One of the researchers gives a good overview of the study’s findings in an article for Harvard Business School’s Working Knowledge that provides succinct negotiation tactics and reasons for why you should make the first offer. Topiccs include: when you should not make the first offer, how to counter first offers, how to construct a reasonable—yet aggressive—offer, how to protect yourself from the effects of anchoring, and more.

Some key points worth considering (in no particular order):

We might expect experts to be immune to the anchoring effect. Real estate agents, for example, should be able to resist the anchoring effects of a property’s list price because of their presumed skill at estimating property values. Testing this theory, [it is clear that] anchors affect the judgment of even those who think they are immune to such influence. But why?

Every item under negotiation (whether it’s a company or a car) has both positive and negative qualities—qualities that suggest a higher price and qualities that suggest a lower price. High anchors selectively direct our attention toward an item’s positive attributes; low anchors direct our attention to its flaws. […]

The probability of making a first offer is related to one’s confidence and sense of control at the bargaining table. Those who lack power, either due to a negotiation’s structure or a lack of available alternatives, are less inclined to make a first offer. Power and confidence result in better outcomes because they lead negotiators to make the first offer. In addition, the amount of the first offer affects the outcome, with more aggressive or extreme first offers leading to a better outcome for the person who made the offer. Initial offers better predict final settlement prices than subsequent concessionary behaviors do.

There is one situation in which making the first offer is not to your advantage: when the other side has much more information than you do about the item to be negotiated or about the relevant market or industry. […]

How extreme should your first offer be? My own research suggests that first offers should be quite aggressive but not absurdly so. Many negotiators fear that an aggressive first offer will scare or annoy the other side and perhaps even cause him to walk away in disgust. However, research shows that this fear is typically exaggerated. In fact, most negotiators make first offers that are not aggressive enough.

 

• Optimum Starting Prices for Negotiations and Auctions (and Why)
• Clarifying Questions Placate Detractors
• Negotiating Over ‘Sacred Values’

In an analysis of both the General Social Survey and the published literature, researchers for the Reason Foundation show that alcohol drinkers earn, on average, 10% more than abstainers (pdf). This is known as the drinkers’ bonus.

Recent studies indicate that drinking and individual earnings are positively correlated. Instead of earning less money than nondrinkers, drinkers earn more. One explanation is that drinking improves physical health, which in turn affects earnings (Hamilton and Hamilton, 1997). We contend that there is an economic explanation. […]

Drinkers typically tend to be more social than abstainers. As Cook (1991) explained, drinking is a social activity, and one reason people drink is to be sociable. In the medical literature, Skog (1980) showed that moderate drinkers have the strongest social networks. Furthermore, Leifman et al. (1995) documented a negative relationship between social integration and abstinence. Whether abstainers choose not to be as social or whether organizers of social occasions involving drinking exclude abstainers is unclear. Abstainers may prefer to interact with other abstainers or less social people. Alternately, abstainers might not be invited to social gatherings, work-related or otherwise, because drinkers consider abstainers dull.

Corcoran et al. (1980), Montgomery (1991), and Putnam (2000) each made convincing cases that social networks are important for finding jobs and earning promotions. Montgomery (1991) explained that companies prefer acquaintances of employees because employees screen potential candidates and thereby reduce the cost of search. Approximately half the workers surveyed in the Panel Study of Income Dynamics found their job through friends or relatives, and one-third reported help from acquaintances in obtaining their job (Corcoran et al., 1980). Therefore, a person with more contacts will have more labor market options (Burt, 1997). Granovetter (1995) suggested that a large quantity of weak ties or friends-of-friends may be most important to garnering the best job offers.

Thus, if social drinking enables greater social networks, it will also increase earnings. In terms of search theory: the more one drinks, the more people one knows, and the more people one knows, the lower the marginal costs of search.

The study is packed full of excellent references to published studies (as you can tell from the above excerpt), so I suggest reading the accessible (and very short!) report. It’s also worth noting footnotes four and five, describing how this is just like all investments in capital, in that an optimal level exists: “you must drink more than 21 drinks per week to earn as little as a non-drinker”.

via @phila_lawyer

• Unlikely Events Influenced by Financial Incentives
• Health and Alcohol Intake (Men, Women, Wine)
• The Truth About Markets

The skill of piecing together sense from fragmented and inaccurate information is a central attribute of human intelligence. Literal interpretation, and insensitivity to context, are not marks of rationality but mental disorders. […]

The [behavioural economics] experimenter’s trick is to construct an artificial situation in which normally sensible behaviour gives what he thinks is the wrong result. The “mistake” is detected in a meaningless problem designed solely to elicit the “mistake”. […]

Allais was less concerned to show that our behaviour was irrational than to argue that the premises of rationality itself were irrational. […]

Allais’ most famous experiment showed that we often treat very high probabilities very differently from certainties, although “rational” individuals would regard them as almost the same thing. But very high probabilities often are different from certainties: very high probabilities are usually derived from calculations whose relevance and validity are themselves uncertain. […]

Irrationality lies not in failing to conform to some preconceived notion of how we should behave, but in persisting with a course of action that does not work. Sometimes in modern economics and political life, there is a big difference.

