Monthly Archives: December 2011

The Irrationality of Price Anchoring

Roulette wheel

Roulette wheel, by Conor Ogle from London, UK

tl;dr summary – people will unconsciously anchor their judgment on a random number given to them, even if that number was fabricated in front of their own eyes.

If you’ve never heard the term price anchor, you’ve undoubtedly experienced it anytime you’ve had to negotiate a purchase, whether it was for a used car, an online auction, or even cheap souvenirs at a Chinatown bazaar.

Even if you manage to haggle the seller down to half the initial stated price, don’t be too quick to congratulate yourself; the merchant might have gotten what he/she wanted despite the discount, if the asking price was over the top.

And the kicker is: even if you knew the initial asking price was too high, you still might have been fooled into overpaying.

Daniel Kahneman, a psychologist who won the Nobel Prize for Economics, conducted a famous experiment in which college students were influenced by a random number that they knew to be random:

Amos and I once rigged a wheel of fortune. It was marked from 0 to 100, but we had it built so that it would stop only at 10 or 65. We recruited students of the University of Oregon as participants in our experiment. One of us would stand in front of a small group, spin the wheel, and ask them to write down the number on which the wheel stopped, which of course was either 10 or 65.

We then asked them two questions:

  • Is the percentage of African nations among UN members larger or smaller than the number you just wrote?
  • What is your best guess of the percentage of African nations in the UN?

The spin of a wheel of fortune – even one that is not rigged – cannot possibly yield useful information about anything, and the participants in our experiment should simply have ignored it. But they did not ignore it. The average estimates of those who saw 10 and 65 were 25% and 45%, respectively.

Kahneman, Daniel (2011-10-25). Thinking, Fast and Slow (p. 120). Macmillan.

In his recently published book (well worth purchasing, BTW), Thinking, Fast and Slow, Kahneman reflects that “we were not the first to observe the effects of anchors, but our experiment was the first demonstration of its absurdity: people’s judgments were influenced by an obviously uninformative number.”

This lesson is something to keep in mind as a content-creator, particularly in a digital age in which it’s very easy to distribute your work for free. The fact that so many developers sell their apps for free (or, “freemium”) creates a price anchor that makes even 99 cents seem too much for a high-quality game (see Tom Oatmeal’s excellent comic on this phenomenon).

Kahneman’s experiment suggests that some people might be fooled into paying higher than they might, but in today’s inter-connected world where price comparisons are instant, it’s harder to get away with irrationally high prices. The more pressing concern is that pricing too low can cause customers to assign an irrationally low value to your product.

Rather than get offended when people demand that your product be free, see it as a quirk in human psychology – people can’t help but be fooled by even random numbers – and adjust accordingly. You may just have to adjust your product or its pitch to emphasize its uniqueness before you have the freedom to set a palatable price anchor.

Louis C.K. thanks his fans for buying his $5 Beacon Theater Show

Louis C.K. just sent an email to everyone who bought his recent Beacon Theater performance through his experimental sale. Here it is, just incase you haven’t forked over the measly $5 for a great hour of entertainment, and a significant milestone in online distribution:

Louis C.K. via 11:44 AM (2 hours ago)

Hi. This is LOuie. It seriously is me. Im even going to leave the O stuipdly capatalized because who would pay an intern to do that?? Okay so you bought the thing with my fat face on it and you clicked the button that said i could email you. And i know that now you are thinking “aw shit. Why’d i let this guy into my life this way?”. Well dont worry. Because i really swear it that i wont bug you. I will not abuse this privalage of having your email. You wont hear from me again… Probably, unless i have something new to offer you. The reason i’m writing now, in the back of a car taking me to the Tonight Show set, is to let you know that as of now there is some new and cool stuff on my site, related to Live at the Beacon Theater. Theres a thing where you can download and print a dvd box cover and label so you can burn and make your own dvd of the video. And theres a new option where you can gift the special to as many people as you want (for 5 bucks each) and they’ll get a nice gifty email from you with a link to the video.

Also, some of you may know, i recently made a statement (that sounds so dumb. Like i’m the president or something) about how the video has been doing online. Im pasting it in here below in case you missed it.

Lastly I’m planning to put some more outtakes of the show on youtube and i think i will put one on the site that is only available for free to you folks on this list, who bought the thing and opted in. But dont hold me to that because really i just thought of it and typed it.

Okay well please have a happy rest of the year and more happy years after that. And please even have been happy in your past. What?

Thanks again for giving me 5 dollars. I bought 3 cokes with it.

