Neuroscientists and economists from New York University conducted a study using brain imaging techniques and behavioral economic research to find out why people overbid at auctions. They found that the potential of losing a social competition while bidding may, in part, cause people to pay too much. In other words, people are afraid of what they’ll lose by not overbidding.
So how did researchers conclude that it was the social competition that urged the overbidding?
They used fMRI (functioning magnetic resonance imaging) to observe brain patterns as participants either played an auction game with a partner or a lottery game. The subjects could win money in either game, but winning the auction game depended on outbidding the partner. The fMRI showed the striatum, which is part of the brain’s reward circuitry, had the biggest response when winning or losing in the auction versus lottery game. Because of this “exaggerated loss response” only occurring during the auction game, the researchers think that the loss of “social competition inherent in an auction may lead people to bid ‘too high.’”
This is referred to as “The Winner’s Curse” – overpaying for an item due to overestimating the item’s actual market value. In auctions, the other bidders are what drive up the perceived value of an item.
This study helps marketers in the fact that it backs up the theory of telling people what they’ll lose by not buying your product or service instead of highlighting what people will gain from buying your product or service.
People know the marketplace enough to know that there are a limited number of items on a shelf. And there are generally more buyers than there are products, which puts the supply and demand favor into the company’s hands. So, people are more apt to buy something knowing that they’ll have it before their friends or family. They also buy items so that they aren’t the last ones or aren’t left out.
When we were kids, didn’t we have to get the newest toys before anyone else? It helped our social status at the time – the cool kids always had the newest toys. That same kind of thinking still applies to adults – we still want the newest, hottest item first. The potential loss of social status drives us.
This is also known as loss aversion. In marketing, instead of always focusing on positives (“look what you’ll gain with this product”), you need to throw in some negatives (“look what you’ll lose if you don’t buy this product”). Consumers think that it just makes sense for marketers to use positive talk to persuade them to buy – that’s selfish. But a marketer that warns people of impending doom for not buying a product isn’t seen as selfish – she’s seen as selfless. She’s trying to help people by helping them avoid some loss. And because loss is so much more important than gain, people respond more to marketing messages that focus on loss.
The key is to making this work is to focus on a real loss, not a fake loss. Don’t try to scare people into buying your product. That just makes you look like a bully. Be sure you can back up the potential for loss with studies or with some kind of proof (preferably photos showing a real loss) so that your company won’t be accused of scare tactics.
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