The framing effect in bonobos, chimpanzees and capuchin monkeys.

The framing effect in bonobos, chimpanzees and capuchin monkeys.

Noam Chimpsky had had a long day playing with the other chimpanzees. Noam was starting to feel hungry so headed towards the eating area of his enclosure. He had previously stored some fruit on a branch of a large tree. On the way to collect his fruit Noam noticed that one of the other chimpanzees had a new fruit that he had never seen before. Noam was determined to try some of the new fruit. He collected some of his fruit from his stash of fruit and went towards the other chimpanzee who was still carrying the new fruit. Noam wanted to trade some of his fruit for the new fruit. He stopped in front of the other chimpanzee, placed his fruit on the ground and tried to trade. The chimpanzee with the new fruit was happy to trade but wanted more fruit then Noam was willing to give. Noam decided that trading was a bad idea if he had give away too much fruit so he went off to his tree, with his fruit in hand and settled down to eat – afterall, Noam could try some of the new fruit another day.

Noam’s choice was to trade a small amount of food for the new fruit or to trade a lot of his fruit for the new fruit. In the end, Noam decided that the new fruit was not worth a lot of his fruit. Like humans Noam is susceptible to the framing effect. For Noam, his dilemma was to accept a negatively framed trade were he would lose out by giving away too much of his fruit or to broker a positively framed trade were he would give away a small amount of fruit for the new fruit.

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The framing effect states that the manner in which options are presented (or framed) can influence how we evaluate choices. We evaluate the options relative to a reference point (i.e., the amount of fruit the Noam had to start with). Changes that seem to worsen the status quo (i.e., Noam giving away a lot fruit for the new fruit) are treated differently to changes that improve the status quo (i.e., Noam gaining the new fruit after trading for a small amount of fruit). The way in which we (and Noam) perceive the choice is important because we are more willing to invest in a choice that is positively framed, rather than negatively framed. The framing effect has been documented extensively in human decision-making in areas such as financial trading (Seo et al., 2010) and medical decision-making (Bornstein et a., 2001). However, as we have seen in the case of Noam other animals, other than humans also exhibit the framing effect. According to molecular-clock estimates our genus split with other primates around 23 million years ago (Schneider et al., 2001), which means that we share a common ancestor with other primates. We share some of our decision-making processes (e.g., the framing effect) with the other animals.

One study the sought to investigate the framing effect in other primates used 40 bonobos (Pan paniscus) and chimpanzees (Pan trogladytes) (Krupenye et al., 2015). The apes were required to make choices between a positively framed option that provided a preferred food item (fruit) and a negatively framed option with a different food item (peanuts). The apes completed 5 sessions of 12 trials on separate days. Both the bonobos and the chimpanzees choose the positively framed option more than the negatively framed option demonstrating that they were susceptible to the framing effect. Furthermore, male apes were more susceptible then female apes to the framing effect.

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Capuchin monkeys (Cebus appella) have also shown the framing effect in several different studies (Chen et al., 2017; Lakshminarayanan et al., 2011). In their natural environments capuchins live in complex environments, they are socially sophisticated primates whose native environment requires careful management of their scarce resources. The study by Lakshminarayanan et al., (2011) found that capuchins are able to learn how to trade tokens for food. When trading tokens they are susceptible to framing effect for positively and negatively framed choices.

The results of the capuchin, bonobo and chimpanzee studies suggest that the mechanisms that drive the framing effect is evolutionarily ancient. Some of our ‘human’ economic biases are shared by Noam and the other primates throughout the primate order. These studies highlight the importance of comparative research in understanding the origins of cognitive biases and individual differences in human decision-making. To understand the human brain and decision-making we should complement of research by looking towards our distant relatives.

The sunk cost effect in customer loyalty schemes.

The sunk cost effect in customer loyalty schemes.

Gary was bored at work sat at his desk. He was wasting time before a meeting by browsing some of the popular shopping websites looking for a new book to read for his commute to work. Like many of us, Gary has several membership subscriptions for websites that he shops on a lot. The subscriptions that he buys for with a small annual cost guarantees Gary quick delivery, priority ordering and discounts on a large range of products. Since he was bored at work Gary thought that he’d take advantage of his subscription and order another book – afterall he pays for the service so why not make the most of it?

Almost all large companies have subscription membership schemes that offer their customers exclusive benefits. Mobile phone (cell phone), internet, utility (e.g., gas and electricity), insurance, and travel providers all offer their main services alongside additional schemes with small membership charges for exclusive offers. These schemes are everywhere. Subscription-based membership schemes are very profitable for most companies, and rely on customers opting for easy, lazy decision-making over well thought through decision-making. The historical cost of purchasing the subscription for a small fee is an important aspect of this easy decision-making.

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Traditional economic theories explain that when making decisions historical costs should be irrelevant, they should not factor into present decisions (Kramer, 2017). One of the most prominent cognitive biases were historical costs are an important influencer of decision-making is known at the sunk cost fallacy. Kelly (2004) summarized the sunk cost fallacy into two claims: i) individuals give weight to sunk costs in their decision-making (i.e., subscription costs), and ii) it is irrational for them to do so.

Two popular examples of subscription-based membership schemes that benefit from the sunk cost fallacy are the Bahn Card 50 and Amazon Prime. The Bahn Card 50 is the original customer loyalty scheme for Deutsche Bahn, the main German railway operator. The Bahn Card 50 was introduced in 1992, as of 2014 it had 5 million subscribers. The fee for the card is EUR 255 per year which gives the owner of the card a 50% discount on train fares. Like all of the other subscription-based membership schemes the owner of the Bahn Card 50 regards the subscription cost as a sunk cost (historical cost), in doing so they try to make the most of the scheme (Tacke & Firmer, 1992).