Regards. Sincerely, Actually,


=========================== People of Earth (minus the ones who don’t give a shit about this): it’s been amazing to conduct this experiment with you. The experiment was: if I put out a brand new standup special at a drastically low price ($5) and make it as easy as possible to buy, download and enjoy, free of any restrictions, will everyone just go and steal it? Will they pay for it? And how much money can be made by an individual in this manner?

It’s been 4 days. A lot of people are asking me how it’s going. I’ve been hesitant to share the actual figures, because there’s power in exclusive ownership of information. What I didn’t expect when I started this was that people would not only take part in this experiment, they would be invested in it and it would be important to them. It’s been amazing to see people in large numbers advocating this idea. So I think it’s only fair that you get to know the results. Also, it’s just really cool and fun and I’m dying to tell everybody. I told my Mom, I told three friends, and that wasn’t nearly enough. So here it is.

First of all, this was a premium video production, shot with six cameras over two performances at the Beacon Theater, which is a high-priced elite Manhattan venue. I directed this video myself and the production of the video cost around $170,000. (This was largely paid for by the tickets bought by the audiences at both shows). The material in the video was developed over months on the road and has never been seen on my show (LOUIE) or on any other special. The risks were thus: every new generation of material I create is my income, it’s like a farmer’s annual crop. The time and effort on my part was far more than if I’d done it with a big company. If I’d done it with a big company, I would have a guarantee of a sizable fee, as opposed to this way, where I’m actually investing my own money.

The development of the website, which needed to be a very robust, reliable and carefully constructed website, was around $32,000. We worked for a number of weeks poring over the site to make sure every detail would give buyers a simple, optimal and humane experience for buying the video. I edited the video around the clock for the weeks between the show and the launch.

The show went on sale at noon on Saturday, December 10th. 12 hours later, we had over 50,000 purchases and had earned $250,000, breaking even on the cost of production and website. As of Today, we’ve sold over 110,000 copies for a total of over $500,000. Minus some money for PayPal charges etc, I have a profit around $200,000 (after taxes $75.58). This is less than I would have been paid by a large company to simply perform the show and let them sell it to you, but they would have charged you about $20 for the video. They would have given you an encrypted and regionally restricted video of limited value, and they would have owned your private information for their own use. They would have withheld international availability indefinitely. This way, you only paid $5, you can use the video any way you want, and you can watch it in Dublin, whatever the city is in Belgium, or Dubai. I got paid nice, and I still own the video (as do you). You never have to join anything, and you never have to hear from us again.

I really hope people keep buying it a lot, so I can have shitloads of money, but at this point I think we can safely say that the experiment really worked. If anybody stole it, it wasn’t many of you. Pretty much everybody bought it. And so now we all get to know that about people and stuff. I’m really glad I put this out here this way and I’ll certainly do it again. If the trend continues with sales on this video, my goal is that i can reach the point where when I sell anything, be it videos, CDs or tickets to my tours, I’ll do it here and I’ll continue to follow the model of keeping my price as far down as possible, not overmarketing to you, keeping as few people between you and me as possible in the transaction. (Of course i reserve the right to go back on all of this and sign a massive deal with a company that pays me fat coin and charges you straight up the ass.). (This is you: yes Louie. And we’ll all enjoy torrenting that content. You fat sweaty dolt).

I probably sound kind of crazy right now. It’s been a really fun and intense few days. This video was paid for by people who bought tickets, and then bought by people who wanted to see that same show. I got to do exactly the show I wanted, and exactly the show you wanted.

I also got an education. And everything i learned are things i was happy to learn. I learned that people are interested in what happens and shit (i didn’t go to college)

I learned that money can be a lot of things. It can be something that is hoarded, fought over, protected, stolen and withheld. Or it can be like an energy, fueled by the desire, will, creative interest, need to laugh, of large groups of people. And it can be shuffled and pushed around and pooled together to fuel a common interest, jokes about garbage, penises and parenthood.

I want to thank Blair Breard who produced this video and produces my series LOUIE, and I want to thank Caspar and Giles at Version Industries, who created the website.

I hope with all of my heart that I stay funny. Otherwise this all goes to hell. Please have a safe and happy holiday, and thank you again for all this crazy shit.

Sincerely, Louis C.K.

To me, there’s no comedian out there right now who is as inspiring as Louis. He shoots his own TV show and edits it on his own laptop. When a fan uploads a bootleg recording of him on a torrent site, he emails the fan personally to ask to take it down; not because he thinks it’s theft, but because he doesn’t want he sees as his rough draft work to be floating around. And then to try to one-up the torrenters, he experiments with distributing his own show.