The example Kay uses is a bit glib but does serve its purpose.That last paragraph, however, is the crux of it all. As you may have guessed, this is the Allais that designed the Allais paradox — an experiment in behavioural economics that shows the above wonderfully.

• Bonus Cultures and Ideal Banks, Schools, Hospitals
• The Truth About Markets
• Optimism as Incentive

The key to selling and building a brand during financial crises, therefore, is simple: manage fear. Understand how it works and how it affects purchasing behaviour. This advice on brand-building during a recession comes from Martin Lindstrom, ex-advertising agency executive, author of Buyology, and one of TIME’s 100 Most Influential People in the World, 2009.

First, there’s always good news in bad times. A standard approach in this situation is to address consumers’ problems. And people always have problems. The fact is we rarely know what we want, but we have no trouble pointing out our difficulties. For example, no one knew they wanted an airbag, but everyone agreed they wanted safer cars.

It’s therefore important to ask yourself what sort of problems are consumers facing during this economic recession? There are many. […] Convert problems into assets for your brand.

Second, add a practical dimension to an irrational decision. No matter how much money you may have in the bank, or how secure your employment may be, it’s now fashionable to save your money and buy everything at a discount. What can a brand owner do? Particularly in light of the fact that a discounted brand typically takes seven years to recover!

The answer is simple. Add a practical dimension to the equation. […]

Third, you have to systematically remove fear. Hyundai did it. And a stream of new banks are doing it. Both have succeeded in identifying why consumers are reluctant to spend. Once this is understood, then you can harness it and build a better product by addressing the fear and finding a way to eliminate it. Your sales may be down. But do you know why? People are certainly buying less, and explanations like, “Well, there’s a recession going on out there,” are not helpful. What’s important is to understand the fundamental role of fear, and then turn it around to strengthen your brand. Some of the world’s most enduring grocery brands were built on the back of the Great Depression. Each one turned the threat into an opportunity.

• In Defence of Branding
• Kodak and Brand Naming
• Resources for Community Building

With this theory brought to his attention through the “quite fascinating book” The Spirit Level, Nicolas Baumard displays the evidence to support the theory that economic inequality is bad for all inhabitants of a country before considering some possible explanations, and looking at what this means in terms of poverty and climate change.

It is common knowledge that in rich societies the poor have shorter lives and suffer more from almost every social problem. In [The Spirit Level], [the authors] demonstrate that more unequal societies are bad for almost everyone — the well-off as well as the poor […]. The remarkable data the book lays out and the measures it uses are like a ‘spirit level’ which we can hold up to compare the conditions of different societies. The differences revealed, even between rich market democracies, are striking. Almost every modern social and environmental problem — ill-health, lack of community life, violence, drugs, obesity, mental illness, long working hours, big prison populations — is more likely to occur in a less equal society.

Baseball fan? Baumard also points out that “the more equal the salaries in a base-ball team are, the better its performance”.

• Facebook’s ‘Like’ and Conspicuous Consumption
• Absolute and Relative Poverty
• India and the Definition of Middle Class

The report, produced by the president of the Center for Global Development, Nancy Birdsall, suggests that “middle class” is defined as everyone with an income above $10 a day, excluding those in the top 5% of earners in the country… meaning India has no middle class.

This is a combination both of the depth of India’s poverty and its inequality. China had no middle class in 1990, but by 2005, had a small urban middle class (3% of the population). South Africa (7%), Russia (30%) and Brazil (19%) all had sizable middle classes in 2005. […]

In socio-political terms, the middle class is traditionally that segment of society with a degree of economic security that allows it to uphold the rule of law, invest and desire stability. They do not, unlike those defined as rich, depend on inheritances or other non-productive sources of income. […]

OECD countries define their poverty lines as 50% of median income which works out […] to about $30 day. In the US the poverty line for a single individual in 2008 was $29 per day and for each individual in a four-person household was about $14 per day.

However, people in developing countries living on even $10 a day still have extremely low social indicators. Economist Lant Pritchett has shown that infant mortality of households in the richest quintile in Bolivia was 32 and Ghana 58 per 1,000. Fewer than 25% of people in the richest quintile in India complete 9 grades of school, Pritchett showed. “An upper limit of the 95th percentile, while on the high side, is just about sufficient to exclude the countrys richest,” Birdsall adds.

via The Browser

• Absolute and Relative Poverty
• Equal Societies Good for All
• Prosperity, Freedom, Fertility

That’s my attempt at a concise summary of the findings from a study coining the phrase ‘medium maximisation’.

