Cognitive Marketing Series: Prospect Theory and Endowment Effect

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This is a podcast episode titled, Cognitive Marketing Series: Prospect Theory and Endowment Effect. The summary for this episode is: <p>In latest episode of the Cognitive Marketing Series, hosts Bobby and Cole discuss prospect theory and endowment effect. They discuss what they are and how they can be applied to everyday life and marketing. Check out the resources below to learn more about the value function, and also Lev's Ultraviolet conference. </p>
Episode overview
00:26 MIN
❓ What is prospect theory?
01:26 MIN
📈 Prospect theory in everyday life
04:15 MIN
🐸 Boiling frogs and prospect theory
02:25 MIN
🎰 Prospect theory applied to marketing
01:01 MIN
🚗 How marketing tactics are like test drives
01:27 MIN
💻 MarTech and the endowment effect
02:11 MIN
🤚 How the endowment effect prevents change for marketers
01:23 MIN
👱‍♀️ The Goldilocks Effect
02:37 MIN
🙅‍♀️ For marketers, more is not always better
00:57 MIN

Speaker 1: Welcome to the In the Clouds Podcast. In the Clouds is a marketing cloud podcast powered by Lev. The most influential marketing focused Salesforce consultancy in the world. Lev is customer experience obsessed, and podcast hosts Bobby Tichy and Cole Fisher have partnered with some of the world's most well known brands to help them master meaningful, one- on- one connections with their customers. In this podcast, they'll combine strategy and deep technical expertise to share best practices, how- tos, and real life use cases and solutions for the world's top brands using Salesforce products today.

Bobby Tichy: Welcome to the In the Clouds podcast. This is Bobby Tichy along with Cole Fisher, and today we're jumping back in the cognitive clouds. You may remember from a few episodes back, we covered law of least effort and paradox of choice and how those two elements can affect a marketer, and how you can use those concepts to become a better and more informed marker. And along those lines, we're going to jump into a couple of new concepts today, prospect theory and endowment effect, and maybe as a start of what that looks like, Cole, if you wouldn't mind giving us a good overview of what each of those are, and then we can dive into it.

Cole Fisher: Sure. So we'll start with prospect theory. Prospect theory is... Remember, we covered off on loss aversion, and prospect theory parallels a lot of that. Doesn't necessarily explain why we have loss aversion, but it makes more practical sense of how it pervades so many decisions and view points in our lives, in this general framing concept. So prospect theory is essentially a framework on why we make the decisions we do and how we evaluate options. And so this includes things like whether we view something as a gain or a loss, and how much subjective emotion, either positive or negative emotion, comes with that. Endowment effect is what will follow up. It's related, but it is more focused on how we have a paradigm shift of how we value things that we own versus what we don't own. And this will also relate a little bit to paradox of choice. But we'll get into what these two concepts are, how we see them in everyday life, really common threads in psychology and behavioral economics pervade these concepts, such as loss aversion, and then as well how marketers kind of use these in everyday life.

Bobby Tichy: So starting with prospect theory, what's a good example, or what's a use case that you've learned or identified that would be helpful for us to start with?

