Tag Archives: Anchoring

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The Psychology of Microsoft Points Part 2: Conversion Factors

Note: This is Part 2 of a two-part article on the psychological effects of using point-based currencies like Microsoft Points or Nintendo Points. Part 1, which you can read by executing precision clicking acts here, dealt with the psychology of waste. Below, I’ll look at how research on anchoring and consumer behavior using foreign currency suggests other psychological factors at play.

In a way, buying things with Microsoft or Nintendo points feels like spending money in a foreign currency. Tourists have long noticed this “Monopoly money” effect where the unfamiliar bills and coins with funny little holes in them don’t seem as real as the currency back home. This has to do with the fact that they don’t usually put the mental effort into doing the conversion every time they buy something.

“Though travelers know the exchange rate, it’s too much trouble to do the math for every little purchase,” says William Poundstone, who writes about the psychology of spending in the book Priceless: The Myth of Fair Value.1 “There is thus a zone of uncertainly about how much you’re ‘really’ spending, and this makes it a little harder to feel so bad about splurging. By setting 80 points to the dollar, Microsoft intentionally makes it hard to do the mental conversion! They could just as well have made it 100 points to a dollar, or 1 point = $1.”2

That Modern Warfare map pack is going to cost you three eggs, a goat, and five lengths of knotted string.

This mental error also happens because people often pay more attention to the face value of the foreign currency (i.e., the number of Microsoft Points in this case) when estimating how much they spend. This is called “anchoring” in psychological parlance, and while I’ve discussed it before in the context of Steam sales I’ll repeat a quick illustration from one classic study by Kahneman and Tversky.3 In the experiment, the researchers asked some subjects to estimate this product:

8x7x6x5x4x3x2x1

Then they asked another group to estimate this product:

1x2x3x4x5x6x7x8

Look closely at both of those. Those of you who understand how multiplication works know that these products are equal –40,320 to be exact. Yet the average estimate for the group that was given the problem starting with “8″ was 2,250 while those who saw a “1″ at the beginning of the problem had an average estimate of just 512. Why? Because one group anchored on a high number and the other anchored on a low number. It turns out that anchoring can really screw with our estimations of everything from crime statistics to hardware failure rates to how much things cost in a foreign currency.

But you guys! Wait! At an exchange rate of about 80 points per 1 dollar, that means that anchoring on the number of Microsoft Points should lead us to feel that we’re spending more than we really are. Because while 1,200 points may equal $15, the 1,200 number is more salient and through the magic of anchoring its magnitude systematically nudges our estimations of cost upwards. Indeed, studies comparing spending where the exchange rate for foreign currency is a multiple of the dollar (e.g., 1 US dollar = 4 Malaysian ringgits) to exchanges where the currency is worth a fraction of the dollar (e.g., 1 US dollar = 0.4 Bahraini dinar) have shown underspending in the former and overspending in the latter.4 And if spending MS Points is like spending Malaysian ringgits in that 1 dollar gets you 80 points, Microsoft could actually be letting us off easier than they could if they gave you just .8 points for a dollar and charged 12 points for a new game. But shhhh! Don’t tell them!

So there you have it. Maybe you’ll be a little better informed next time you plunk down money for MS Points, Playstation Network funds, or Nintendo Points. Hey, if you really do want something and think it’s a good price by all means do what you need to do to buy it! Just consider everything above first.

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The Psychology of Sony’s Playstation Move Announcement

Last week at the Electronic Entertainment Expo (or “E3” if you’re in a hurry) the two big stories for console makers were 3D ((God, don’t get me started…)) and new motion controllers. As I watched Sony’s press conference where they pitched the Playstation Move ((Think Wii Motion Plus with a glowy ball on the end)) something struck me about the way that they presented the pricing for the product.

Peter Dille, a Senior Vice President at Sony, started the announcement by throwing up a $49.99 price up on the screen behind him. The crowd, which had been worried that the Move and its competitor Kinect on the Xbox 360 would come out in the $150 range, seemed really pleased by this. There was even cheering! That mood tanked, though, when Dille plunged ahead and noted that, uh, actually that was just for ONE part of the thingie. To get the quasi-optional “navigation controller” you’d have to drop another $29.99. You could FEEL the wave of “WTF?” that swept through the theater. Then Dille went on to point out that you’d need to buy a Playstation Eye camera accessories to get the full effect, but that they were bundling it, some sports game, and the Move controller (but not the navigation controller) for $99.99. Here, you can see it in the first 30 seconds of this video:

Those adept at the maths quickly figured out that if you wanted to buy all four things –the Move, the navigation controller, the game, and the Eye camera– you’d be out about $130 give or take a penny or two even with the bundles.

I myself quickly started thinking through Sony’s announcement from a psychology angle, and my first thought was that they had screwed up. I wrote last week about how our preference for all-you-can-eat/play pricing is rooted in the fact that we experience diminishing sensitivity to increases in losses as they go up –we experience a bigger jump in aversion between a loss of $5 and a loss of $10 than we experience between losses of $1,005 and $1,010. The thing is, prospect theory ((Kahneman, D. & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 263-291.)) holds that we have similarly diminishing sensitivity to gains. Look at the graph!

