Saturday, March 08, 2008

The Psychology of Money: We think higher-priced items are better

Do you ever buy higher-priced items because you think their higher quality makes them a good value? Are you sure they're actually higher quality?

It isn't news that consumers interpret higher prices as a signal of quality; for decades, studies have been demonstrating that we expect more expensive products to be better. But two recent studies have taken that conclusion a step further-- not only do prices affect our expectations of quality, but we may actually experience identical products as being better if they're priced higher.

In a study released in January, researchers from CalTech and Stanford told subjects that they were drinking five different varieties of wine and informed them of the prices for each as they drank. But in reality, they only tasted three types, because two were offered twice: a $5 wine described as costing $5 and $45, and a $90 bottle presented as $90 and $10. (There was also a $35 wine with the accurate price given.) Not only did the subjects rate identical wines as tasting better when they were told they were pricier, but brain scans showed greater activity in a part of the brain known to be related to the experience of pleasure. In other words, the experiment may be evidence that we genuinely experience greater pleasure from an identical object when we think it costs more (although we can't say for sure because the brain is so complicated and the increased brain activity could theoretically mean something else.)

And just this week comes news of a study in which participants were given an inactive dummy pill which they were told would provide pain relief, before going through the second of two identical sets of electric shocks. 85% of the subjects who thought the pills cost $2.50 reported feeling significantly less pain the second time around, compared with only 61% of the subjects who thought the pills cost $0.10. The authors speculate that this may help account for the fact that brand-name drugs are sometimes found to be more effective than perfectly identical, but cheaper, generic equivalents.

There is, of course, some logic to believing in an association between higher price and higher quality; they do often go together. Last year, an analysis (PDF) of 241 products in 46 categories found a correlation between price and "objective quality"-- as measured by Consumer Reports ratings-- of .16 (to put that in context, a correlation of 0 is random and a correlation of 1 is a perfect relationship.) But in more than a third of categories, they found that the relationship between price and quality was actually negative (higher prices generally related to lower quality.) And the same analysis found that the correlation between the average consumer's "perceived quality" and the products' price was much stronger than the relationship between price and objective quality.

What I find a bit disturbing is that these findings suggest that the price of an item can affect the way we experience its value. We all say that instead of being cheap (trying to get the lowest price), we want to be frugal (trying to get the best value.) But at least being cheap is straight-forward and mathematical; figuring out the best value requires subjective judgments of quality, and these studies suggest that prices themselves can skew what we believe are our rational judgments of quality.

How can we try to correct for this? The best way I can think of is to do a little blind testing of our own. If there are products you pay extra for because you think the higher quality makes it worthwhile, then maybe it's worth brainstorming ways to test whether it's true quality or just perceived quality. For some products this would probably be easy (blind taste-tests of food and drink) and others would take some creativity (maybe getting an accomplice to take the labels off of cleaning products and marking them #1 and #2)... but for other items it would be near-impossible.

I suppose the other argument would be that there's no point in destroying illusions of higher quality when we're actually reaping the benefit of them. If you buy $45 wine occasionally as a special treat because you really enjoy it, and then you do a blind taste test against your everyday $5 wine and discover they both taste equally good, have you now lost the ability to get increased pleasure from the $45 wine? I don't know, but I'd guess not-- I'd guess you develop a greater appreciation for the cheaper option rather than less appreciation of the more expensive one. (Although the study with the pills is murkier-- would I rather pay more and get better pain relief, or would I want to be convinced that the more expensive option is only worth the low price of the generic and perhaps actually experience less effective pain relief as a result?)

What do you think of all this? Have you or those around you experienced a perception of higher quality related to higher price that you believe is actually illusory? And if you've learned a pricier choice was no better than a cheaper option, do you feel like you "lost out" on the benefit you thought the expensive item had? Do you try to keep a handle on the way prices affect your perception of quality, and if so, how?

The Psychology of Money is an ongoing series that highlights some insights we can gain about ourselves and our personal finance decisions from psychological research; click here for previous posts.

3 comments:

Finance Girl said...

That is so true! Marketers even set their prices high on purpose if they wish to be a "prestige brand."

It's a good idea to do blind tests on the products you buy. As they say with beer, what you're really drinking is the label, because it all tastes the same!

Funny about Money said...

:-) I call this the "get-what-you-pay-for" syndrome. And while it's true that often you DO get what you pay for, that's not always so.

I had a friend who was flat-out convinced that the more you pay for something, the better it must be. She spent phenomenal amounts of money on goods that really were no better than the same objects you could buy for more reasonable amounts at less tony establishments.

Case in point: one day while diddling away money at an upscale shopping center, we wandered into a staggeringly overpriced boutique that was having a moving sale. For well over a hundred dollars (!), she bought an 11-inch square lime-green plate, an eight-inch-square black plate, and three painted, carved stone fake fruits. Together, these made an attractive tabletop arrangement.

I picked up three fake fruits--one of them was chipped in an inconspicuous spot, so the salesman gave it to me free, and then I begged an extra discount on mark-down for the other two, nabbing all three for about $20.

But I looked at the plates, which had someone's name incised on the back, and thought...hmmm...i've seen these someplace before. Once free of my pal, I took a drive over to Cost Plus (World Market), where what should I find but YES! An 11-inch lime green plate and an 8-inch black plate, on sale for about three bucks apiece! No artiste's name on the back, though.

No one has ever picked up either of those plates off my coffee table to inspect the back of them.

This is the same friend who, she thought behind my back, dubbed me "Funny about Money." LOL!

rachel @ master your card said...

This is fascinating. I have heard people say 'pay less, pay twice'. However, recently I have noticed that clothes that I paid a lot of money for because I thought they would last, have not lasted as well as I expected so I am considering going for cheaper options in future.