Priceless: The Myth of Fair Value (and How to Take Advantage of It) (4 page)

Anchoring research has convinced some that jurors should not directly set damage awards. Daniel Kahneman believes that jurors are trying to express their outrage at the defendant’s actions in the incoherent language of dollars. It’s as if jurors are from Mars and they don’t know what the money is worth on this planet. Essentially, they’re rating the defendant’s culpability on a scale of 1 to 10. They look to the attorneys for cues on how much that’s worth in Earth dollars.

Morgan succeeded in convincing the
Liebeck v. McDonald’s
jurors to feel outrage. His case was two-pronged: that McDonald’s coffee was hotter than many of its competitors’ and that the fast-food chain had been insensitive to the scope of Liebeck’s injuries. In the penalty phase of the trial, Morgan asked the jurors to penalize McDonald’s in the amount of one or two days of the company’s worldwide coffee sales. He wasn’t counting on the jury to do the math. Morgan informed them that McDonald’s coffee sales came to about $1.35 million a day.

$   $   $   $   $   $   $   $   $   $   $   $

Huh? Well, the accident involved coffee. Morgan didn’t say much about why this specific demand was reasonable, maybe because it
wasn’t
especially reasonable. The more you think about the request, the less sense it makes. Why one or two days? Why worldwide sales, as opposed to just in the United States, or just in New Mexico, or just the coffee that McDonald’s sold to Stella Liebeck on the day in question (49 cents’ worth)?

Thinking about it
was the point. It is believed that an effective anchor must be in short-term memory at the moment a decision is made. On the face of it, that’s a serious limitation. Short-term memory, the kind we use to dial unfamiliar phone numbers, lasts only about twenty seconds. This is one reason many were skeptical that anchoring could apply outside the lab. A jury may deliberate for days. Jurors get bored and spend much of the time daydreaming. Who knows how many numbers they’re exposed to?

Field studies show that anchoring effects persist over realistic time frames. For an important matter like a jury award, there is not likely to be any single moment of decision. Each juror will consider the matter a number of times in the jury box, separated by intervals of inattention. They will reconsider the decision each time it is challenged by a new argument or confirmed by a new fact. A successful anchor needs to be memorable enough that it is recalled each time the decision is revisited.

Morgan’s non sequitur demand was, if nothing else, memorable. A day or two of McDonald’s coffee sales has the ring of poetic justice. It framed the deliberations, encouraging the jurors to construct their own two-part question:

(a) Is a day or two of coffee sales fair?

(b) How many days of coffee sales
is
fair?

Jurors are poor at scaling dollar amounts to the size of a crime or problem. In a 1992 survey by W. H. Desvousges and colleagues, people were told that birds were dying because they became mired in uncovered pools of oil at refineries. This (fictitious) problem could be solved by putting nets over the pools. The experiment asked participants to indicate how much they would be willing to pay for nets to save the birds. The researchers tried telling different groups that 2,000 birds were being killed a year—or 20,000 birds, or 200,000 birds. The answers didn’t depend on the number of birds! In all cases, the average dollar amount was around $80. Evidently, all that registered was
A lot of birds are being killed. We should do something about it
.

Morgan most definitely wanted the
Liebeck
jurors to scale their award to McDonald’s deep pockets. (Not many hot-coffee suits get filed against mom-and-pop diners.) This is another reason “days of coffee sales” was an effective currency. Once the jurors agreed on the right number of days, the scaling up was straightforward.

You may wonder why Morgan asked for “one or two days.” Why be indecisive? When people are given three prices (think of those for small, medium, and large coffee), and they have no strong preference, they tend to pick the “middle” price. Morgan could have anticipated he would be competing against a much lower figure from the defense or an unsympathetic juror. By introducing a “middle” option, Morgan gave the undecided an easy out, favorable to his client.

The
Liebeck
jury settled on $2.7 million in punitive damages, exactly two days’ worth of coffee sales by Morgan’s estimate. It’s hard to deny that Morgan’s demand was a compelling influence. Going by the research, Morgan’s only blunder may have been not asking for one or two
years
of coffee sales.