Gain Curve

Figure 1: Diminishing Sensitivity to Gains. Uh, sorry about recycling an earlier graph, but I kind of ran out of time.

What this means is that we more enjoy getting lots of little things that add up more than we like getting one big lump of thing, even if their objective values are the same. Finding a series of four $5 bills is going to make us more giddy than finding one $20. Or, to put it another way, according to our mental accounting:

$5 + $5 +5 +$5 > $20

That’s just how our emotional brains work.

And it hasn’t gone unnoticed by advertisers and marketers, who have followed its lead to create what I call the famous “But wait! There’s more!” style of pitching your wares. Just look at any late night infomercial for an example. “Order now and you not only get the juicer for $99.99, but you get the a chopper attachment, a recipe book, five pounds of mangoes, and this adorable kitten –all for free!” True masters of this pitch will stretch out the “free” bonus gifts, parceling them out like a trail of candy so that you perceive them as a series of separate additions to the offer instead of one big bundle. This is a more effective sales technique than just saying “You get all this stuff for $99.99″ because it side steps that diminishing sensitivity to gains.

This is, in fact, the boat I thought Sony was missing with the way they did their Move price announcement. It seemed to me that it would have made more sense to come out at a price of $129.99 for the Move, but then systematically and not too quickly note that for that price in addition to the Move controller they’re also going to throw in a navigation controller –valued at $29.99! And a Playstation Eye accessory that currently goes for $39.99! Does that sound like a good deal? But wait! What if we threw in a free game valued at $59.99? OMFG! Dude! All for $129.99? That’s CRAZY! That’s like getting the Move controller FOR FREE!

Playstation Moves

But wait! Buy now and we'll throw in 1 + 1 + 1 + 1 Move controllers for the price of 4! What a deal!

I got to thinking, though, and eventually came to the conclusion that Sony probably beat me to: despite the power of what I describe above, the way they did it was probably smarter but because of a different psychological phenomenon: anchoring.

You may remember anchoring as our tendency to give undue weight to the first figure ((Or any perception, really)) we hear when determining the value of something, even if the number is completely unrelated. As I mentioned in my article about the efficacy of those Steam bundle sales, behavioral economist Dan Ariely and his colleagues did a nifty experiment ((Ariely, D., Loewenstein, G., & Prelec, D. (2003). Coherent arbitrariness: Stable demand curves without stable preference. Quarterly Journal of Economics, 118, 73-105.)) where they effected auction prices just by having bidders write the last two digits of their social security number on the top of their bid sheets. Those with high numbers (like 85) bid way more on items than those with low numbers (like 18). Anchoring!

Sony’s presenter capitalized on anchoring, quite deliberately I bet, when he threw up the $49.99 price for just the Move controller. There will be plenty of chances for Sony to advertise the value of bundles using diminishing sensitivity and the “But wait! There’s more!” tropes. Its job at E3 was to come out ahead of Microsoft in terms of how expensive people see its motion controller as when THAT was an important question on everyone’s mind. By throwing out the $49.99 number instead of the $129.99 number, Sony accomplished that. Sure, anybody can do the math, and judging by the audible groans from the audience plenty of people did. But that’s not the point. The point is that you ((Or if not you, Mr. hyper rational guy, then plenty of buyers and analysts)) are going to anchor on the lower number and think of the Move as relatively cheap.

And just imagine how much more effective that $49.99 anchor would have been if Microsoft really had announced the $149.99 price everyone expected for its motion controller, Kinect. I bet some folks at Sony were pretty annoyed that things didn’t break that way.

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Three Reasons Why We Buy Those Crazy Steam Bundles

Steam, the digital game distribution platform owned by Valve, often has these weird bundles for sale where they cram together, for example, every id Software or every Rockstar game or every game featuring squirrels into one package. One message board I frequent has a mega thread dedicated to gaming bargains, and doing a search for “Damn you, Steam” produces results like these:

“Damn… maybe I want Colonization. Have CIV IV & BTS on Disc. Should I just get Colonization @ $10.19 or just get them all and have on Steam for a wee bit more. Damn you Steam.”

“Damn you Steam! More games to buy that I’ll probably never get to play.”

“Damn you Steam. I had just successfully resisted the urge to buy games at both the holiday sale from GoGamer (Heroes of M&M 5 Complete and EU:Rome at $10 each were tempting, and Company of Heores Opposing Front for $5 is a steal) and the last round of Steam Deals (King Arthur especially was calling my name), and now you put Civ IV complete (I own none of the Civ IV stuff) out there for $14. My game backlog can’t take much more of this!!”

“This is madness. I am buying games for a theoretical PC that I will build someday (maybe) so I can play them. Damn you, Steam.”

