Contrast Effect

WHY WE ARE IN LOVE WITH OBAMA ALL OVER AGAIN

Obama

“With every passing day I like Barack Obama even more,” remarked an ex-colleague a few days back. In fact, this seems to be the general feeling these days. The recent CNN/ORC poll put Obama’s approval ratings among Americans at 55 per cent. Obama’s rating in 2016 has been at 51 per cent. This has been the highest since his first year as President.

Obama is currently what Americans call a lame duck President. An individual can become the US President only twice. This essentially ensures that any President is typically lame duck during his last few months as President.

So what explains such high approval ratings for Obama, given that there is no way he is going to get a third term? What the economists call the contrast effect is at work. As Barry Schwartz writes in The Paradox of Choice—Why More is Less: “If a person comes right out of a sauna and jumps into a swimming pool, the water in the pool feels really cold, because of the contrast between the water temperature and the temperature in the sauna. Jumping into the same pool after having just come indoors on a sub-zero winter day will produce sensations of warmth.”

And it is this contrast effect which has been driving up the approval ratings of Barack Obama. The elections to elect the next American President are scheduled to happen on November 8, 2016. The two main candidates are Hillary Clinton and Donald Trump. Of course, when people compare Obama to Clinton and Trump, he comes out right on top. This contrast effect has essentially ensured that Obama’s approval ratings have gone up.

In fact, the contrast effect has even led some people to say that Michelle Obama might be the right candidate for President in the years to come. As Myra Gutin professor at Rider University and author of The President’s Partner: The First Lady in the Twentieth Century put it: “Michelle Obama is able to talk to people in a way in which Hillary Clinton can’t.”

While the American first lady has maintained that she has no political ambitions, there is already speculation being made that she might be elected to the American Senate in the years to come. And all this is happening because of the contrast effect that is at work.

In India, closer to home, the prime minister Narendra Modi suddenly starts looking so much better when we compare him to the Congress Party leader Rahul Gandhi.

In fact, the contrast effect is a standard tool used in the marketing of products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine priced at $429. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled.

The $275 bread making machine was expensive on its own. But when compared to another machine at $429, it suddenly started looking like a good deal and the sales went up.

In fact, this is a standard trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.

Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover Economist– “In Dalston, Sainsbury’s [a big retailer] own brand of fresh chilled juice was sitting next to the Tropicana at about half the price.”

The moral of the story is, whether it’s juice or the American President, the contrast effect can really drive up sales.

The column originally appeared in Bangaore Mirror on October 19,2016

Of film critics and their love for Bajrangi Bhaijaan

bajrangi bhaijaan
One of my favourite armchair theories is built around film critics and Salman Khan—the more the critics hate a Salman Khan movie, the more money the movie tends to make. It doesn’t work all the time, but it works often enough to at least be categorised as an armchair theory.

The superstar’s movies get regularly panned by film critics, and yet they end up making a lot of money. Now that doesn’t mean that the critics are wrong about what they think of Salman’s movies. They are actually quite trashy. An apt comparison are the movies that Amitabh Bachchan starred in the 1980s. Movies like Nastik, Mahaan, Pukar, Desh Premee, Mard, Coolie, Geraftaar, Jadugar and Toofan.

Most of these movies made a lot of money nevertheless they are completely unwatchable now, unless you are a die-hard fan to whom the quality of the movie doesn’t really matter. Bachchan’s bubble finally burst with Gangaa Jamunaa Saraswati, which I think is the trashiest film ever made.

Khan’s bubble is still going strong and it was rather surprising that critics liked his latest film Bajrangi Bhaijaan. And these are not the trade critics whose reviews depend on what kind of business the movie they are reviewing is likely to do. These are critics who are genuinely in love with cinema. And they seem to have liked Bajrangi Bhaijaan and the movie has received a spate of ratings of 3 out of five stars.

