Issue 13 of The Psychology of Pricing
So far in this course, we’ve learned a few of the ways consumers use signals in the marketplace to determine what something is worth. Context, competitors and effort are some of the things that matter, especially when the value is hard to determine.
The specific rules of thumb consumers use when they aren’t sure about what things are worth may seem surprising and a little irrational, but they also help navigate a marketplace with an almost endless amount of choices and novelty. But what about people whose job it is to accurately determine value. What rules of thumb do they use?
In a study of realtors, Margaret Neale and Gregory Northcraft invited the agents to an open house. The goal was to determine how much the house was worth. The researchers gave the realtors all the relevant information about the house. However, one thing differed: the suggested price. The realtors at the open house were shown four different listing prices: $119,900, $129,900, $139,900 and $149,900. The house itself was the same, and the realtors’ jobs were to inspect the house and all the information, then come up with an estimate for what they think the price should be.
The findings of this and similar studies show that, perhaps unsurprisingly, experts use the same signals as consumers when it’s hard to determine value. For the realtors in the study, a $30,000 increase in listing price resulted in an $16,000 increase in what they thought the price should be. (1) However, when Neale and Northcraft invited laypeople to the open house and asked them the same question, they did worse than the experts. For laypeople, a $30,000 increase in listing price resulted in a $31,000 increase in how much they thought it should be! This research shows that, while experts are better than laypeople at determining value, they both fall prey to the same biases.
Everyone uses heuristics (rules of thumb) and signals in the marketplace to determine value, even experts. Keep behavioral principles in mind even when you deal with customers you think are experts.
(1) Northcraft, G. B., & Neale, M. A. (1987). Experts, amateurs, and real estate: An anchoring-and-adjustment perspective on property pricing decisions. Organizational Behavior and Human Decision Processes, 39(1), 84–97.