Priceless: The Myth of Fair Value (and How to Take Advantage of It) (35 page)

As you’d expect, customers were more likely to take up low-interest offers than high ones. By tracking the response to specific letters, the researchers were able to tell which factors had motivated customers to apply for loans. They found that gender mattered and race didn’t. The gender effect was strictly a guy thing. At a given interest rate, male customers were much more likely to take out a loan when the letter had a female photo. For female customers, the photo didn’t matter.

There is such a tradition of selling with sex, of bikini models draped over the tractor-trailer, that you may get the wrong idea about this experiment. The photos were simply black-and-white headshots of businesslike young women. The men who received letters with these generic female photos were more likely to apply for loans than those who received a letter with a male photo or none at all. There was no meaningful difference in response rates between the male-photo and no-photo letters. That indicates it was the female gender that mattered and not simply “putting a human face on an impersonal corporation.”

Here’s the really incredible thing. Mullainathan and Shafir’s group calculated that adding a female photo to letters addressed to men generated the same volume of additional loan applications as lowering the interest rate 4.5 percentage points. That’s a difference of 4.5 percentage points
a month
. It would be 54 percent more a year.

“Why?” is the toughest question in psychology. South Africans are exposed to Calvin Klein ads,
The Family Guy
, and hard-core porn. It is safe to assume that the customers weren’t making a rationalization along the lines of “I’ll get to meet this hot babe, and that’ll be worth paying a killer interest rate.” They couldn’t have been conscious of basing financial decisions on the photos at all.

Whether to toss junk mail or read it is normally a split-second decision. One possible explanation is that men simply like pictures of women, and this caused a few more to read the letter rather than trash it. Pictures of men don’t have the same effect on women, or so it would seem.

Another hypothesis (not mutually exclusive) is that the photos primed automatic patterns of gender behavior. Men believe women to be weak bargainers (or act as if they do—this may all be unconscious). Putting a woman’s face next to a given interest rate identifies it as a good deal. It’s almost as if the woman is a human reference price, saying “This rate is cheaper than what you’d get from a man.” This doesn’t exhaust the possible psychosexual explanations. In many a social context and experiment, men are competitive with other men, less so with women. Seeing the woman’s picture may relax the usual anxiety about getting the best possible interest rate.

A little photo = massive incremental profits. There’s got to be a catch. Shafir’s group combed the data for evidence that something,
anything
, was not as it appeared. They wondered, for instance, whether it was possible that the customers who “fell” for the pictures were poorer credit risks. Their reaction to the photos could be symptomatic of bad financial decision making generally. This could erase any hoped-for extra profit.

The researchers found no statistical evidence that the customers susceptible to the female photos differed in income level, education, or payback rates of the loans taken out. On the contrary, the photos were more effective at raising profit than simply raising the interest rate. A loan company that charges a higher rate will have fewer customers, for one thing, and those customers paying the higher rate are normally more likely to default. The photos allowed the company to attract more customers at high rates
without
increasing the default risk. Such is the power of gender.

Terence Burnham of Harvard’s Program for Evolutionary Dynamics conducted a much-discussed experiment on testosterone and bargaining. It was an ultimatum game in which the proposers each had $40 to split. They were required to choose between keeping $15 for themselves (leaving $25 for the responder) and keeping $35 ($5 for the responder). This forced the proposer either to be more generous than he probably wanted to be, or to be dangerously stingy, inviting a veto. The other novelty was that all the players were male, and they submitted saliva samples to be tested for testosterone content. This allowed Burnham to analyze the game behavior by testosterone level.

Of seven responders classed as high testosterone, five rejected the insultingly low $5 offer. Of nineteen other men, of average or low hormone level, only one rejected the $5 offer. A high-testosterone minority did 80 percent of the vetoing.

This is provocative because the veto is the emotional core of the ultimatum game. Everything else follows from it by mere logic. Proposers are “generous” to insure themselves against a veto. Gender differences in game play may reflect a common belief that women are less likely to veto. Similar behavior operates whenever people set a price. The vetoing responder exemplifies the bargainer who storms away from the table; the angry guy down the block who cancels his cable TV because they raised his rates; the tax protester who’d sooner bankrupt himself with attorney fees than pay his taxes. He’s the ultimate price-sensitive consumer, the one willing to reject a too-high price even at a ruinous cost to himself. He’s usually a man.

Burnham believes that responders veto to avoid appearing submissive. Concepts like money and logic and fairness came late in human evolution. The emotional behavior seen in the ultimatum game and in real-world price setting is presumably grounded in more basic and biological motives. In market societies, money is a medium of social dominance, a way for alpha males to impress potential mates by ritually emasculating rivals. It is no coincidence that a man who pays too high a price “gets screwed.”

The threat of a veto has a deterrent effect out of proportion to how often it’s exercised. Everyone is less inclined to make unfair offers and set unfair prices because they know they might not get away with it. In that sense, the high-testosterone minority helps create our world of prices.

Testosterone is responsible for male sexual development and for libido in both genders. It plays an important role in social dominance behaviors. The expression “testosterone poisoning” evinces the common belief that too much male hormone leads to impulsive, unprovoked aggression. Nearly as old as this idea is skepticism about it. Most of the experiments have been done on animals, and human research is occasionally embroiled in gender politics. Some worry that a testosterone-aggressiveness link would “excuse” men for inexcusable behavior. (Another view is that it would supply scientific proof that men are pigs.)

Under the best of circumstances, it is a challenge to isolate the effects of a hormone on human behavior. It is known that testosterone levels affect behavior
and
vice versa. After Brazilian soccer fans watched their team beat Italy for the 1994 World Cup, the Brazilians’ testosterone levels went up, one study claimed, while those of the Italians went down. Similar results have been reported for successful and unsuccessful London financial traders.