So what were these guys smoking? How come so many film critics had nice things to say about a Salman Khan movie? Why have things changed this time around? The answer might perhaps lie in what economists call the contrast effect. Comparison comes naturally to human beings especially when they are making a decision. In such a situation, a particular option can be made to be look better by comparing it with something which is similar, but at the same time a worse alternative. This is known as the ‘contrast effect’.

As Barry Schwartz writes in The Paradox of Choice—Why More is Less: “If a person comes right out of a sauna and jumps into a swimming pool, the water in the pool feels really cold, because of the contrast between the water temperature and the temperature in the sauna. Jumping into the same pool after having just come indoors on a sub-zero winter day will produce sensations of warmth.”

This is the contrast effect and it best explains why film critics have fallen in love with Salman’s latest movie. How is that? Look at the movies Salman has starred in the recent past: Jai Ho, Kick, Dabanng 2, Bodyguard etc. Each one of these movies was pretty trashy. In comparison, Bajrangi Bhaijaan is a slightly better movie with some sort of a storyline and very good performances by the child artist Harshali Malhotra(who the audience has fallen in love with) and as well as Nawazuddin Siddiqui.

Hence, this contrast effect between the earlier movies of Salman and Bajrangi Bhaijaan has led to good reviews. In fact, a similar contrast effect was at work when Ek Tha Tiger had released in 2012. The movie was better than some of Salman’s earlier releases like Veer, Ready, London Dreams etc. And the critics had similarly given it good ratings.

There is another learning here. Bajrangi Bhaijaan has been breaking box-office records. As I write this, the movie has already made close to Rs 200 crore on the Indian box-office. Over and above Salman’s fans who watch every movie of his, however trashy it might be, the non-fans have also been streaming into the theatres because of the good reviews that the movie has universally received.

And what this tells us is that if Salman stars in even half decent movies they are likely to earn much more money than the trash that he chooses to star in. Hope he is reading this.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on July 29, 2015

