Contagious Why Things Catch On

Scenario A:
Imagine you’re at a store looking to buy a new barbecue grill. You find a Weber Q
320 grill that looks pretty good, and to your delight it’s also on sale. Originally priced at $350, it
is now marked down to $250.
Would you buy this barbecue grill or drive to another store to look at others? Take a second to
think about your answer. Got it? Okay, let’s do the exercise again for a different retailer.
Scenario B
: Imagine you’re at a store looking to buy a new barbecue grill. You find a Weber Q
320 grill that looks pretty good and to your delight it’s also on sale. Originally priced at $255, it
is now marked down to $240.
What would you do in this case? Would you buy this barbecue grill or drive to another store to
look at others? Wait until you have an answer and then read on.
If you’re like most people, scenario A looked pretty good. One hundred dollars off a barbecue grill
and it’s a model you like? Seems like a good deal. You probably said you’d buy it rather than keep
looking.
Scenario B, however, probably didn’t look so good. After all, it’s only fifteen dollars off, nowhere
near as good as the first deal. You probably said you’d keep looking rather than buy that one.
I found similar results when I gave each scenario to one hundred different people. While 75
percent of the people who received scenario A said they’d buy the grill rather than keep looking, only
22 percent of people who received scenario B said they’d buy the grill.
This all makes perfect sense—until you think about the final price at each store. Both stores were
selling the same grill. So if anything, people should have been more likely to say they would buy it at
the store where the price was lower (scenario B). But they weren’t. In fact, the opposite happened.
More people said they would purchase the grill in scenario A, even though they would have had to
pay a higher price ($250 rather than $240) to get it. What gives?
THE PSYCHOLOGY OF DEALS
On a cold, wintry day in December 2002, Daniel Kahneman walked onstage to address a packed
lecture hall at Sweden’s Stockholm University. The audience was filled with Swedish diplomats,
dignitaries, and some of the world’s most prominent academics. Kahneman was there to give a talk on
bounded rationality, a new perspective on intuitive judgment and choice. He had given related talks
over the years, but this one was slightly different. Kahneman was in Stockholm to accept the Nobel
Prize in Economics.
The Nobel Prize is one of the world’s most prestigious awards and is given to researchers who
have contributed great insight to their disciplines. Albert Einstein received a Nobel Prize for his
work on theoretical physics. Watson and Crick received a Nobel in medicine for their work on the
structure of DNA. In economics, the Nobel Prize is awarded to a person whose research has had a
large impact on advancing economic thinking.
But Kahneman isn’t an economist. He is a psychologist.
Kahneman received the Nobel for his work with Amos Tversky on what they called “prospect
theory.” The theory is amazingly rich, but at its core, it’s based on a very basic idea. The way people
actually make decisions often violates standard economic assumptions about how they 
should
make
decisions. Judgments and decisions are not always rational or optimal. Instead, they are based on

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psychological principles of how people perceive and process information. Just as perceptual
processes influence whether we see a particular sweater as red or view an object on the horizon as
far away, they also influence whether a price seems high or a deal seems good. Along with Richard
Thaler’s work, Kahneman and Tversky’s research is some of the earliest studying what we now think
of as “behavioral economics.”
—————
One of the main tenets of prospect theory is that people don’t evaluate things in absolute terms.
They evaluate them relative to a comparison standard, or “reference point.” Fifty cents for coffee
isn’t just fifty cents for coffee. Whether that seems like a fair price or not depends on your
expectations. If you live in New York City, paying fifty cents for a cup of coffee seems pretty cheap.
You’d chuckle at your good luck and buy coffee from that place every day. You might even tell your
friends.
If you live in rural India, though, fifty cents might seem hugely expensive. It would be way more
than you would dream of paying for coffee and you’d never buy it. If you told your friends anything it
would be your outrage at the price gouging.
You see the same phenomenon at work if you go to the movies or the store with people in their
seventies or eighties. They often complain about the prices. “What?” they exclaim. “No way am I
paying eleven dollars for a movie ticket. That’s such a rip-off!”
It might seem that old people are stingier than the rest of us. But there is a more fundamental reason
that they think the prices are unfair. They have different reference points. They remember the days
when a movie ticket was forty cents and steak was ninety-five cents a pound, when toothpaste was
twenty-nine cents and paper towels cost a dime. Because of that, it’s hard for them to see today’s
prices as fair. The prices seem so much higher than what they remember, so they balk at paying them.
Reference points help explain the barbecue grill scenarios we discussed a few pages ago. People
use the price they expect to pay for something as their reference point. So the grill seemed like a
better deal when it was marked down from $350 to $250 rather than when it was discounted from
$255 to $240, even though it was the same grill. Setting a higher reference point made the first deal
seem better even though the price was higher overall.
Infomercials often use the same approach.