Cole Fisher: So prospect theory is a lot about why we view gains and losses so differently. And I'll start with the initial founding of it. So a couple of the godfathers of behavioral economics, if you will conman, Kahneman and Tversky, did a bunch of research on framing and all the effects. And there are a ton, and actually, if we have time we might get into a couple of the smaller, more straightforward effects later on in this podcast. But they came up with this general framework about how we evaluate options and decisions. And there's a graphical interface that we've included in the podcast description. And you'll see this X axis is objective state. So that's gains versus losses. If you're positive, you're gaining. And if you're negative, you're losing. The Y axis is subjective state, and that's are positive or negative emotion. It's essentially the amount of psychological arousal that we feel upon gaining or losing anything. And so remember how we talked about it in behavioral economics. It differs from neoclassical economics in the fact that neoclassical is, in essence, the straight out of textbook supply and demand, very straightforward. But when you try to fit that model to everyday life, there's so many other subtle nuances and things going on that it rarely ever fits. So neoclassical economics would tell us that for every one unit of gain on the X axis, I should increase one unit of positive emotion on the Y access. So for instance, I should receive one unit of positive motion for every$ 20 I find. If I find$ 40, I should receive two units of positive emotion. And of course that doesn't actually work. What's actually funny is, and I'm going to take just one minute here to kind of nerd out on the neurobiological side of this. So in FMRI studies, which is functional MRI studies... So if you've seen MRI scans, magnetic resonance imaging, functional is what it looks like over time, and so that's what they do brain scans with. And so if they're hitting your knee, if they're asking questions, things like that, they're just trying to see, according to blood oxygenation levels, what parts of the brain are being stimulated for any given activity. And what they've done is they've done this sort of prospect theory concept, and they said," Okay, here's a game, and you're gaining money or points or whatever. Or you're losing them." And what they notice is that when we see gains, we see, in the pleasure center, the nucleus accumbens, which is near the center of the brain, will actually activate. When we actually have losses, the pain center, which biologically, if you got kicked in the shin, this same anterior cingulate cortex would would fire up in an FMRI scan. And that's near the front of the brain, near the emotional limbic system and the cognitive prefrontal cortex. So it's oddly right in place with where we feel emotion, and where we process, higher, more abstract thought capabilities. Now what they actually find though, the really interesting thing here is that for every... And let's say they're playing a game and they gain$ 100, they'll see X amount of activity in the pleasure center of the brain. But if they lose$ 100, they'll actually see double the amount of pain. And so it's not always double. They say generally, most textbooks will suggest that that losing is twice as painful as gaining is enjoyable. That's not really necessarily technically true, because the amounts in different people, it varies, but that's a general rule of thumb that a lot of people are saying. It's twice as painful to lose X, as it is enjoyable to gain X.

Bobby Tichy: Is it kind of like the... And I can't remember exactly what the numbers were for the study, but it was a study based on income. And it was saying that once you hit a certain amount, anything above that amount was incremental in value. Or was not as incremental in value. So if you make 40,000 and you make you jump up to 80, 000, that's obviously going to be a big bump. But if you go from 80, 000... Maybe these numbers are not good examples, but if you go from 80, 000 to 160,000, yeah there's a bump, but it's not as big psychologically as 40 to 80.

Cole Fisher: Yeah. And so you're exactly right. And that magic number, I think most recently is... It varies from study to study, but generally it falls around 70 to$ 75, 000 of household income. After that, you don't actually experience more life satisfaction or emotional happiness, as the correlation ceases to exist after 70 to$75, 000 of annual household income. But yeah, that's the same concept is... And part of this is the adjusting base lining. If you get a 5% raise tomorrow, you'd be pretty happy. But in six months, you're going to forget about that. Part of that is just the baseline and concept that we just adapt like a frog in boiling water to whatever situation we're in. But part of that is this-

Bobby Tichy: Hold on. Do frogs and boiling water adapt?

Cole Fisher: Oh, you've never heard of that biology experiment, that frogs-

Bobby Tichy: No.

Cole Fisher: Being coldblooded. Yeah. So being coldblooded, if you put a frog in regular water and then slowly dial up the temperature, they won't perceive the change, and you could eventually technically kill a frog by boiling it to death.

Bobby Tichy: But they'll never detect the change because they're coldblooded?

Cole Fisher: Yeah, their body adjusts to the temperature until it's doing damage.

Bobby Tichy: Boy. Until it kills crosstalk.

Cole Fisher: Yeah. You've never heard of that concept? It's just kind of-

Bobby Tichy: Too many episodes of Seinfeld. I can't be bothered with things that actually would improve my intelligence.