This example taken from the paper (pdf) and presented by The New York Times may help:

Students were given a choice between two simple tasks. One would take six minutes, and the students were told that they would get a gallon of Haagen-Dazs vanilla ice cream as a reward. The other would require seven minutes of work, and the payment would be a gallon of Haagen-Dazs pistachio.

Not surprisingly, since the second option involved more work and a less popular flavor, only about a quarter of the students chose it.

But the researchers also repeated the experiment with a couple of tweaks. In the new version, the six-minute task led to a payoff of 60 points, and the seven-minute task brought 100 points.

The researchers then told the students that anyone who finished with between 50 and 99 points would be given a gallon of vanilla ice cream. Anyone with 100 points would get pistachio.

Practically, there was no difference between the two experiments. But the outcomes ended up being very different.

In the comments of a previous post of mine looking at the denomination effect, the idea that “the greater the level of abstraction, the more ready we are to spend” was mooted. So it seems to be the case here.

via @BFchirpy

• Psychology of Money
• The Deadweight Loss of Gift Vouchers
• Prevention of Attainment Increases Desire, Decreases Attractiveness

At one time, the offer and receipt of a gratuity was a statement of social and economic superiority on the part of the giver, its acceptance a statement of social and economic inferiority on the part of the recipient. To be salaried – to be trusted to do the job for which you had been contracted and paid – was a mark of status. Contractually agreed performance-related pay – commissions and piece work – was widespread in shops and factories, but has now largely been abandoned.

The common outcome was that employees came to care more about the quantity of the product than its quality. The system polarised the conflict between the interests of the organisation and of those who worked in it. […]

Teachers and doctors strongly resist the introduction of a bonus culture: not just because they resent measurement of performance and accountability for their activities […] but because they oppose importing the culture of assembly lines. They fear an environment in which they would be encouraged to focus on narrowly quantifiable objectives at the expense of the underlying needs of clients.

Even if many teachers and doctors are incompetent and lazy, many others are seriously committed to the organisations for which they work, the subjects and specialisations to which they are devoted, and to a broader sense of professional ethics: and it is only people like these who establish the kinds of schools and hospitals we want as parents or patients.

• The Truth About Markets
• Against Behavioural Economics and Irrationality
• The Societal Value of Various Jobs

When economists try to model behavior in the real world, they’re always dealing with imperfect information. “The data is always limited, and once you get hold of it there are tons of reasons to mistrust it,” Segerstrale says. In virtual worlds, on the other hand, “the data set is perfect. You know every data point with absolute certainty. In social networks you even know who the people are. You can slice and dice by gender, by age, by anything.”

Instead of dealing only with historical data, in virtual worlds “you have the power to experiment in real time,” Segerstrale says. What happens to demand if you add a 5 percent tax to a product? What if you apply a 5 percent tax to one half of a group and a 7 percent tax to the other half? “You can conduct any experiment you want,” he says. “You might discover that women over 35 have a higher tolerance to a tax than males aged 15 to 20—stuff that’s just not possible to discover in the real world.”

Of course, there’s a fairly obvious caveat:

One possible flaw in this economic model is that the kind of people who spend hours online taking care of imaginary pets may not be representative of the rest of the population. The data might be “perfect” and “complete,” but the world from which it’s gathered is anything but that.

• Financial and Public Incentives to Perform: What Works
• The Deadweight Loss of Gift Vouchers
• Optimism as Incentive

Research looking at our reactions to such proposals offers same suggestions for negotiating over sacred values.

A more successful tack for negotiating over sacred values, as it turns out, is to simply use the right words. Whether discussing nuclear disarmament or reluctance to sell one’s lucky mug at a garage sale, using specific rhetorical strategies can make trade-offs seem less taboo and can facilitate conflict resolution. […] One tactic is to describe tradeoffs in terms of “costs and benefits” and “analysis” rather than in terms of sacred values and money. This vague utilitarian language appears to mask the emotion-laden taboo nature of the exchange. Another strategy is to emphasize the dire, obligatory nature of the trade-off. For example, people are more willing to sell their body organs for medical transplants when told it is the only way to save lives because this framing posits the exchange as one sacred value for another. In an age where many of the most volatile conflicts stem from sacred causes, and politicians have questioned effectiveness of diplomacy, understanding how to best negotiate about these issues has never been more critical.

via Schneier on Security

• First Offers and Aggressive Offers: Optimal Negotiating Tactics
• Want Happiness? Buy Memories, Not Objects
• Official: Money Makes Us Happy, Happiness Makes Us Money