In animals and humans, there seems to be a stronger case linking testosterone to aggressive
responses
(to another’s provocation) than to initiating conflicts. A Swedish study in the 1980s failed to find evidence that high-testosterone youths were more likely to pick fights with other boys. It did find that they were more likely to talk back to teachers.

There have been ultimatum game experiments in which subjects were dosed with testosterone. “We essentially create alpha males in the study,” Claremont Graduate University neuroeconomist Paul Zak said of
one. In the ultimatum game, administered testosterone has about the same effect as the naturally occurring kind, rendering responders more likely to veto low offers.

Harvard psychologist Elena Kouri and colleagues devised a game in which each player sat isolated in front of a button. They were told that by pushing the button, they could reduce the amount of money paid to an unseen partner. The partner had a similar button and could retaliate, reducing the subject’s payoff. The game was thus like a nuclear standoff. Nobody should be the first to push the button.

Just to make things interesting, Kouri’s group told the subjects that their partner
had
pushed the button. The subjects who had been given testosterone were more inclined to retaliate massively with repeated button pushes. However, the testosterone group was not more likely than the placebo group to be the
first
to push the button.

Social dominance is a relative thing. The alpha male is the one who has more (females, money, power) than any other male around. Absolute numbers don’t matter so much. When two stags fight over a female, the goal is not a win-win solution. It is to do better than the other male does. Put that in the context of the ultimatum game: It doesn’t help to win a nickel when a rival gets 95 cents. Better that neither should get anything. This is the perspective that testosterone promotes.

It’s like the joke about a hunter in the north woods who puts on a pair of expensive Nikes. “Hey, why the running shoes?” his buddy asked.

“That’s in case we meet up with a grizzly bear,” the man said.

“You think you can run faster than a bear?”

“I don’t have to run faster than a bear,” the man explained. “I just have to run faster than you.”

So, okay, you’re negotiating a price and would like to know how aggressive you can be. It would be helpful to know the other guy’s testosterone level, right? You might be able to get a clue just by looking at his ring finger.

1.
Look for a wedding ring.
Studies show that married men have lower testosterone levels than single men.

2.
Check out how long the ring finger is relative to the index finger.
The ratio of the ring finger to the index finger is determined by prenatal
exposure to the androgens that determine gender. A number of recent studies have reported that men with long ring fingers (relative to the index) excel at competitive sports and deal making, and are more likely to reject low offers in the ultimatum game. A Cambridge University group headed by John Coates examined financial traders and found correlations between ring-to-index-finger ratio and trading success, and also between testosterone levels and trading success.

As a tentative rule, you may have the best luck driving a hard bargain with a man whose ring finger is short (compared to the index) and has a wedding ring on it.

Many hormones come in yin and yang pairs. For price decisions, testosterone appears to have a complement in oxytocin. Isolated by Vincent du Vigneaud in 1953, oxytocin is released naturally during childbirth and breast-feeding. It helps foster an immediate emotional bond between mother and child. Both genders produce oxytocin, and like testosterone, it is both cause and effect of behavior. Oxytocin levels rise during sex and other forms of intimacy. When administered in the lab, oxytocin increases trusting behavior in money decisions.

Paul Zak is credited with coining the term “neuroeconomics.” He has found that dosing ultimatum game players with oxytocin massively increases generosity. In a 2007 experiment conducted with Angela Stanton and Sheila Ahmadi, oxytocin boosted proposer offers 21 percent (from an average of $4.03 with a placebo to $4.86 with the oxytocin).

Oxytocin didn’t affect the responder’s minimum acceptable offers (as testosterone does). Zak’s group also tried a dictator game and found no significant effect for oxytocin. Their conclusion was that oxytocin affects
strategic
money decisions, those in which someone has to consider how his or her actions will make another person feel. When oxytocin levels are high, proposers are more empathic, and this promotes generosity.

Zak’s interest in price decisions dates to high school. He was working at a gas station outside Santa Barbara when a customer came in and said he’d found a string of pearls on the bathroom floor. Had anyone reported it lost? Soon the phone rang, and the caller said he’d
lost the pearls, bought as a gift for his wife. Zak told him they had it. Great, the guy said, promising a $200 reward. He’d be there in thirty minutes. Meanwhile, the finder announced he had an important job interview and had to leave. He agreed to split the reward with Zak, fifty-fifty. Zak agreed, handing over $100 from the cash register in exchange for the pearls. Needless to say, the guy who “lost” the pearls still hasn’t showed. The pearls were worth about $2. This “ultimatum game” is also known as the pigeon drop, and it’s one of the oldest cons in the book.

That tale is worth keeping in mind when evaluating some of the products inspired by Zak’s research. Internet retailers are now hawking oxytocin sprays to salespeople hoping to cut more and better deals. (Zak, of course, has nothing to do with the products.) One such spray, with the promising name Liquid Trust, runs $49.95 for a two-month supply (“100% Money Back Guarantee!”). The website includes the usual gamut of testimonials, one from a bartender who claims the spray made his tips increase fivefold. It offers this advice:

H
OW
S
ALESPEOPLE
U
SE
L
IQUID
T
RUST

Apply Liquid Trust every morning after showering.

Use it with your favorite cologne or perfume.

Throughout the day, a scentless mist of Oxytocin will be released from you.

Be yourself at sales meetings and discover how strongly prospects want to buy from you. Instead of feeling suspicious of you, they are now strangely attracted to you and your product.

Do you send thank you cards to prospects and clients? Spray some Liquid Trust on the envelope and see the magic happen. Even though they cannot smell it, Liquid Trust is there and working to increase trust in you.