Cole Fisher: No, it's just this general concept that as slow, tiny, incremental changes happen, we get used to these things and they become less and less significant to us. And that's what happens in prospect theory. So in that FMRI scan, the pain centers of the brain are exploding with twice the neuro activity when we incur loss, as compared to the pleasure center, when we receive gains of the exact value. And the reason that is, is because in order to harken back to those neoclassical economic days, it's law of marginal utility. Remember that the analogy of the first bite of the sandwich. The first bite is always the best, and after that marginal utility gets lower and lower because you just get used to it, and it just doesn't have the same effect. Same thing with drug addictions and gambling and things like that. There's never really enough, and you never really have the experience that you've started with. And so one of the applications here of prospect theory is this small effect called reflection effect, which is... Commonly known as reflection effect. But basically, and since you and I have talked about this in the past, I'm not going to ask you this question, but generally speaking, we become risk averse in gains, and we become risk seeking in losses. So what that means is if I were to ask a question, say if you want me to... I'm going to give you an option. I will give you$ 20 right now, guaranteed, or you can have a one in five chance of me giving you$ 100. Most people will be conservative and say," I'll take the guarantee, I don't like one in five odds." And so they will take the$ 20 guaranteed. Now, if I flip the script and say," Okay, now you either are guaranteed to lose$ 20, or I'm going to let you have a one in five chance of giving me$ 100, you're going to be out 100 bucks, or you have four in five chance of losing nothing." Now all of a sudden we become risk seeking in losses, and we'll say," Hey, let's roll the dice. I'd rather take the chance of not losing anything, even though I have a one in five chance of losing$ 100." Now, statistically, neo classically, they're supposed to be the exact same option. There's a wash between the two. But 80% of the time during studies, most people will go with... I'm making it up. It's usually 70 to 90 or something like that, and all sorts of studies like this indicate that people will be risk averse in the gain and accept the$ 20 guarantee, but they will take the chance on losing more than that if they have to. And honestly, this explains too things about why gamblers act the way they do. Why if you're going to lose something, go all in and maybe there's a chance that you either come out even, or even have a gain. But this reflection effect is actually part of what's called the fourfold pattern. And that is the certainty effect and the possibility effect. So what that means is at those ends of the curves, so once we've passed the point of marginal utility on a gain, or even disutility on a loss, that is actually a word, once we've reached those kind of curves where it flattens out like that, the prospect of losing a potential gain now actually creates the feeling of loss aversion. So we become... That loss averse, or what's risk averse, is we actually seek to take risks when we're near certain losses, but we'll do anything to avoid risks, when there's even the slightest chance of a loss when we're on the gain side of the curve. So essentially, if you're facing a gain a or a loss, whether you think it's high or low probability, that's a huge impactor on your behavior. So we see this every day with concepts like lotteries. People know there's a one in 13 million bajillion whatever odds of striking the lotto this week, but they'll still sink five, 10, 20 bucks a week into that. And they don't mind doing that because they're willing to roll the dice on that. But the same thing, the opposite is true with insurance. I may be the best driver in the world, I may know my traffic patterns just fine. I may be very, very safe, but if even the slightest odds of your family or your car, your property, yourself is at danger, you want to make sure you're covered. And so people are willing to spend way more than they need to on insurance. This same sort of concept comes into lawsuits, where a plaintiff may have a great case for having a seven figure lawsuit in front of them. But if go to court, there's still a slight chance that they might lose, and gain nothing. In which case, even though they had seven figures of opportunity, they're willing to take a$500, 000 settlement, just to make sure that they don't run that risk. So they become risk averse in that gain. But the insurance company, they're willing to go to court because they're more, depending on the numbers of course, that's why they dial these back to such bad settlements sometime, because they're willing to roll the dice saying," Hey, if I'm going to lose, I might as well go to court and just take the chance that I might get off the hook here."

Bobby Tichy: And I think it's really interesting that if you have... So if you have something to gain, you become much more risky, but if you have something to lose, you become much more risk averse, which is interesting, especially as we think about the impact it has on marketers. And the example I can think of is around messaging, and especially around email marketing. So I think we've both worked with customers who may or may not have the best sending practices, or the best acquisition practices of getting their email addresses. They've bought lists, or they're emailing folks that have previously unsubscribed, or just haven't engaged in a long time, and to a list of a 100, 000 people they might have a 3% conversion rate. And so you say to them," Well, if you cut your list in half to actually people who want to receive your messaging, your conversion could go up to six or 7%," which is essentially the same. But they're worried about losing what they have, versus increasing through some kind of a loss.