I don’t begrudge people who have made and positioned their careers around the traditional media model (including newspapers and music, of course). I grew up with computers and it still took me by surprise. I don’t know what Louis’s background, but judging by the caliber of his comedy, he seems to have been too busy paying his dues in the comedy club circuit to have become a formally trained multi-media artist/videographer/techie/marketer. And yet even though he’s in his mid-40s and could likely coast on his career, he’s undertaken the kind of sacrifice and experimentation that you rarely see among artists and creators who have a much greater need to figure out the digital transition.

And he’s pretty funny. And, if it’s not already unfair that he’s got so much going for him, he’s incredibly eloquent and insightful even when doing serious interviews. Check out this interview with him on Fresh Air:

So I got a lot of emails from people saying, ‘Why can’t you just keep it clean? Because I am now shut off from your act by the horrible things you said, and that’s such a shame.’ And I would not usually respond to them because I don’t return emails, but in my head and to a few of them I said, ‘Well, you’re the one putting the limit. Not me. I’m saying a bunch of stuff, and you’re the one saying I should only say one facet of it.’ That’s a limit. But at the same time, when these people would write to me I’d kind of like them. Whenever I’ve encountered a Christian saying, ‘Why don’t you stop talking like that so I can hear you?’ I think, ‘Well you’re the one putting the earmuffs on, but I wish you could hear me because I like you.’

“There are things in the show I’m able to show [my daughters]. There’s an episode about Halloween that I showed them parts of. There’s a lot of things they’re able to see. They’re just fun stories. And my daughters, I think they really enjoy what I do. There are certainly some things they can’t see in Louie because … the language is grown-up and is for adults. They know that. They get it. I’ve played them some George Carlin clips that have cursing in them. I explain it to my kids that some people get uncomfortable or their feelings get hurt by certain words, so you want to respect that in regular life, but there is a reason for these words. They’re not just ‘bad.’ So I’m bringing them along. They’ll see this stuff when it’s appropriate to see it.”

I was one of the lucky people who got $10 tickets to his show in Brooklyn a few months back. So many people rushed to get tickets online that the ticketseller’s site crashed. Later in the day, Louis announced that he would stick around for a third show. What a class act.

To find insights: ask the cage cleaners, not the veterinarians

A chair with its front worn out.

A chair with its front worn out: image cropped from Sapolsky's book, Why Zebras Don't Get Ulcers, Third Edition

Sometimes the great insights about how things really work can come from the people who are thought to be too far down the ladder to possibly understand the big picture. Robert M. Sapolsky, an author and professor of neurology at Stanford, coined a proverb for this phenomenon:

“If you want to know if the elephant at the zoo has a stomachache, don’t ask the veterinarian, ask the cage cleaner.”

In other words, the low-level employees who fix what’s broken may often be in the best position to first notice when, why, and how something broke. Or, as Sapolsky puts it: “People who clean up messes become attuned to circumstances that change the amount of mess there is.”

This is not just a cute aphorism to remind you to tip your cleaning lady, but a lesson that has manifested itself at least a few times in scientific history. Sapolsky retells the confession of Dr. Meyer Friedman, who – with his partner R. H. Rosenman – is credited with discovering the link between Type-A personalities and heart disease. This revelation sparked off the field of research into how physical and mental health are intertwined.

According to Friedman, though, the breakthrough observation first came from his upholsterer:

It was the mid-1950s, Friedman and Rosenman had their successful cardiology practice, and they were having an unexpected problem. They were spending a fortune having to reupholster the chairs in their waiting rooms. This is not the sort of issue that would demand a cardiologist’s attention. Nonetheless, there seemed to be no end of chairs that had to be fixed. One day, a new upholsterer came in to see to the problem, took one look at the chairs, and discovered the Type A-cardiovascular disease link.

“What the hell is wrong with your patients? People don’t wear out chairs this way.” It was only the front-most few inches of the seat cushion and of the padded armrests that were torn to shreds, as if some very short beavers spent each night in the office craning their necks to savage the fronts of the chairs. The patients in the waiting rooms all habitually sat on the edges of their seats, fidgeting, clawing away at the armrests.

The rest should have been history: up-swelling of music as the upholsterer is seized by the arms and held in a penetrating gaze—“Good heavens, man, do you realize what you’ve just said?” Hurried conferences between the upholsterer and other cardiologists. Frenzied sleepless nights as teams of idealistic young upholsterers spread across the land, carrying the news of their discovery back to Upholstery/Cardiology Headquarters—“Nope, you don’t see that wear pattern in the waiting-room chairs of the urologists, or the neurologists, or the oncologists, or the podiatrists, just the cardiologists. There’s something different about people who wind up with heart disease”—and the field of Type-A therapy takes off.

