take to a store today and pick up a copy of the latest issue of that magazine. People who buy stuff don’t like to wait – especially 8-10 weeks for the “first” issue to arrive in the mail.

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Liam Delaney watches this Kayak.com ad and wonders how a behavioral economist answers the question, “Is ignorance bliss?”

Some text on the screen informs you that the woman getting the massage saved so much money from going to the website being advertised that she was able to afford to pay the guy for the whole afternoon. Some text also informs you that the other woman has overpaid for her room. However, both look pretty happy. Its fair to say that the woman getting the massage probably looks a bit happier but, in general, they both look like they are having a good holiday…

One reading of the add is that its a bit overboard to go looking through lots of websites when planning a holiday. Ultimately, satisficing rather than optimising might be fine – just go somewhere that meets some criteria you have and is within your budget – whether you get some expensive drinks thrown in for free or save enough money on the room to get an afternoon’s massage is ultimately not really the point of going on holiday…But it is, in general, an interesting question as to whether we miss what we didn’t know was available.

What’s going on here is an interesting interplay between two behavioral phenomena. Kayak.com is going to give you a lot more choices for airfare and hotels and cars, which is why you’re going to save some money, which is why you’re going to enjoy Magnus. More choices can be more confusing, though – in fact, if the choices are overwhelming, you might end up avoiding taking the trip altogether, in which case you’ll be worse off than both of the women in the ad. But Kayak.com is also playing on the fear of regret. This fear can also lead to an avoidance of taking action because of worries that, in hindsight, the decision won’t look so good. Unfortunately, because of Kayak.com, you now know what you’re losing. Fortunately, because of Kayak.com, you also know how to get it back.

All that assumes, of course, that you can use Kayak.com as easily and as quickly as whatever other information gathering process you are using now – or that at least whatever hiccups you face will be more than compensated for by Magnus. If the Nudge blog were making the ad, it would have included a short clip near the start of the ad of the two women booking their hotels on Kayak and another site, with the woman who used Kayak finishing first.

Kayak wants you to know that using its site helps you behave more like an Econ. But you’re still a Human, so if your pre-Kayak vacations have been pretty good, maybe, as Liam says, you shouldn’t worry so much about Magnus. Just enjoy the drink by the pool. If you still can having seen the Kayak ad!

 

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Assorted links

1) Would you shop more in your hometown if it had a rewards program?

2) Why a proposed rookie wage scale emerges from the lessons of Thaler and Massey’s research on the NFL draft.

3) Why Swipegood won’t lead to more charitable giving.

4) A No-Lose lottery now in Alabama.

5) Choice architecture in the wild: Mobile phone edition.

6) An entry in a $25 lottery or $.05 off every trip if you bring your own bag. Which one works better? Hat tip: Rags Srinivasan.

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Before there was behavioral economics, there were marketers observing human behavior closely and appling their insights to the art and science of selling products. Today’s behavioral economists haven’t become marketers, but the discipline’s work is now finding its way back into marketing as a framework to systematically and strategically think about crafting clever campaigns. The advertising agency Draftfcb is one place where behavioral economics ideas are percolating through more than a few minds. Some of these thoughts have started appearing in a series of video blogs under the title “Lessons in Marketing to Crazy People.” Those lessons include making the first step of engagement with any product or service incredibly easy (“So Easy a Caveman Can Do It!”), and making the last impression (rather than the first one) count. The fifth video in the series has just been posted with thoughts on overcoming immediate hassles, which any good behavioral economist knows have foiled many a good intention.

The full set of videos can be found on John Kenny’s (of Draftfcb) Youtube channel.

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Urinals XII

How do you improve sanitation in Cambodia when education campaigns and free toilets haven’t worked? The BBC reports on “shame marketing” by International Development Enterprises (IDE) that is trying to turn the toilet into a status symbol.

IDE – which is itself funded by donors including the World Bank – developed a fresh approach, using disgust and shame to make people want a toilet enough to buy one at full price.

The young facilitator at the presentation in Sleng is half stand-up comedian, half sanitation ideologue. Chhun Dina adding up figures Chhun Dina tells villagers they are surrounded by their own excrement. As she moves between her audience and the whiteboard, Chhun Dina manages to elicit hearty laughter and rueful smiles even as she tells the villagers in no uncertain terms that they are living among their own filth…

“It’s like a mountain. Imagine if it rained and that mountain fell into the river. You’d be washing and bathing in your own excrement.”

Before the presentation, only two of more than 40 houses in Sleng had a toilet. But when Chhun Dina finished, there was a rush to sign up to buy one.

This is where the second part of IDE’s plan comes in. It commissioned a design for a low-cost “easy latrine” which, with a little training, local businesses could make and sell. The price to the newly-enlightened villagers is around $30 – and the easy latrine can be installed and ready to use on the same day that someone decides they no longer want to live without a toilet.

Hat tip: Dorothy Hall.

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Assorted links

1) Celebrating the transparent Rx bottle.

2) Should your credit score take into account your savings habits?

3) Imagine eating a huge bowl of M&Ms…Still hungry?

4) Self-checkout lanes = fewer impulse purchases.

5) Marketing nudge – how opt-in box for emails dropped conversion rate by 17 percent. Explanations?

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From the consultants at McKinsey:

Our research suggests, for instance, that ice cream shoppers in grocery stores look at the brand first, flavor second, and price last. Organizing supermarket aisles according to way consumers prefer to buy specific products makes customers both happier and less likely to base their purchase decisions on price—allowing retailers to sell higher-priced, higher-margin products. (This explains why aisles are rarely organized by price.) For thermostats, by contrast, people generally start with price, then function, and finally brand. The merchandise layout should therefore be quite different.

In some ways it’s strange (though not surprising) that ice cream manufacturers have been able to brand their products better than thermostat manufacturers. They’re both basically selling commodity goods. Or will Ben and Jerry’s fans vehemently disagree? Is high-end ice cream really that innovative a product?

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1) Jodi Beggs on Greg Mankiw’s NYT column about work and taxes.

2) Behavioral economics and the high-minded movies in your Netflix queue.

3) Social shaming to boost alumni donations. An ill conceived idea, says Dan Greenberg.

4) The power of grammar. Imperfect vs. perfect aspect phrases affect your perception about a politician?

5) Dan Simons has a four-part series on the psychology behind using science as a marketing tool. Part I is here. Buyer beware.

6) Lesson for sustainable corporate social responsibility: Letting customers name their price for a product when half of proceeds go to charity is better for company and charity than when product is marketed with fixed percentage (20 %) of proceeds going to charity.

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It’s relatively cheap to change the package on a bag of of fresh carrots. It’s more expensive to design a machine that sells unbruised bananas.

But dispensing fresh produce comes with a particular set of challenges. Fruits and vegetables spoil a lot more quickly than a bag of pretzels. They cost more to stock and carry a higher price tag. Getting the temperature right is tricky, too: Bananas need to be stored at a higher temperature than cantaloupe to stay fresh. And then there’s the bruising issue: A banana can easily get squished from the 4-foot fall from a machine’s top shelf…The new machine—which is already in some schools—sells for more than $5,000 compared to about $3,000 for a typical machine.

More in the WSJ.

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