What Arun Jaitley can learn from marketers and real estate agents

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul


I need to confess at the very start that I should have written this column a few days back. But more important things happened and this idea had to take a back seat. Nevertheless, as they say, it’s better late than never.
So, let’s start this column with two examples—one borrowed and one personal. The idea behind both the examples is to illustrate two concepts from behavioural economics—contrast effect and anchoring.
In the book The Paradox of Choice: Why More is Less, Barry Schwartz discusses an example of a high-end catalog seller, who was selling an automatic bread maker for $279. As he writes “Sometime later, the catalog seller began to offer a large capacity, deluxe version for $429. They didn’t sell too many of these expensive bread makers, but sales of the less expensive one almost doubled! With the expensive bread maker serving as anchor, the $279 machine had become a bargain.”
Essentially, there are two things that are happening here. The buyer first gets “anchored” on to high price of the deluxe version of bread maker which is priced at $429. After this the contrast effect takes over. The bread maker priced at $279 seems cheaper than the deluxe version and people end up buying it.
As John Allen Paulos writes in A Mathematician Plays the Stock Market “Most of us suffer from a common psychological failing. We credit and easily become attached to any number we hear. This tendency is called “anchoring effect.””
And once an individual is anchored on to a number, he then tends to compare it with other numbers that are thrown at him. Marketers exploit this very well. As Schwartz points out “When we see outdoor gas grills on the market for $8,000, it seems quite reasonable to buy one for $1,200. When a wristwatch that is no more accurate than one you can buy for $50 sells for $20,000, it seems reasonable to buy one for $2,000. Even if companies sell almost none of their highest-priced models, they can reap enormous benefits from producing such models because they help induce people to buy cheaper ( but still extremely expensive) ones.”
This was the borrowed example. Now let me discuss the personal example. Sometime in May 2006, I was suddenly asked to leave the apartment that I lived in because the landlord had not been paying the society charges for a very long time. And thus started the search for another apartment to rent. Affordable apartments in Central Mumbai tend to be in buildings that are not in best shape.
Given this, real estate agents use a trick where they try and exploit the contrast effect. The first few apartments that they show are in a really bad shape. After having done this they show an apartment which is slightly better than the ones shown earlier, but the rent is significantly higher.
The attractiveness of the apartment shown later is increased significantly by showing a few “run down” apartments earlier.
The idea behind sharing these two examples was to explain the idea of anchoring and contrast effect. I hope both these concepts are clear by now. Now let me move on to real issue that I want to talk about in this column.
On November 18, the finance minister Arun Jaitley said in a speech “Inflation, especially food inflation, has moderated in the last few months and global fuel prices have also come down. Therefore, if RBI, which is a highly professional organisation, in its wisdom decides to bring down the cost of capital, it will give a good fillip to the Indian economy.”
In simple English, Jaitley, as he has often done in the past, was asking the Reserve Bank of India (RBI) to cut the repo rate. Repo rate is the interest rate at which RBI lends to banks. The idea is essentially that at lower interest rates, people will borrow and spend more, and companies will invest and expand. This will lead to faster economic growth. While this sounds good in theory, as I had argued a few days back, it isn’t as simple it is made out to be.
One argument offered by those asking the RBI to cut interest rates is that inflation as measured by the consumer price index has fallen to 5.52% in October 2014. It was at 6.46 % in September 2014 and 10.17% in October 2013.
Nevertheless, is inflation really low? Or are Jaitley and others like him who have been demanding an interest rate cut just becoming victims of anchoring and the contrast effect?
The inflation figure of greater than 10% which had been prevalent over the last few years is anchored into their minds. And in comparison to that an inflation of 5.52% does sound low. Hence, the contrast effect is at work here.
Further, it is worth remembering that this so called low inflation has been prevalent only for a few months. Chances are that food prices might start rising again. The government has forecast that the output of kharif crops will be much lower than last year and this might start pushing food prices upwards all over again. Also, recent data showsthat vegetable and cereal prices have started rising again because of the delayed monsoon.
Central banks of developed countries typically tend to have an inflation target of 2%. In the recent past they have been unable to meet even that number. Large parts of the world might now be heading towards deflationary scenario, where prices will fall.
In October, the consumer price inflation in China stood at 1.6%, well below the targeted 3.5%. Also, in January earlier this year the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework set up by RBI had recommended that the Indian central bank should set an inflation target of 4%, with a band of +/- 2 per cent around it .
The committee had said “transition path to the target zone should be graduated to bringing down inflation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent.”
Once, these factors are taken into account, the latest inflation number of 5.52% as measured by the consumer price index, isn’t really low, even though it seems to be low in comparison to the very high inflation that had prevailed earlier. But as explained this is more because of anchoring and the contrast effect at work.
Also, as I had written earlier, more than anything people still haven’t come around to the idea of low inflation, given that inflationary expectations(or the expectations that consumers have of what future inflation is likely to be) continue to remain on the high side.
As per the Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year.
If inflationary expectations are to come down, then low inflation needs to be prevail for some time. Just a few months of low inflation is not enough. As RBI governor Raghuram Rajan had said in a speech in February this year “ the best way for the central bank to generate growth in the long run is for it to bring down inflation…Put differently, in order to generate sustainable growth, we have to fight inflation first.”
Rajan is trying to do just that, and it’s best that Jaitley allows him to do that, instead of demanding a cut in interest rates every now and then.