Sapolsky, Robert M. Why Zebras Don’t Get Ulcers, Third Edition: The Acclaimed Guide to Stress, Stress-Related Diseases, and Coping (p. 408). Macmillan.

Unfortunately for the upholsterer, Dr. Friedman was too busy to listen to him. Only years later, when Friedman and Rosenman conducted studies of their patients did Friedman finally grasp the importance of what his upholsterer had discovered (although not the upholsterer’s name).

It’s hard to know how many other “Eureka, the janitor is right!” moments that science and technology are beholden to. Unlike the case of Sir Alexander Fleming, it’s one thing to say how, out of genius and keen observation, you made lemonade out of lemons (in Fleming’s case, penicillin after forgetting to put away his staph samples during summer vacation). It’s a little more deflating to admit that the maintenance worker beat you to the discovery.

Cleaning up the mess in online advertising

Eric Veach, who author Steven Levy describes as the “Google engineer who created the most successful ad system in history,” was no mere low-level grunt when he designed the implementation for AdWords (although apparently, this accomplishment isn’t enough to inspire someone to write a Wikipedia entry on him). He came to Google in 2000 after working on Pixar’s movie-rendering software and was assigned to the ad department, which Veach describes to Levy as “a backwater of the company.” (Levy, Steven (2011-04-12). In The Plex p. 83.)

At that time, Google ads were still sold by actual people and Google had declined an offer to merge with Overture Services, then the leader in auction-bid online advertising and later acquired by Yahoo. So Veach was part of the team to create Google’s own auction system. Veach had observed – and strongly disliked – how Overture’s system invited a kind of “cat-and-mouse game” between bidders: If the winning bidder bid $100, it would have to pay $100, even if the next bidder had only bid $50. The optimal strategy, of course, was to bid the lowest increment possible to edge out the other bidders, which led to the use of automated software to game the system.

This was not an ideal competitive situation. And, according to other reports, Veach and Salar Kamangar were dismayed at its impact on server load, since advertisers would frequently log in to make these minor bid modifications. To clean up this mess, Veach designed a different model. As Levy describes it:

The winner of the auction wouldn’t be charged for the amount of his victorious bid but instead would pay a penny more than the runner-up bid. (Example: If Joe bids 10 cents a click, Alice bids 6, and Sue bids 2, Joe wins the top slot and pays 7. Alice is in the next slot, paying 3.) It was incredibly liberating because it eliminated the fear of “winner’s remorse,” where the high bidder in an auction feels suckered by paying too much.

Levy, Steven (2011-04-12). In The Plex (p. 90). Simon & Schuster, Inc.. Kindle Edition.

Veach’s model was so counter-intuitive that he had to constantly defend it, even to Larry Page and Sergey Brin. He was vindicated when AdWords (which had several other technical innovations behind it) went on to help Google to its first profitable year in 2002.

As Levy writes, Veach’s method had already been vouched for, in high places:

Part of her [Sheryl Sandberg, former chief of staff to the secretary of the treasury in the Clinton administration] job at Google was explaining its innovative auction. She kept staring at the formula, wondering why it seemed so familiar. So she called her former boss, Treasury Secretary Larry Summers. “Larry, we have this problem,” she said. “I’m trying to explain how our auction works—it seems familiar to me.” She described it to him. “Oh yeah,” said Summers. “That’s a Vickery second-bid auction!” He explained that not only was this a technique used by the government to sell Federal Reserve bonds but the economist who had devised it had won a Nobel Prize.

Veach had reinvented it from scratch.

Levy, Steven (2011-04-12). In The Plex (p. 90). Simon & Schuster, Inc.

While Veach was not some low-level “cage cleaner,” his job did involve cleaning up a seedy part in the world of online advertising. Levy’s book may gloss over whatever mathematical proofs and logic Veach used in deciding on the second-bid auction method. But given that Veach’s strategy was initially doubted by Google’s founders, who themselves were not shy to contrarian thinking, Veach is a good example of how those who get their hands dirty may end up with a clearer “big picture” of how a system truly works.

The pre-mortem

The case of Friedman’s upholsterer is by definition, a rare occurrence. A more common – and tragically so – kind of cage-cleaner is the whistleblower.