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Amazon’s subscription-based membership scheme is called Amazon Prime. Prime was introduced 2004. For a fee of $99 (as of November 2014) subscribers get faster delivery and priority to access to products on Amazon’s shopping website. Prime has become an important part of Amazon’s business model. After the introduction of Prime Amazon recorded a 150% increase in purchases by Prime members in the year immediately after joining the scheme. Prime is responsible for 20% of Amazon’ overall sales in the United States. For a company that makes billion in profits every year exploiting the sunk cost fallacy has proven to be very profitable.

The sunk cost fallacy is just one of many cognitive biases that influence decision-making. As we have seen above for people like Gary, and of course most of us, the sunk cost bias can affect the way in which we make decisions through subscription-based membership schemes. It is easier to think that since we have already paid a membership fee that gives us a discount we should take advantage of this and use it. If you sit back and think about the situation not exploiting the discount actually saves us more money than the discount would because we are not spending anything more. Big companies such as Amazon have learnt to use these cognitive biases, thereby making huge profits from our quick, easy and effortless decision-making.

The anchoring and adjustment heuristic in real estate transactions.

The anchoring and adjustment heuristic in real estate transactions.

Jack and Sally were looking forward to buying their first house. Like many of us they browsed real estate websites and searched through the real estate agent shop windows looking for that ideal first home. As Jack and Sally browsed the potential properties they kept in mind their budget. Jack made note of a few potential properties with the correct number of bedrooms, bathrooms, reception rooms and garden size whilst noting the seller’s asking price. Eventually after visiting a few properties for viewings they decided to put an offer in for one of the properties. Jack noticed the asking price saying that it was above their budget and for a moment began to lose hope. After discussing with Sally as to how much to offer for the house Sally reminded Jack that although the house was on offer for £500,000 they could in fact put in an offer below the asking price. Jack and Sally went on to offer £450,000 and after some consideration the seller agreed to the price. Jack and Sally won the property that they wanted to buy and in the process demonstrated one of the most prevalent cognitive biases in human decision-making, namely the anchoring effect.

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The anchoring effect (also called the anchoring and adjustment bias or anchoring and adjustment heuristic) is one of the cognitive biases that occurs most often when making a judgement about the quality, value or worth of an item. The effect works because when you are given a number (e.g., 1200 meters) that relates to a property of an item (the quality etc) with a question about that property you are likely to, whether knowingly or not, anchor your judgement by using the number as a reference point (i.e. the anchor). Imagine a boat tethered to a lowered anchor, the boat cannot move far from the anchor and remains within range of the length of the tether. We typically do not deviate a lot from the anchor. The anchoring effect has been observed to influence factors such as charitable giving, price valuations, fairness judgements, loyalty judgements, judgements of guilt, and prosocial motives among many other factors (Soule & Madrigal, 2015). The anchoring effect is just one of many cognitive biases that influences our judgements in a systematic and predictable fashion. It is simply easier to accept the anchor (e.g., the house seller’s asking price) and adjust closely to the anchor (e.g., £50,000 less rather than £150,000) than to make an entirely new judgement about something (e.g., the value of the house).

In the case of Jack and Sally there is a clear anchoring effect (albeit to no negative effect to the seller). Jack and Sally see the initial asking price (the anchor) and consider making offers that are close to this, they are anchored by the seller’s asking price. Of course, in the case of buying a house deviating from the asking price by too much (toward a lower price) will result in a rejected offer.

It is important to understand the anchoring effect because prices are by nature simple numeric information that can act as the anchor or reference point. Since the majority of the most agonising judgements that we must make in life revolve around pricing (e.g., buying that first house, holiday home, car or a big holiday) understanding the role of cognitive biases in decision-making is important. To avoid falling into the trap of the cognitive biases we should make ourselves aware of these biases. We are not the rational decision makers that we think we are.

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One large study investigating the anchoring effect in residential home sales recorded data from 14,000 separate transactions (Bucchioneri & Minson, 2013). The researchers noted that the literature on housing economics, negotiations and auctions converge on the notion that home prices are an objective function of the property’s neighbourhood and characteristics (e.g., number of rooms, size of the house and characteristics). However, as we have seen above the judgement and decision-making literature on the anchoring effect suggest that there is a positive relationship between the listing price (asking price) and the sale price. The analysis of the 14,000 transactions found that higher asking prices are associated with higher sales prices independent of the property’s features, which is consistent with the anchoring effect. For the average property in the study overpricing by 10 to 20% lead to an increase in sales price because buyers were anchored by this higher sales price. So, whether a property has 5 large bedrooms in a desirable area of the countryside or 2 small bedrooms in a noisy part of a city asking for higher price for the 2-bedroom property (compared to the 5-bedroom property) could result in a higher sales price than the 5-bedroom property despite the larger property being initially more desirable than the smaller.

In the domain of property rentals the same study by Bucchianeri and Minson found that by adopting the same strategy of overpricing the asking rental price by 10 to 20% there was an increase in rental value of $117 to $163.

The data from transactions on house sales and rental pricing suggest that although we tend to believe that it is the characteristics of a property that determines the value of the property this is not the case. Pricing strategies are the major determiner of the value of the property. So, whether you are buying you first starter home, buying your dream family home, renting your house or looking to rent a house being aware of the anchoring effect will save you or make you more money. If you are selling your house to take full advantage of anchoring set your asking price 10-20% higher than the valuation, after all, if your property does not sell you can simply reduce the price at a later point. If like Jack and Sally you are buying your first home, to take advantage of the anchoring effect you can start by being aware that the asking price is not absolute, you can put in a lower offer if this is reject simply increase the offer by a small amount.

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