The article appeared originally on www.equitymaster.com on Nov 21, 2014

Call of the mall: Tricks they use to make you spend more



Vivek Kaul
On a recent visit to a refurbished supermarket I was surprised to see a bakery right at its entrance. What it clearly told me that Indian retail was finally catching up with its global counterparts when it comes to marketing. Now you might like to believe that having a bakery as a part of a supermarket is a perfectly natural thing. But there is more to it than what meets the eye.
So why do most modern supermarkets have bakeries right at their entrances?  Martin Lindstrom has the answer in his book Buyology – How Everything We Believe About Why We Buy is Wrong. As he writes “Not only does the fragrance of just-baked bread signal freshness and evoke powerful feelings of comfort  and domesticity, but store managers know that when aroma of baking bread or doughnuts assails your nose you’ll get hungry – to the point where you just may discard your shopping list and start picking up food you hadn’t planned on buying. Install a bakery, and sales of bread, butter, and jam are mostly guaranteed to increase. In fact, the whiff of baking bread has proven a profitable exercise in increasing sales across most product lines.”
In fact Lindstrom even points out that some Northern European supermarkets don’t even bother with setting up bakeries they just pump artificial fresh-baked bread smell straight into the store aisles from their ceiling vents.  In some cases a florist shop or a cookie store comes into play.  “Smell and sound are substantially more potent than anyone had even dreamed of…All of our other senses, you think before you respond, but with scent, your brain responds before you think,” writes Lindstrom.
Music also has a role to play in this. Ever wondered why supermarkets generally tend to play soothing music? This is to slow down the consumer so that he takes time to look around the items in the supermarket.
And this is not the only trick that supermarkets malls and companies use to get you to buy more than what you may need and even things you may not need.
Another favoured trick is to offer something extra free rather than pass on an equivalent decrease in price to the consumer. Now this sounds a little complicated so let me explain this through an example that Akshay R Rao, a marketing professor atthe Carlson School of Management, University of Minnesota in the United States, discussed with me in a recent interview.
“Imagine that I am selling coffee beans, and I offer you 100 beans for Rs. 100 on a normal day. Then, one day, I offer you a 33% discount, so you receive 100 beans for Rs. 67. On another day, I offer you 50% extra (or free). You now get 150 beans for Rs. 100. But, I impose no limit on how many or how few coffee beans you can buy, on either day. So, on the day in which I offer 50% extra, you could quite easily have bought 100 beans for Rs. 67! Yet, most people prefer 50% more to a 33% lower price, even though the two options are economically equivalent,” said Rao. (You can read the complete interview here)
This inability of the consumers to distinguish between the options is exploited by businesses. Bookstores often resort to this trick. As Paul Ormerod writes in Positive Linking –How Networks Can Revolutionise the World “Marketers observed…that discounts offers such as ‘buy one, get one free’ or ‘three for the price of the two’ – a concept I am very keen on because this is how bookstores often package up their offers – tend to be more effective is boosting sales than the exact equivalent price reduction on a single purchase. The amount of money which is paid for the bundle of products is identical in each case, but more will usually be bought if they are packaged under an offer than if there is a simple equivalent reduction in the individual prices.”
Another trick used to great effect by retailers is contrast effect. It has been put to great use by retailers as well to increase the attractiveness of certain products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled. As an article on the website of the Harvard Law School points out “Apparently, the $275 model didn’t seem like a bargain until it was sitting next to the $429 model.” (You can read the complete article here)
This is a trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.
Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover Economist– “In Dalston, Sainsbury’s  (a big retailer) own brand of fresh chilled juice was sitting next to the Tropicana at about half the price., and the concentrated juice was almost six times cheaper than the Tropicana.”
You would be surprised to know that malls and supermarkets are even built in a way so as to encourage people to shop more. In a multi floor store, typically the women’s apparels are on the first or the second floor. This is because women are likely to go the extra distance to shop for something than men. Also, a lot of things that can be bought instinctively and do not require much thought are placed near the payment counter so that people can almost pick them up mindlessly while making the payment.
In fact the reason why most food courts are on the top floor of the mall is because the retailers want you to buy more and pick up things you hadn’t planned to. This is done by ensuring that in order to reach the food court you have to go through the length and the breadth of the mall and in the process you might pick up something along the way. The smarter individuals might just take the lift to the food court. But then once a person reaches a mall the tendency is to loiter around for a while.  This also explains why there are multiple escalators in a big retail store or a mall. This is done to ensure that once you are in the mall you go through a large part of it.
Supermarkets use the same logic and ensure that essential items like wheat, rice and vegetables are placed inwards in the store. This is to ensure you to go through the entire store and thus increase your chances of picking up something you hadn’t planned to. The next time you are at a big supermarket try buying an essential item like milk and see the sections that you pass by the time you have found the essential you are looking to buy. Chances are you might find chocolates and other junk food along the way.
Supermarket shelves are also strategically planned. The more expensive items are typically around the middle shelves to ensure that they are at the eye height of the consumer. The cheaper products are rather right at the top or at the bottom. This ensures that a consumer might just be lazy and buy the expensive product. There is also a psychological aspect at play. The supermarket by placing the expensive products in the middle is trying to project it as a quality product in comparison to the ones placed in the top or the bottom shelf.
So the next time you are at a supermarket or a mall be aware of these tricks and don’t get caught in the trap of buying things you did not plan to in the first place.
The article was originally published on www.firstpost.com on September 28,2012. http://www.firstpost.com/business/call-of-the-mall-tricks-they-use-to-make-you-spend-more-472689.html
Vivek Kaul is a writer. He can be reached at [email protected]