Cole Fisher: Yeah. And it's funny you bring that up. So we've heard the nothing to lose theory, and in the sports world that makes you a huge threat. In the NFL playoffs, just getting in there and a team that is underseeded, or is the low seed that has nothing to lose, has no expectations, they become very dangerous. You're just betting everything you got and your behavior is very different. Now, this same sort of concept, your right. In terms of how we message thing, to marketers and even end consumers, an example of this and how we frame this is gain versus loss. So if I told you that I've got yogurt that's made up of 3% fat, you would probably think it's disgusting. But if it had a big sunburst next to the logo saying 97% fat free, you'd probably love it. It's the exact same thing, but it's just framed as a gain versus a loss. Same thing for how we report on diseases, while we're thinking of topical situations. Something with a 99. 9% survival rate sounds pretty easy, but if you have a one in 1000 chance of dying, which is statistically the exact same thing, that sounds a lot worse. And your example, Bobby, of somebody that has 100,000 contacts and 3% conversion rate, well those 3% conversions are probably coming off of their best subscribers. Those that are active and will remain active. Culling the herd and getting rid of... And you and I talk about this easily as markers, because it's not our contact list and it's not our database, but that loss aversion, that fear of losing something is a big deal. And actually that parlays perfectly into what's endowment effect. And I'll just jump into an endowment effect, is it's this little phenomenon that takes place that causes individuals to value an owned object higher, oftentimes irrationally, than what it's marked value is. So it's an emotionally driven bias. One of the... I'll just give you an example of this. One of my favorite examples is there was a psychologist and a behavioral economist that went to Duke University for a study, and they noticed that all these students... And I guess this is a common practice that at Duke for basketball tickets, which are super low in supply for student tickets, but super high in demand, obviously, given Coach K and the Duke history of success there. So basically a week before a game, fans pitching tens and sleeping in the grass in front of the stadium, and then at random intervals a university official sounds off an air horn. And that requires all of those fans, all those students, to check in with the basketball authority within five minutes. Anybody who doesn't make that five minute check in is cut from the waiting list for the lottery for tickets. So what these two did is they went around posing as ticket scalpers. They got the list of all the students and all the fans that had signed up, and afterwards they called them all up individually and said," Did you win? Yes or no?" And then if you didn't win, what would you be willing to pay to buy a ticket? And then if you did win, what would you be willing to sell your ticket for?" And so the answers of those that... And keep in mind that both samples of population here had the same amount of skin in the game. They had the same amount of level of effort, presumably the same amount of interest, and those that did get tickets were randomly selected from those kids that are all camping out and waiting for this game. So of the kids that didn't win, they were willing to pay, on average,$ 170 for a ticket to the game. I'll ask you Bobby. What do you think the people who owned tickets, who did win the tickets, were willing to sell them for?

Bobby Tichy: Probably less than what the market rate would be.

Cole Fisher: Opposite of that. One would think that there's probably a general marketplace sets its own prices, at least in our free market society here, that it would be something near$ 170. Those that did win tickets said, on average, they were willing to part for those tickets for$2, 400.

Bobby Tichy: Holy smokes.

Cole Fisher: And so there's been a lot of studies. The famous Cornell mug study, which is coffee mugs, which came out to be," If you owned it, you valued it twice of what people who didn't own it value it as." And what this is, it's this general concept that if I own this ticket, it's now something that I have to give up. And it's, again, that loss aversion thread being woven through to another concept here, an endowment effect, saying," If I lose this ticket, it better be really worth my while, because I'm so loss averse. I don't want to lose anything." And to your point to the marketers, I don't want to lose half my day database, even though culling the herd is better for my overhead expenditure, better for my conversion rates. I don't want to lose. I don't want to lose out on that because that's painful for me. Remember, that anterior cingulate cortex is going to fire up at twice of what the gain would be. Or in this case, I think it's 11 times or something like that, the difference and the cost of a ticket. And so the reason this happens is because it's partly related to this self bias and positivity bias, which is more psychological in its roots, but it's just how we generally have ego and think that things we have or do are better, and we look more positively on ourselves and what we've done. But the big reason for this is loss aversion, and this notion of," Its mine," becomes a powerful, persuasive effect on how we spend more time, money, effort, value on what we now own, than when we didn't own it. So think about a friend of yours who has a clunker car, spends more time and money investing in this thing, trying to fix it up, always getting new parts because this thing's just falling apart insuring it. At the end of the day, any given year they're probably putting more money into it than what it's actually worth. Then one day when they actually go to part with it, they wonder why no one wants to buy this rusty Ford Pinto for 20 grand. It's because they have such a misperception of what the true market value is for this. So the way marketers and consumers interact with this on a regular basis are... A lot of marketing tactics are like test drives, or airlines use this for free first class upgrades. Now that you've been first class, it's a loss to go back to your regular seats. So the next flight, all of a sudden you had all this space, leg room, free drinks, everything. And now you're back shoulder to shoulder like the old days when... Before this, you were fine. But then you got first class, you just had a taste of it, and now you can't give that back up. Or premium versions of a product, giveaways that require a purchase or some sort of activation effort. Because you've been given something, or a part of a product, or access to a product, you now don't want to give that up. Think about free trials, or free trials for apps or premium channels or something like that. You get a week of HBO, Showtime, Disney +, whatever it is, and then that week expires and now it's time to give it up. That becomes painful. That's because it's a loss, and we're averse to that loss. And that becomes really difficult for us to give up. And that's why it's such a clever move for marketers when they do these types of things. Because consumers get used to this, we adjust that baseline to where we are now the owners of this product. And now when that's pulled away, our valuation of that product is higher than it was before we owned it. Does that make sense?