Dr. Eskildsen’s new patient was seven months heavy with child and a bit unsteady in her high heels. She had seen the ad in the newspaper offering a free eye exam and figured the price was right. Dr. Eskildsen’s office was across from the courthouse in downtown Eugene, Oregon. A businesslike sign announced the
OREGON RESEARCH INSTITUTE VISION RESEARCH CENTER
. Inside, the lobby was decorated much like any other small town optometrist’s office of the 1960s. Nothing was terribly expensive, everything was neat and new looking. There was Philippine mahogany paneling (a veneer) and seafoam-green carpeting. A couple of prints added a splash of color, one of them a travel poster of
WONDERFUL COPENHAGEN
—perhaps Dr. Eskildsen was Danish? A receptionist greeted the patient and directed her up three steps into the examination room.

Dr. Paul Eskildsen was a serious man of indeterminate age. With the cleft in his chin, he must have looked dashing before his hair receded. He was wearing glasses and gave the impression of being slightly ill—as if this line of work did not agree with him.

“Would you please come over here and toe this mark on the floor?” he asked mildly. “I am going to project some triangles on the wall, and I would like you to estimate the height of them.”

The patient complied and soon fell into the tedium of an eye checkup. A few minutes later, Dr. Eskildsen noticed that something had changed in the patient’s manner.

“How do you feel?” he inquired.

“Goofy,” the patient said. “I was kind of reeling around.”

Perhaps it’s because you’re pregnant, the doctor suggested, without much conviction.

“I never felt this way before,” the patient insisted. “It’s a feeling of not being able to control my standing.” The woman managed a few steps in her heels, bracing herself against the wall. “Are you hypnotizing me? Because that’s kind of sneaky.”

Dr. Eskildsen spoke not to his patient but to an intercom on the wall: “Okay, Jim, our subject has popped.”

Paul Hoffman had been an Air Force navigator in the South Pacific. Home from the war, he earned a Ph.D. in experimental psychology and became an assistant professor at the University of Oregon, where he found he didn’t much like teaching. Instead, Hoffman nursed a dream of establishing a think tank to study human decision making. He got his chance in 1960. Using a $60,000 National Science Foundation grant and a mortgage on his home, Hoffman bought a Unitarian church building at Eleventh and Ferry and rechristened it the Oregon Research Institute. Hoffman believed that some research was best done without the red tape of a university. A prime example of that came in 1965.

The designers of a New York office building presented Hoffman with a problem. The tenants on the building’s top floors would be paying the highest rents. The architect and engineers were concerned that these top floors would sway in Manhattan’s stiff winds. They didn’t want their prize tenants to feel vulnerable. To prevent that, they needed to know exactly how much horizontal swaying was noticeable. There did not seem to be any data on that.

As Hoffman recognized, they needed to do an experiment in psychophysics. A “just noticeable difference” is the smallest perceptible amount of a stimulus (in this case, the swaying of a room). There was an extensive psychophysical literature, going back to the nineteenth century, on how to measure just noticeable differences. It would have been easy enough to build some sort of moving cubicle. But Hoffman knew that had he told people the experiment’s purpose, they would have been expecting the cubicle to move. That expectation would cause them to detect motion—or
say
they detected it—much sooner. “So I began to
think,” Hoffman recalled. “How would you invite a person to come down to an office and sit in a room, for some purpose or other, and be able to start that room in motion?”

Hoffman rented a space in a Eugene office building at 800 Pearl Street and constructed a fake optometrist’s office. The examining room was on wheels. A soundproofed hydraulic mechanism, originally designed to move logs through a sawmill, caused the room to sway back and forth with increasing speed and displacement. The vibration-free movement could range from an inch to twelve feet. Paul Eskildsen, a psychologist who also happened to be a licensed optometrist, agreed to play that role. During the course of seventy-two bogus eye exams, they slowly cranked up the speed of the room’s swaying until the subjects “popped”—that is, said something to indicate they noticed. The data Eskildsen and Hoffman cared about was how much the room had to be swaying for “patients” to notice. Physical descriptions (pregnancy, high heels, etc.) were carefully recorded, as were their words:

I feel that I’m not stable. I feel like I’m on a boat. Back in Pennsylvania we had to take drunk driving tests by walking on a line . . .