Lessons from Ek Tha Tiger even if you aren’t a Salman fan


Vivek Kaul

I haven’t seen a Salman Khan movie in a cinema hall in more than 17 years now. The last time was when I saw Hum Aapke Hain Koun for the twelfth and the last time, at the Sujata cinema in Ranchi, sometime in February 1995. The movie was running in its record twenty seventh week. And as many of you would agree Hum Aapke Hain Koun was more of a Madhuri Dixit movie than a Salman Khan one.
Those were days when movies ran for prolonged periods and the 3200 print release that Salman Khan’s most recent release Ek Tha Tiger had, were unheard of. Money was made over a period of time and not in the first three-four days of release.
Given that, if the people did not like the movie over the first three four days of its release the chances of the movie doing well were rather low. Unlike these days when the marketing blitzkrieg that accompanies a big release is so huge that most people are tempted to watch the movie over the first weekend of its release, and before they realize that they have ended up watching a lousy movie, the producer has made his money. What nobody really tells you is that how much money all these superhit movies make on the “fifth” day after their release?
This strategy also requires a large number of prints of the movie being released to ensure that everyone and anyone who wants to see the movie gets to watch it. Hence the days when house-full boards were put up in front of cinema-halls are long gone.
Getting back to where we started. Salman Khan has attained a superstar status in Hindi cinema over the last few years. His movies have constantly done a business of over Rs 100 crore. Movies like Wanted, Ready and Bodyguard which were remakes of hit movies from down south, were superhits in Hindi as well.
But the movies of Salman Khan have never found favour with serious film critics (leaving out the ones who run film trade journals and have other incentives at work ).
So I was rather surprised when Salman’s latest release Ek Tha Tiger got reasonably good reviews in most of the mainstream media. This got me interested and I decided to break my rule of not spending money on a Salman Khan movie and go check out the movie at the nearest multiplex.
Half way through Ek Tha Tiger I had a throbbing headache. It was similar to the one I had got when I was forced to watch Ready (or was it Bodyguard?) on television with a young cousin. The movie does have a few things going for it. The foreign locales in ETT (as diehard fans of Salman like to call it) are new. Indian cinema goers have never seen movies shot in Turkey, Cuba and Ireland, before this. Also Katrina Kaif has acted better than the dumb blonde she portrays well in most of her other movies. The supporting cast has acted well.
But on the whole the movie is a little better than the mindless crap offered by Salman’s earlier releases like Ready, Bodyguard, Wanted etc. So the question is why had so many film reviewers gone around giving it the kind of good reviews that they had?
They had become victims of what behavioural economists call the ‘contrast effect’. We all tend to compare things before making a decision. Given this, the attraction of an option can be increased significantly by comparing it to a similar, but worse alternative. This is known as the ‘contrast effect’.
Let’s understand this through an example. Real estate agents who help put out homes on rent, use the contrast effect very well. The way it has worked with me whenever I have tried to look for a rented accommodation is somewhat like this.
The agent first takes me around and shows me a couple of apartments which are not in the best of condition. While coming out of these places, seeing my displeasure, the agent typically says that the apartment I showed you wasn’t really great.
