The Most Expensive Thing in a Supermarket

As a sequel to the post: What’s the Price of a Kilogram of House? Or of a liter of Tooth Paste? … Prices and Units of Measure

I have found the most expensive product that is sold in a supermarket, or in any shop. No it is not gold, nor diamonds and not even HP printer ink... it is "saffraan"... 

And the price... ONLY 25000 Euros/ kilogram. ... yes twenty five thousands. 

Maybe it is time to rethink our career options :) Suddenly farming doesn't sound that bad...

Eggs, Baskets, Money and Children

I assume that in every culture there is a saying very close to “don’t put all the eggs in one basket”. This piece of popular wisdom is a very rudimentary but effective way of risk management. After all if the eggs are not all in one single basket, the risk is spread and in the case of a bad event, the damage is limited.

Now, let me give you a very simple problem: You have 6 (six) eggs and 3 (three) baskets in which you can carry the eggs. How do you allocate the eggs to the baskets? Namely how many eggs do you put in each basket??

Take 15 seconds to think….

Most likely you decided to put 2 (two) eggs in each of the 3 (three) baskets. After all it makes perfect sense since risk is equally divided and any second grade child knows that six divided by three is two (6/3=2).

But now take a deep breath and think WHY you decided to spread the eggs equally among baskets.

The fast thinking that lead to putting two eggs in each basket is called the “1/N” heuristic. And as its name says, when people have to divide (allocate) resources they usually give equal portions to each recipient (in our case baskets).

But does it make full sense? Think what do you know about the baskets that I told you about? Nothing. Just that there are three of them. But what if one is broken and for sure when you will lift it the eggs will fall out of it? Would you still put two eggs in each basket? Most likely the answer is NO. What about the size of the baskets? Do 2 eggs fit in each of them?

The thought exercise can continue, but I guess you realized what “the lesson” is here. Sometimes we make decisions just by applying a simple and naïve rule such as “1/N”. At the same time these decisions can have a big impact on our wellbeing. Let me give some examples…

When someone makes the decision to invest their savings… do they put half in stocks and half in bonds? Or do they put half in the bank and another half in real estate (not that I recommend these investments in any way)? How good is the huge majority of people at predicting the profit or losses of these investments.

When a family has children parents tend to treat them equally using the 1/N heuristic in allocating time and parental investment. And this seems fair enough, right? But if the children are more than 2 and they are not born at the same time, do they actually get equal parental investment over time? The answer is NO and someone wants to do the math, feel free.

In brief… make sure that you know at least something about the baskets in which you’re putting the eggs; and don’t forget about the time factor… what is equal at a point in time does not mean that it is equal over time.

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What’s the Price of a Kilogram of House? Or of a liter of Tooth Paste? … Prices and Units of Measure

Prospect theory teaches us that virtually any value is perceived as a gain or a loss depending on a reference point. Another teaching of prospect theory is that any value is “big” or “small” only relative to a reference point.

I’ve remembered this a few days ago when I was shopping at Albert Heijn (the main supermarket chain in The Netherlands for who does not know). I guess there’s some sort of regulation that makes retailers give the price of a product also per unit of measure. For most products this is usually very intuitive from the perspective of official and perceived units of measurement.  

For example if someone buys meat, that person would want to buy, let’s say, “two pieces of chicken”. At the same time the person is quite aware that chicken meat is measured in kilograms and that those two pieces of meat weight around 300-400 grams. Similarly if someone wants to buy orange juice, that person would buy “a bottle”, but at the same time he or she is aware that “one bottle” is about 1 liter. 

For most products we buy at a supermarket there is a very natural correspondence between the informal (or perceived) unit of measure (e.g. a box of milk) and the official unit of measurement – one liter. In this case, expressing prices in both “per selling unit” (box, bottle etc.) and in official units of measurement (liter or kilogram) makes perfect sense and I think it is really benefic for both customer and retailer.

At the same time, in supermarkets but not only, there are products for which the transition from informal to formal units of measurement is not that easy an intuitive. One day I wanted to make some mint tea (or maybe it was mojito??) and decided to buy some fresh mint (plant). I saw a very nice “bunch” (the informal unit of measurement) of mint on a shelf and stretched my arm to get it… that was when I saw the price per kilogram label and everything changed. The “bunch” of mint was less than 2 Euros which for a non-frequent purchase seems reasonable… but it weighted only 15 grams. When I saw the price per kilogram – namely 92.67 Euros I was blocked… How much can Mint cost??? (by the way, fresh basil costs the same, while the prices for other spices are really “spicy” – up to 200 Euros per kilogram).

Another example of severe discrepancy between informal and formal units of measurement is “mints” (mint drops). Although I try not to make impulse purchases, one day I yielded and on the way to the cash register I grabbed a “box” of Smint (mint flavored drops). I couldn’t help myself and I looked on the label for price per unit. The small box (informal unit of measurement) of Smint was so cute and was priced only at a bit below 2 Euros, but the price per kilogram was around 170 Euros… That was really a shock, so I got the bigger box which was priced at only 55 Euros per Kilogram.

Here’s some food for thought: How much does a liter of Printer Ink cost? In case you had a shock, get a glass of water.