It’s unpleasant. You probably have me on an X-ray or something. Maybe I’m on
Candid Camera . . .

I think you’re taking away my gravity or something . . .

Eskildsen was not immune. Every day he got seasick, went home to recuperate, and came back the next morning to get sick again.

The results showed that the threshold for noticeable swaying was about ten times smaller than the building’s engineers had been assuming. Though this was not what the clients wanted to hear, they were intrigued by Hoffman’s methods. Architect Minoru Yamasaki and engineer Leslie Robertson visited Oregon and insisted on taking a “ride” in the contraption. They were convinced.

A nondisclosure agreement prevented Hoffman from publishing or even talking about his findings. The building developer did not want anything that could be construed as adverse publicity. The Oregon tests did cause the engineers to adopt stiffer exterior columns. The building
opened to great fanfare in 1970 as the World Trade Center. Thirty-one years later, two hijacked jetliners crashed into the center’s twin towers. Hoffman’s recommendations are credited with keeping the towers standing long enough for more than 14,000 people to escape to safety.

Today the Oregon Research Institute (ORI) is revered as a cradle of behavioral decision theory. ORI was the longtime professional home of Sarah Lichtenstein and Paul Slovic, the first to demonstrate clearly just how clueless people are about prices and decisions based on them. For one productive year, ORI was also home to Amos Tversky and Daniel Kahneman, perhaps the most influential psychologists of their age.

Before getting to this illustrious group, it’s necessary to say something about their predecessors, and about the peculiar science of psychophysics.

Well into the twentieth century, psychologists had a case of physics envy. There was agonizing over whether psychology was a science at all. In a quest to make their field more quantitative, psychologists collected reams of numbers. What they were going to do with these numbers was not always clear. No one epitomized this epoch better than Stanley Smith Stevens—“S. S. Stevens” in his publications and “Smitty” to just about everyone.

Stevens (1906–1973) grew up among a gaggle of cousins in a polygamous Mormon household in Logan, Utah. Upon coming of age, he was packed off as a missionary to Belgium. There he labored under the handicap of not speaking the languages of the heathens he was attempting to convert. His subsequent academic career took him from the University of Utah to Stanford to Harvard. Stevens’s psychology Ph.D. was awarded, per Harvard custom of the time, by the Department of Philosophy.

War made Stevens’s reputation. At the behest of the U.S. Air Force, he founded the Psycho-Acoustic Laboratory in 1940. Its location, the basement of Harvard’s neogothic Memorial Hall, belied its somewhat incredible mission: to study the effects of extremely loud noises on pilots. Experimental subjects listened to deafening 115-decibel blasts for seven hours a day. Stevens found that the noise did not impair mental performance too much. The main problem was that nobody could hear what anyone else was saying. Stevens’s lab took on the task of designing intercoms for noisy cockpits.

Stevens retained a gruff military manner throughout his career. As one colleague recalled,

I was directed to Dr. Stevens’s office and found him in what I came later to recognize as a characteristic posture, legs extended, ankles crossed, feet on corner of desk. As he sat up and turned to greet me I saw a handsome man in his mid-thirties, tall and muscular, round-shouldered with long arms and large hands, a 4-4-4 on the somatotype scales; a long face with a high forehead and excellent features; wavy black hair and a natty moustache; an open, level gaze and an expression that in repose seemed sad, even disapproving, but could break into an irresistibly winning smile . . . In appearance he could have been a matinee idol, but the idea of S. S. Stevens as an actor would strike anyone who knew him as absurd. He could never have spoken lines from another’s script. He was his own man, if ever anyone was. I did not actually join the laboratory until eighteen months later; by then I had learned that my first impression was only one side of a very complex personality. Stevens was a primitive—he had in him the force of Nature.