What is Operations?

No, not really; arbitrary coherence though?

Dan Ariely, Professor of Behavioral Economics at Duke University, and author of Predictably Irrational, outlines an interesting social phenomenon. 

In 1974 Frenchman Jean-Claude Brouillet purchased an atoll in French Polynesia.  With that came a lagoon filled with black-lipped oysters—and with those, black pearls.  At first, however, there was no demand for the things; after all, they were gun metal gray and about the size of a musket ball.  As time passed, many marketing efforts failed; he could have tossed the effort aside.  But instead, Brouillet commissioned a spot in the front window of a New York 5^th avenue jewelry store with an outrageously high price tag.  Shortly after, the most prospers women were strutting around New York city with black pearls draped around their necks—and we have been anchored to the high price since.

 Drazen Prelec, an MBA professor at MIT’s Sloan School of Business, conducted an interesting experiment with his Marketing Behavior class: his fifty-five students each wrote their last two digits of their social security number on a piece of paper.  He then introduced several items—two bottles of nice wine, a computer keyboard, an academic book, a box of Belgium chocolates, etc.  Next, each student wrote their last two SS numbers in dollar form next to each item listed on the paper—for example 79 would be $79.00.  The class then had an auction for each item, and the each student wrote whether or not they would buy each item at the winning price.  The result was the folks with the lowest numbers were the lowest, and vice versa.  The simply usage of an SSN was enough to anchor the price!

Arbitrary coherence is when although the initial price was arbitrary, once those prices are established in our mind, they become the basis for decisions going forward—making them coherent. 

For example, I pay the same rent amount that I paid at one point for a studio apartment in Washington, DC.  Here, I have a three bedroom townhouse, deck/yard, and too much space.  I was anchored to the price, and saw this as a deal too good to pass up.  I just as easily could have been anchored to a lower cost of living environment, and augmented accordingly.  This is congruent with a study Uri Simonsohn’s, a professor at University of Pennsylvania’s Wharton Business School, class conducted that showed when people move to and from different cost of living cities they often remain at their previous spending state.  Folks coming from low to a high cost of living area will often live in a smaller house, etc.  Folks upgrading do just that—they upgrade.

Anchoring influences all kinds of purchases.  How has this affected you and any of your decisions?

Tim Smith