Priceless: The Myth of Fair Value (and How to Take Advantage of It) (38 page)

It was probably a smart move. On September 15, 2008, Sotheby’s began an unprecedented sale of 223 new works by Damien Hirst (and
his studio). It was the day Lehman Brothers filed for bankruptcy, but 98 percent of the works sold. The top lot was a pickled “Golden Calf” with 18-karat gold leaf horns and hooves. It went for £10.3 million, setting an auction record for Hirst. The two-day sale total was £111.5 million, or about $200 million.

As for the skull, accountant Dunphy conceded that it’s still for sale: “By the way, the price of it now would be double.”

Thomas Mussweiler, Fritz Strack, and Tim Pfeiffer of the University of Würzburg did an experiment in which they took a ten-year-old car (an Opel Kadett E) to sixty German mechanics and car dealers. A researcher claimed that his girlfriend had dented the car and said he was debating whether it was worthwhile to have it fixed. He mentioned that he thought the car was worth 2,800 marks. “According to your opinion, is this value too high or too low?” He then asked the expert to estimate the current value of the car and the repair cost.

The experts’ average estimate of the car’s value was 2,520 DM. The researchers went through the same spiel with a different set of mechanics, this time saying they thought the car was worth 5,000 DM. These experts’ average estimate was 3,563 DM. That’s over 40 percent more.

So far, this was yet another demonstration of anchoring among real-world professionals. The mechanics had the actual car right in front of them. They were still swayed by a casually mentioned price.

The purpose of the Würzburg experiment was to test an antidote for anchoring. It’s a technique called “consider the opposite.” Hearing a high value for the car prompted the mechanics to think of reasons that might justify the high price. Those reasons remained in active memory and easily accessible, skewing estimates toward the anchor.

This suggests that anchoring could be diminished simply by asking the mechanics to think of reasons the anchor figure might be
wrong
(“consider the opposite”). To test this, the researchers canvassed two further groups of mechanics. After each researcher said he thought his car
was worth 5,000 DM (or 2,800 DM), he continued, “A friend of mine mentioned yesterday that he thought this value is too high (low). What would you say argues against this price?”

This prompted the mechanic to list reasons. Then, as before, the researcher asked the mechanic for his estimate of the car’s value.

The high-anchor mechanics now gave an average estimate of 3,130 DM (compared to 3,563 without the antidote question). The low-anchor people estimated an average of 2,783 DM (versus 2,520 before). In each case, “consider the opposite” reduced the power of the anchor and made the estimates less extreme. Furthermore, the mechanics who named more reasons were less affected by the anchor.

“Consider the opposite” is not a new idea. In 1650 Oliver Cromwell made a famous plea to the elders of the Church of Scotland: “I beseech ye in the bowels of Christ, think that ye may be mistaken!” Cromwell was trying to convince them that they were wrong to threaten the Commonwealth by supporting Charles II as king. His words fell on deaf ears, yet they echoed down the ages. Three centuries later, Judge Learned Hand said that Cromwell’s plea should be “written over the portals of every church, every school, and every courthouse, and, I may say, of every legislative body in the United States.”

Judge Hand’s point was, look before you leap to conclusions. By considering how your judgment may be wrong, you might come up with an overlooked reason and change your mind. Cromwell and Hand were speaking of the conscious side of decision making. Mussweiler’s group believes that “consider the opposite” affects the intuitive and automatic side of decision making too. It can diminish the power of anchors on prices. That can be useful in negotiations, in which it’s not always possible to name a number first.

There was an alternate explanation for these results. Half the time, the researchers went to the mechanics with an extremely optimistic view of the car’s value. The mechanics may not have wanted to burst a customer’s bubble (“the customer is always right”). The researcher had indicated that he would repair the dent only if the car was worth enough to justify it. Any mechanic wanting work would have had reason to give a high estimate. This would have created the same effect as anchoring,
making it impossible to tell how much was unconscious heuristic and how much was conscious salesmanship.

Likewise, the researcher’s mention of a skeptical friend could have been taken as a conversational hint that he would not be insulted by a dissenting view. By encouraging candor, this could have accounted for the pattern of results seen.

To address this, Mussweiler’s team did a second experiment. University of Würzburg students were asked to estimate the chances that German politicians would win the next election. They were asked, for instance, whether Chancellor Kohl’s chances were greater or less than 80 percent . . . and then asked what they thought his chances were. This showed the usual anchoring effect. When another group of students was asked to first name three reasons why Kohl would lose, the anchoring effect was greatly diminished, much as it had been with the car mechanics.

“Consider the opposite” is easy to apply. When a dealer, vendor, agent, or employer quotes you a figure, take a deep breath, and don’t make any commitments until you’ve had a chance to think of reasons why that price might be unreasonable. Make a game out of it: try to think of as many reasons as possible.

Many hard-headed businesspeople dismiss such exercises in positive (negative) thinking. But anchoring is real, and we can use all the help we can get.

Car dealers are not crazy about the new breed of buyer who shows up with a sheaf of printouts. Today, anyone with an Internet connection can unlock the mysteries of car dealer profits. A few dollars buys an up-to-the-moment accounting of the dealer cost for any model and its options, including destination charges and holdbacks and other unadvertised incentives. The organizations that sell the information typically advise buyers that 5 percent of the dealer’s true cost is a “fair” profit. Consequently, the buyer with printouts comes in knowing exactly what he intends to pay. He is the opposite of a “sucker” and demands a different strategy.