Dr. Richard Feynman, the Nobel Prize-winning quantum physicist, might be best remembered by the general public for his role in the investigation of the Challenger disaster. During a televised press conference, Feynman used a cup of ice water to demonstrate how NASA’s managers apparently overlooked a simple tenet of physics that helped lead to the shuttle explosion:

But as Dr. Feynman tells in the second half of his book, What Do You Care What Other People Think? (which should be required reading for all scientists, engineers, and journalists), he may have gotten credit for the revelation of the shuttle’s O-ring, but he did not come up with it himself. One of his fellow commission members pointed out the possible defect to him. And that commission member had been told about it by an anonymous astronaut, who said that NASA had data demonstrating the O-ring’s problem but apparently hadn’t used it.

The truism that “Hindsight is 20/20″ is sometimes used to excuse the most boneheaded of screw-ups. It’s not that it took the Challenger to blow up before we could discover that the O-rings, like most other solids in existence, lose resilience when it’s cold out. High-level managers had the information available to them; they just chose to overlook the complaints and observations of low-level engineers. The good-natured Feynman was so alarmed by NASA’s “fantastic faith in the machinery” that he threatened to quit the investigation unless they included his criticisms in the final report.

But anyone who works in an organization of more than 2 people can attest to how fear of being ostracized can make it difficult to stop a project or plan in motion. During a Let’s-Go!-type of team meeting, there’s nothing more of a buzz-kill than someone in the back constantly complaining how the i’s aren’t all properly dotted.

In his book “Thinking, Fast and Slow,” psychologist Daniel Kahneman (a Nobel Prize winner himself) describes how psychologist Gary Klein devised a sort of “partial remedy” that I had never heard of before – but that I wish were more commonplace: the “premortem“:

The procedure is simple: when the organization has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision. The premise of the session is a short speech: “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”

The premortem has two main advantages: it overcomes the groupthink that affects many teams once a decision appears to have been made, and it unleashes the imagination of knowledgeable individuals in a much-needed direction. As a team converges on a decision—and especially when the leader tips her hand—public doubts about the wisdom of the planned move are gradually suppressed and eventually come to be treated as evidence of flawed loyalty to the team and its leaders. The suppression of doubt contributes to overconfidence in a group where only supporters of the decision have a voice. The main virtue of the premortem is that it legitimizes doubts. Furthermore, it encourages even supporters of the decision to search for possible threats that they had not considered earlier.

Kahneman, Daniel (2011-10-25). Thinking, Fast and Slow (pp. 264-266). Macmillan.

Just like the egotistical scientist who is loathe to give credit to a janitor for first making a groundbreaking observation, no project manager likes admitting that disaster was averted only through the foresight of an underling. The problem is such that in bureaucracies, managers may actively avoid receiving such momentum-killing feedback, and underlings who wish to keep their jobs may lean toward keeping quiet rather than being pegged as the negative nancy.

The pre-mortem, which (ideally) rewards contributors for thinking destructively, may be one of the few ways to recognize the cage-cleaners who deal with the muck. Or at least, the people who take the time to listen to them.

The Bastards Book: A Programming Tutorial for journalists, researchers, analysts, and anyone else who cares about data

Crossing Bleecker and Lafayette through a snowstorm

Back when I wrote my “Coding for Journalists 101″ guide about a year and a half ago, I barely realized how useful code could be as a journalistic tool. Since then, after the Dollars for Docs project at ProPublica and various other programming adventures, I’ve become a slightly better coder and even more adamant that programming is basically a necessity for anyone who cares about understanding and communicating about the world in a quantitative, meaningful way.

The world of data has exploded in the past few years without a corresponding increase in the people or tools to efficiently make sense of it. And so I’ve had a hankering to create a more cohesive, useful programming guide aimed at not just journalists, but for anyone in any field.

It’s called the Bastards Book of Ruby. It’s not really just about Ruby and “bastards” was a working title that I came up with but never got around to changing. But it seems to work for now.

As I was writing the introduction (“Programming is for Anyone“), I came across this Steve Jobs interview with Fresh Air. He says pretty much exactly what I’m thinking, but he said it 15 years ago — surprising given that the Web was in its infancy and Jobs’s fame was largely out of making computers brain-dead simple for people. He wasn’t much of a programmer, but he really was a genius at understanding the bigger picture of what he himself only dabbled in:

“In my perspective … science and computer science is a liberal art, it’s something everyone should know how to use, at least, and harness in their life. It’s not something that should be relegated to 5 percent of the population over in the corner. It’s something that everybody should be exposed to and everyone should have mastery of to some extent, and that’s how we viewed computation and these computation devices.”

Bastards Book of Ruby. It’s just a rough draft but already numbers at 75,000 words. See the table of contents.