Bobby Tichy: For sure. And especially when I think about marketers or folks that we work with, I feel like it goes into two buckets, where you'll have a group of people who are very proud of, for example, the journeys that they've designed, or different marketing concepts that they've put together, and are not really open to feedback on how it could be better, or what tools they should be using to increase the value of what they're doing. I think you see this a lot with testing. There are some more organizations we work with that are heavily involved in testing. They're always trying to figure out," How can I improve my customer journey, for example, to get another 0. 1% conversion, or 0. 1% engagement?" But then you also have another group that is very... I don't want to say anti- testing, or anti- innovation, but it's much harder to get those folks to move, to get them off of what they've been doing that's been tried and true for a couple of years, as an example. Which I think is exactly the example or correlation to the endowment effect.

Cole Fisher: Yeah. You and I have come up against this a ton of times when somebody has homegrown MarTech that they use. And even though it-

Bobby Tichy: Oh, for sure.

Cole Fisher: And that's nothing about how effective the MarTech is, but the fact that this one IT owner put blood, sweat, and tears into this thing, and it's very important to them, because it's their baby, and it makes them very important to the organization. Even though everything now has to go through them and they become a bottleneck, if they weren't emotionally invested in that, they would likely be able to look at that and be like," Hey, I don't want to do the bottleneck. Something needs to change here." But it's difficult to have a conversation, because there's emotion tied into that, and that person has a much higher valuation of that product, or that homegrown piece of MarTech equipment, whatever it is, than all their peers do. And so other people might be looking at it like," Hey, we need to do something different in terms of our data warehouse, or whatever this practice is, because this is slowing things down."

Bobby Tichy: I think that's a great example, the IT front. We've come across that at number of companies. Especially larger technology or product driven companies that they're focused on building it themselves, or if they've got something built already they want to continue to use that, rather than use a best of breed of a particular platform. There's always more to the story than that, but you can definitely feel, especially if someone's been involved with building something, their propensity to hold on to it. To poke holes in whatever you have, or whatever might be publicly available, to what they've done. Obviously that makes a lot of sense sometimes. Because they've built it specifically for their use cases and how they want to utilize that particular piece of technology. But is that short term gain that you have better than the long term gain that you might have? And I think that goes back to that loss aversion. I don't want to lose this one particular feature that I've built specifically for our business, and the possible return of having 10 other features that we don't have that might increase conversion or increase engagement.

Cole Fisher: Yeah. And honestly, growth is painful. Change is difficult to manage. And this especially emotionally driven bias keeps us... We've had the same. Whether it's on the IT front, or to your point, the marketer that has set up these dozens of journeys that just get more and more convoluted over time and things get added, and instead of starting from scratch or," Hey, let's test this," or this preconceived notion that we already have, let's see if this is even working right. Some marketers are... And you and I are not outside of that realm. It's like," Hey, we think this works. Are we really, really testing this all the time to make sure this is still valid? Or are we just going off this assumption because we've sunk so much into this that..." I won't get into sunk costs, because that's a whole nother concept. But we've put so much into this that I don't want to lose it now. That that endowment effect drives me to say," Let's just keep the solution that we have, whether it's that IT stack, whether it's an old data warehouse that just doesn't run properly, whether it's journeys for a marketer that could be optimized, but there's such a sentimental value sunk into something like that, that blood, sweat, and tears concept is just... It's going to be hard to rip that bandaid off and step into something that we don't know as much about, or aren't as important to, or don't feel as connected to.