“Got $170 sitting my cart. Staring at it trying to figure out how to cut it down some. Damn you, Steam.”

People are talking like Steam is forcing them to pounce on such deals when they happen even though they already have a huge backlog and may actually already own physical versions of half the games included.

What makes these plainly ridiculous bundles so attractive? I’m glad you asked, because I can think of at least three psychological principles at play here.

Scarcity

First, In marketing there’s a well worn principal called “the scarcity effect.” When something is scarce, it automatically becomes more desirable to us than it would be if it were available everywhere we looked. This “available in limited number” trick shows up everywhere from collectable trading cards to special “limited” editions of new game releases.1 Ever noticed a store front that had a “going out of business!” sign in the window for months on end? That’s the owners trying to capitalize on the scarcity effect. Buy now, sucker, or it’ll be gone!

Consider a simple 1975 experiment by psychologist Stephen Worchel to provide an illustration of this concept involving baked goods.2 Posing as a consumer products survey, the experimenters offered subjects a chocolate chip cookie from one of two jars. One of the jars had many cookies in it. The other had only a few. Of course, people reported the cookies from the mostly empty jars as more delicious, more desirable, and more expensive. This despite that the cookies in both jars WERE THE SAME COOKIES.

But Steam and similar download services like Direct to Drive sells digital games, right? They’re not cookies that are about to disappear, there is literally an UNLIMITED SUPPLY of the 1s and 0s that comprise these digitally distributed games. True, but the scarcity effect still applies, because it’s not so much the scarcity of the physical product that we react to, but the opportunity to buy it. Often these bundles are put up a limited time sales and people HATE losing opportunities to do things once they think they’re within reach.

Notice the WEEKEND ONLY! verbiage. Act now or you'll lose!

Obscuring True Value

The second psychological principle at play here is the fact that it’s hard for shoppers to look at a bundle like that and understand what its true value is. William Poundstone, author of Priceless: The Myth of Fair Value (And How to Take Advantage of It) calls this the “value meal” strategy when describing the psychology of restaurant menu design. How much cheaper is it to get the bundle? What about if I super size it? With curly fries? Oh forget it, just give me the #3.

Likewise, we look at a massive bundle of digitally distributed games and think about how much could I get those older games for elsewhere? Could I find them for sale used, and for how much? Could I rent or borrow any of them? For the games I already own, how much is it worth to me to have them available through Steam so that I don’t have to dig out my old boxes and CD keys? It’s a psychological truism that we have limited cognitive processing power at any one time, and when our brains are tied up considering these questions, we’ve got fewer cycles to devote to thinking about other stuff, like how much we want to actually PLAY the games and to avoid other irrational pitfalls.

Not that this keeps the folks who run Steam from telling us exactly how much the bundle is worth, though, which brings me to the third psychological factor in play: anchoring.

Anchoring

In the context of the psychology of prices, anchoring refers to presenting shoppers with a number in order to get them to “anchor” their perceptions of value on either a high or low absolute. The “low ball” offer is the classic example –open a negotiation over price with a really low number and you’ll set the stage so that what you’re actually willing to pay looks higher in comparison.

As a simple but elegant example, consider an experiment done by psychological wizards Amos Tversky and Daniel Kahneman.3 The researchers asked one group of subjects to estimate the product of these numbers:

8x7x6x5x4x3x2x1

And then they asked another group to estimate this product:

1x2x3x4x5x6x7x8.

Those of you with a grade school education may know that because of how multiplication works these products are equal.4 Yet the average estimate for the group that was given the problem starting with “8″ was 2,250 while those who saw a “1″ at the beginning of the problem had an average estimate of just 512. Why? Because one group anchored on a high number and the other anchored on a low number.

Similarly, behavioral economist Dan Ariely and his collegues conducted a study5 where he used anchoring in an auction simply by having bidders write down the last two digits of their social security number at the top of their bid sheets. Those whose numbers ended in the 80s and above actually were willing to pay up to 346% more for things like wine and chocolates than were those whose social security numbers ended in the 20s or below. CRAZY.

Not one, but two anchors here

How does this relate to those Steam bundles? Well, look closely at one of those promotions and you’ll see that the marketing gurus for the service readily list the retail value of the bundle if you paid full price for all games individually. That’s your anchor; seeing that number will cause many people to set their perceptions of the bundle’s value much higher than if they had seen the sale price alone. In addition, the difference between the “unbundled” and sale prices can trigger the contrast effect, which could be considered a fourth psychological principle at play.

So there you have it: you’re broke and have way too many games to play because you don’t want to lose opportunities to buy something, you’re befuddled by pricing, and your perceptions are anchored by arbitrary “normally sells for…” prices. Now, if you’ll excuse me, I have to go play Commander Keen, Doom, Final Doom, Doom II, Doom 3, Hexen, Hexen II, Heretic, Quake, Quake II, Quake III Arena, Wolfenstein 3D, Spear of Destiny, Return to Castle Wolfenstein, and more mission packs than I care to think about.