Human Emotion in Pricing is Real, But Not Ideal
As mentioned previously in the CPO blog, the 2008 SIGNALS event’s keynote speaker was best-selling author and Duke University professor Dan Ariely. Of course, as the economy and election aftermath take center stage, it would make sense to see the behavioral economist’s commentary all over the media:
Business Week: “Homeowners cling to false optimism about own home”
Scientific American: “Who has a better sense of humor – Liberals or conservatives?”
The New York Times: “Eyes Off the Price”
But whether we’re talking about the housing slump, politics or the gas pump, his observations show us that the human and emotional sides to pricing are very real. In the BusinessWeek article regarding real estate pricing, Ariely says, “To a homeowner, a low, but realistic, listing price is ‘like someone calling your kids ugly.’” And in relation to that weekly fill-up, he slyly notes, “Perhaps it would be better if gas station attendants filled the tank for us, as they used to, so we did not stand at the pump watching the rising price of our gasoline.”
As he highlights the emotions surrounding our sense of pricing and what we feel that things should cost, I am reminded of what this means on a larger scale: Manufacturers dealing in millions of widgets, barrels of oil, or bushels of wheat aren’t immune to the pitfalls of what is essentially irrational human behavior. But if they are to compete in today’s economy, they have to make the effort to stay above the fray.
Price optimization science – integrating as much historical, economic, and market-based data as possible – is essential to achieving this. The key word here is science: Every price should be as informed as possible and framed in the most current and relevant context available. And while there is always going to be an emotional component to the prices that humans negotiate with other humans, the goal should be – especially for complex and many-tiered industries – decreasing the weight that those emotional factors play.
Experts like Ariely throw very valid questions into the mix, and the marketplace of ideas is the better for their contributions. But how can we mitigate the irrationality in our own pricing behavior? Information is key in that battle. With everything available to us at the push of a button, it’s almost foolish to not use as much data as possible to make decisions – be it to guide our decision making, or to prove or justify a hunch or gut feeling. Information can help us better rationalize the choices we make, and it’s key to helping us make pricing decisions that make sense, both today and tomorrow.