Bobby Tichy: I think you see this too with organizations, or with people in their particular positions. You always hear the thought of the people or the leaders that you need to get from one employee to 100 employees, is going to be much different than the leaders or the people that you need to get from 100 employees to 500 employees, for example. And I think that as people too, whether it's a job, whether it's a journey, or whatever it might be, you're always hesitant to give up what you have for the potential bonus that might come with letting go of it.

Cole Fisher: Yeah. You rarely see executive level management transition from the startup phase to the full grown post buyout, enterprise phase. Or at least not see them at some point, start to waver. To your point, just think about that prospect theory, that curve on gains. That growth is now no longer from zero to 100 people, or 200, or 500, whatever. We're looking at like tens of thousands of employees. And you're right. The types of leaders are very different than they are from one company in startup phase versus they are in enterprise phase. The same types of marketing leaders are going to be very different in those types of environments. And you rarely see somebody at that executive level or any level, just say," You know what? I think I was the right guy for zero to 500 people. But yeah, after this, it's a little bigger and it's just not my cup of tea, and I'm willing to step away from something that I have so much blood, sweat, and tears in, and just say I don't think I'm the best one for the job." Or that this isn't the right equipment for the job anymore, or these aren't the right journeys for the marketing team anymore. You just don't see that because it's so emotionally connected to us.

Bobby Tichy: Well, before we jump into completely unrelated, let's take a quick break. Ultraviolet is back. Lev's annual conference, Ultraviolet, is now open for registration. It'll be returning virtually April 12th and 13th. And based on the fact that both Cole and I did sessions last year, which it was pretty clear that ours were one and two, just kept going back and forth which one you want to listen to the most.

Cole Fisher: Obviously, right?

Bobby Tichy: Yeah. But we've got dozens of sessions. It really showcases the best thought leadership from Lev, our customers, as well as our partners, including Salesforce, with a combination of marketing strategy and technical skills. And so there's dozens of sessions, things diving into AMPscript, diving into data modeling within marketing cloud, but also journey strategy, how some of our customers and Salesforce customers are building out their MarTech approach. So you won't want to miss it. You can register and learn more at ultravioletconference. com, and we'll also put a link in the podcast show notes. So before we jump into completely unrelated, anything that you wanted to add on to those two concepts that buttoned those things up between the endowment effect and prospect theory?

Cole Fisher: There's a couple of... So we talked about the reflection and how marketers use these types of tactics. There's a couple of small effects I do want to also just mention that are just interesting, and they're related, but one is decoy effect. And that's where there's... Realtors use this a lot. And so it's something like," I have a house that I think is right for you. I'm going to show you that house. I'm also going to show you a house that is nothing like what you wanted. It has an entire wall made of nothing but glass pains. It's on stilts. It's just something very different than what you want, and that's going to drive you more securely into the house that you do want. So typically what's they have what is called a target, a competitor, and just decoy elements. So there could be more than two options, but decoy effect is used a lot of the times. And so they'll use this in car lots, where usually that car that they put up on the ramp and take forever to get up there, they're not planning on selling that car. In fact, there's no intention whatsoever that they're going to get rid of that car, it took them so long to get it up there. But they're going to put a price tag on it so when you talk to them and you see the alternative, that has less features, a different color, and is a higher price than what you're getting, all of a sudden yours looks a lot better. Your option looks a lot better. Also, very similarly related to that is Goldilocks effect. And that's this the middle is just right. And I'm trying to think of... I want to say it was Panasonic. And so two of these behavioral economists that we actually talked about in the podcast today went to Panasonic. And this is one of the reasons I love behavioral economics, because it bridges that academia world of neoclassical economics with practical world. And so what they did was they actually went to Panasonic and they said," Hey, your competitor," Emerson at the time, this was in I think'92 or something like that," Your competitor has a camera that costs$ 110," or something like that. And Panasonic's rival had$ 180 price tag. And so what they did was they said," Okay, let's try something here. According to the Goldilocks effect, if we added another option, it would make the middle option more attractive." Right now you're just the high end option, and the vast majority of the time people will go for the lower cost option, even if the higher end option has better features and functionality and things like that. So what they did was they said," How about you charge$ 200 for this new product? I think these were ovens, or maybe convection ovens or something like that. So they said," Let's put on this luxury high end and see what happens." Well their market share went from 43% to 73% after adding that third option. Because what happens is people now anchor to the middle with the Goldilocks effect, because the middle is just right. Now we have a luxury end, where I could see the best of the best, we have something comfortably in the middle, and now instead of the same option, we have the cheap option. So they just spent that$ 110 Emerson product, they made that the cheap option by comparison by adding on a luxury option. So their goal was really not to sell the luxury item at all. Very few people actually converted on that. But their market share, with the middle priced option, skyrocketed. And so actually, I think from that their market share overall went to 60%. So they became majority owner of the marketplace. So just something like that-