“So why did you show it to me?” I normally question him, after we are out of the apartment. In such cases I get stock replies like, “Oh this place came to me only today morning. I hadn’t checked it out before, I wouldn’t have shown it to you otherwise,” or “I am just trying to figure out what kind of place you really want.”
This is where part-one of the act ends. Then the agent shows a place which is slightly better than the few run down places he had shown to me a little earlier. But the difference is that the rent in this case is significantly higher.
This is the “contrast effect” at work. The attractiveness of the apartment shown later is increased significantly by showing a few “run down” apartments earlier. The critics who reviewed Ek Tha Tiger had fallen victims to the same “contrast effect”. They had found the earlier movies of Salman Khan so lousy that in comparison a slightly better Ek Tha Tiger was felt to be much better.
The contrast effect has been put to great use by retailers as well to increase the attractiveness of certain products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled. As an article on the website of the Harvard Law School points out “Apparently, the $275 model didn’t seem like a bargain until it was sitting next to the $429 model.” (you can read the complete article here)
This is a trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.
The contrast effect can also be put to use while making financial negotiations, like in the case of a job offer. In this case it makes sense to start with asking for more than you expect realistically. “The contrast effect suggests a strategic move: ask for more than you realistically expect, accept rejection, and then shade your offer downward. Your counterpart in the financial negotiations is likely to find a reasonable offer even more appealing after rejecting an offer that’s out of the question,” points the Havard Law School article points out.
Another area where contrast effect is used to great effect is while selling a fraudulent financial scheme which is basically a Ponzi scheme. In 1919, Charles Ponzi, an Italian immigrant to the United States of America (US), promised to double the money of investors who invested in his scheme in 90 days.
The news spread quickly. Money started pouring in as no other investments in the market at that point of time, promised such high returns, in such a short span of time. At its peak, the scheme had 40,000 investors who had invested around $ 15 million in the scheme. Meanwhile, Ponzi had started living an extravagant life blowing up the money investors brought in.
On Aug 10th, 1920, the scheme collapsed. The auditors, the newspapers and the banks declared that Ponzi was definitely bankrupt. It was revealed that money brought in by the new investors was used to pay off old investors. Thus an illusion of a successful investment scheme was created.
Charles Ponzi was not the last guy to run a fraudulent Ponzi scheme. Such Ponzi schemes have continued since then and keep cropping up all the time.
The contrast effect is at play when investors decide to invest in a Ponzi scheme. It becomes relevant in the context of a Ponzi Scheme when the prospective investor starts comparing the returns on the various schemes available in the market for investment at that point of time to the returns being promised by the Ponzi scheme. The high returns of the Ponzi Scheme stand out clearly and attract gullible investors.
So film reviewers are not the only “victims” of the contrast effect. It is at work in various facets of our “financial” lives as well. There was another big learning for me from the Ek Tha Tiger experiment. The next time I convince myself to watch a Salman Khan movie at a multiplex the least I could do is watch the morning show and not waste much money in the process.
The article originally appeared on www.firstpost.com on August 20,2012. http://www.firstpost.com/bollywood/lessons-from-ek-tha-tiger-even-if-you-arent-a-salman-fan-423669.html
(Vivek Kaul is a writer and can be reached at [email protected]. He is not a Shahrukh Khan fan)