With such customers, bargaining is less about naming prices and more about challenging facts. Dealers have become masters at denial. They insist that
Consumer Reports
is wrong, the Internet is wrong, the buyer’s math is wrong. The information in the printouts is outdated (things change daily!); that particular model is on back order locally; whatever the printout says, other buyers are willing to pay the dealer’s price and more. The buyer who’s done his homework may not quite believe any of this, but it’s impossible to discount it completely. There comes a point at which the buyer is so sick of having his every fact and reasonable surmise contradicted that he gives in. He pays more than 5 percent over printout cost. Maybe he believes the dealer’s denials, and maybe he just doesn’t care anymore.

Car buyers are often advised to use the “buddy system.” They should bring along a spouse or friend for support and a second opinion. The buddy system is a social form of “consider the opposite.” Your friend provides
an opposite opinion to the dealer’s where needed. I suspect that the best-informed buyers are the least likely to take advantage of the buddy system, though. When one is armed with the facts, emotional support can seem like a luxury and not a necessity.

One of the classic experiments of social psychology bears on the buddy system. In 1951, Solomon Asch, then at Swarthmore College, published a study of group pressure on decisions. The subjects of his experiment, all undergraduate men, sat at a table with eight others whom they believed to be fellow subjects. These others were confederates playing along with Asch. The experimenter presented a “vision test” consisting of a series of eighteen simple diagrams. The figure below is a facsimile, reproduced at the actual size Asch used. Take a good look at the line on the far left. Now, which of the three lines on the right is the same length as the line on the left?

The group of confederates unanimously agreed the correct answer was . . . line number 1. The experiment was to test whether the lone subject would go along with the outrageously wrong crowd.

The confederates were told to give the correct answers to the first two diagrams, then to alternate wrong and right answers to the following diagrams. The true subject was seated so that he would be one of the last to answer. In the crucial cases, the subject spoke after hearing a number of the ringers give the same
wrong
answer.

Overall, subjects gave a wrong answer 32 percent of the time. Seventy-four percent gave the wrong answer at least once, and a sizable minority caved in to peer pressure three-quarters of the time. That’s amazing when you consider how simple the exercise was. In a control group, without confederates, virtually everyone gave the right answer all the time.

Asch tried to uncover what the subjects deferring to group opinion believed. He heard three categories of explanation. Some said the group’s bogus answers
did
look wrong, but they reasoned that the group was likely to be right.

Another set of subjects told Asch they
knew
they were right and the group was wrong; they just didn’t want to make waves.

Finally, there was a minority of the truly brainwashed. Even after Asch explained the experiment, they insisted they saw the lines the way the group reported them to be.

Participants who gave correct answers often confessed to uncertainty. “You’re
probably
right, but you may be wrong!” one told the group during the experiment. Later, after learning the truth and feeling “exultant and relieved,” this person told Asch, “I do not deny that at times I had the feeling: ‘The heck with it, I’ll go along with the rest.’ ”

Asch also did experiments involving sympathetic “buddies.” In one, there were two uncued subjects among Asch’s minions. This had a dramatic effect on the line-comparison task. The percentage of wrong answers dropped from 32 percent to 10.4 percent.

The uncued subject who answered first did not have the benefit of hearing the other give the correct answer. He sometimes caved in and went with the majority’s answer. That in turn made it harder for the second
subject to dissent. Asch therefore tried another setup in which the “buddy” who answered first was a confederate instructed to give the correct answer. This halved the error rate again. The percentage of errors on the part of the one real subject was cut in half, to 5.5 percent.

Asch tried to find out how big a group it takes to sway a lone subject. The answer was three.

When the subject was alone, practically everyone gave the right answer. The situation wasn’t much different when the subject went mano a mano against a single confederate giving a wrong answer (
The other guy’s crazy!
). When it was two against one, the error rate rose. Nearly the maximum effect occurred with three confederates. It didn’t change much with greater numbers. In this case, three is a crowd.

In a car dealership, the “truth” is negotiable. A buddy would be a good idea, and two buddies, achieving that seemingly magic threshold of three, couldn’t hurt.

Joan, an inquisitive six-year-old, pried open the “child-proof” cap of an allergy medicine. She swallowed enough pills to require several days in the hospital. Joan’s parents sued the drug company. At the trial, company documents submitted in evidence showed that the drug maker was aware that its child-proof caps, though “generally effective,” had a failure rate “much higher than any others in the industry.” Poor Joan remained “deeply traumatized by pills of any kind. When her parents try to get her to take even beneficial medications such as vitamins, aspirin, or cold remedies, she cries uncontrollably and says she is afraid.”

Care to guess how much Austin, Texas, jurors thought Joan’s case was worth? Try $22 million.

“Joan” is not a real child, but she figured in an intriguing experiment conducted by Daniel Kahneman, David Schkade, and Cass Sunstein. They wanted to see whether they could induce jurors to award crazy,
Liebeck v. McDonald’s
amounts for injuries that weren’t all that serious. They also wanted to test a simple, practical remedy, a way of bringing sanity and justice to our tort system.