Bobby Tichy: I don't want to pay the top dollar, but I can pay more than the bottom dollar, so the middle dollar.

Cole Fisher: Exactly. And so that's the Goldilocks effect, is the middle is just right. And so I would challenge us, if we have takeaway here just as a challenge for marketers. Just recall our discussion about paradox of choice. When there are too many options, it lowers the odds of conversion. More is not always better. But think about how fewer intentionally varied options can actually provide more clarity and increased likelihood of conversion. And so this comes across product recommendations and certain business rules that we have providing limits and intentional variations of products that we recommend. Or product lines like manufacturing. What makes more for Coca- Cola? Coke, Diet Coke and Sprite, or the millions of iterations of Sprite remix cherry 2.0? Things like that. More is not always better, but when you're really intentional and strategic about what these options are and how they're presented, it can really benefit a marketer to work smarter and not harder.

Bobby Tichy: Awesome. Well thanks for going through all of that. Jumping into completely unrelated, New Year's resolutions. What's yours?

Cole Fisher: So, I don't actually do New Year's resolutions.

Bobby Tichy: Me either.

Cole Fisher: Yeah, no kidding?

Bobby Tichy: No.

Cole Fisher: I don't think we've ever talked about this. I usually am the different one. But my thing is, I always just set little goals or things I want to get done, and I don't have anything against New Year's resolutions, I think they help a lot of people, but the fact of the matter is a lot of them change. And usually if it's a resolution, it's a single one off goal, rather than a habit change or a behavioral modification to your everyday life. I always say this. If it's summer and I look down and I see a beer gut starting to spill over my trunks, I'm not going to be like," You know what? I should do something about that next year." I'm going to say like," Oh, something's out of hand right now, or something needs to change. I got to do something about this now." And so whatever it is, I tend to set lots of little micro goals for myself. And so by the time January rolls around if I don't already have most things in place, it's something that I should have been tackling long ago for me. So that's my personal interpretation of why I don't really do New Year's resolutions.

Bobby Tichy: I think I used to, and then you just end up failing at all of them. So well, what's the point?

Cole Fisher: Well, you see the stats. More than 96% of New Year's resolutions fail within the first month or something like that.

Bobby Tichy: Yeah.

Cole Fisher: It varies from study to study, but yeah.

Bobby Tichy: If you constantly have a New Year's resolution of not having any resolutions, then you always succeed.

Cole Fisher: Yeah. If you don't set goals, you never fail, Bobby.

Bobby Tichy: Hey that's... Boy. I think that's bulletin board material. I might have to paint that on our wall at home.

Cole Fisher: That's deep, right?

Bobby Tichy: Yeah. Well, thanks as always to listening to In the Clouds. If you want to reach out to us or have a suggestion for a topic, reach out to us at intheclouds @ levdigital. com, and we'll see you next time.

DESCRIPTION

In latest episode of the Cognitive Marketing Series, hosts Bobby and Cole discuss prospect theory and endowment effect. They discuss what they are and how they can be applied to everyday life and marketing. Check out the resources below to learn more about the value function, and also Lev's Ultraviolet conference.