Now, how much do we actually pay for the stuff we buy and how should we think about our purchases? I remember that a real estate agency (don’t you just love real estate people??) started to communicate prices of houses not by the square meter, but by the kilogram. What they claimed was that “a Kilogram of house” doesn’t cost much differently than a kilogram of regular groceries. For sure I think that a Kilogram of house is cheaper than a liter of printer ink :).

These are more extreme examples, but as I can remember a kilogram of detergent is priced very close to a kilogram of meat and the examples can continue. Should we see our shopping more in terms of official units of measurement or should we stick to the informal ones? What do you think? 

Latter edit: Read also "The Most Expensive Thing in a Supermarket"

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How to Increase Income by 2000% Through Voluntary Price Discrimination

Price discrimination means that some customers pay more than others for the same product at the same vendor. One such case is overcharging tourists. For example an ice-cream vendor in Prague can write on his “price list”: “zmrzlina = 1 Euro” and “Ice-cream = 2 Euros”.  As you may have guessed “zmrzlina” means ice cream in the very beautiful and melodious Czech language.

This type of price discrimination is not voluntary since any tourist would prefer to pay 1 euro instead of 2 Euros for an ice cream. Any sound-minded tourist would ask for a “zmrzlina” (and not for “ice cream”) if she would know what it means and more importantly be able to actually pronounce “zmrzlina”. (no offence to the native speakers of Czech or other Slavic languages, but for most people is really hard to pronounce zmrzlina).

Yesterday I’ve stumbled upon a very nice (and hilarious) example of voluntary price discrimination in which people (actually men) paid 20 times more on their own free will (if there is such thing). Take a look at the picture:

Source of the picture

In case you don’t understand what the sign says here is an approximate translation: “Tax for using men’s toilet: for small penis 10 cents for big penis 2 Euros” And for the people that don’t recognize the coins, the majority of them are 2 Euros coins.

This is not only extremely funny, but it is very smart. Let’s see how:

First, it is voluntary price discrimination. Not like in the “zmrzlina” – “ice cream” case, here the vendor (let’s call it like this) does not take advantage of people not knowing a rare language. The vendor leaves the choice of how much to pay to the customer himself.

Second, it taps into the completely irrational male ego of being a “hunk”, a “macho man” and any other names we could give for that. What I think would lead to an almost 100% rate of paying 2 Euros is the possibility by others to see. I guess that if nearby an attractive woman would be visible to the customer and that he would realize that she could see how much he pays, then people (men) might actually pay more than 2 Euros.  

Third, the sign uses vague terms (and I don’t mean penis). It says “small” and “big”, but what is that more accurately? If it would have said “for penises shorter than 15cm 10 cents and for longer than 15cm 2 euros” it would have been really stupid. By using “small” and “big” no one is actually cheating since there is no clear definition of what is big and what is small. And by cheating I mean also paying 2 Euros when one should pay only 10 cents ...

Fourth, the choice of the prices 10 cents and 2 Euros is superb. The 10 cents coin is the smallest (except for 1 cent and 2 cents but which are not used too often) in the euro coins set, being smaller in diameter than the 5 cents one. The 2 Euros coin is the largest in diameter and has a feeling of an “oversized” coin. The analogy between coin size and penis size is superb. Moreover, a 2 Euros coin is noticeable and when dropped on the plate it makes a noticeable sound.

Fifth, the coins in the plate most of them being 2 Euros suggest a social norm of paying for using the toilet and not cheat. Moreover it suggests competitiveness because most of the men had “big” penises.  

My only critique is that there are too many coins in the plate. This might create the opportunity of cheating (no one will know if I paid or not) and decreases or eliminates the communication of paying 2 Euros, namely the sound made by the 2 Euros coin on the ceramic plate.

Any other ideas or examples of Voluntary price discrimination??

Drink More …! Or Is Volume Actually 3D?

According to Geometry and Physics volume is three dimensional. The volume of a cube is equal to the length of one side at the third power. This is something that anyone that graduated from secondary school consciously knows. However, (human) perception of volume is not actually three dimensional. It is not even two dimensional. It is in fact one dimensional.

But which dimension is used to evaluate the volume of an object? Is it height, length or depth? The dimension used by people to evaluate volume is HEIGHT. The area (surface) of the base of an object is ignored and the volume is evaluated solely by the height of the object.

Imagine that there are two types of glasses available – tall and short – and all glasses have exactly the same volume. People who drink from tall glasses will drink less than people who drink from short ones. Now assume that people who drink from tall and respectively short glasses are equally thirsty. The people who drink from tall glasses will need to drink less to satisfy their thirst than people who drink from short ones. So it is not only the eye that gets fooled, but also the brain and body.

This is something that people working in bars have already learned from practice. Maybe you’ve already noticed (if you didn’t you will after reading this post) that in bars drinks are usually served in glasses that are tall and ridiculously narrow (Small area of the base). This is done to sell a small quantity at a bigger price.

Similarly companies that sell beverages have learned this and make the recipients with a very small base and as tall as possible. This “trick” is also used when companies decrease the volume in a packaging and want to keep the same (or a very close) price. Suddenly a bottle of 750ml looks very much like a 1000ml one, a 400ml bottle looks like a 500ml one and a can of 250ml looks bigger than a 330ml one.

The implications for decision design and behavior building are strait forward. For beverages that should be consumed with moderation (such as, of course, alcohol, particularly strong drinks) it is preferred to serve or consume them from tall glasses with a small base. On the other hand, for things that should be consumed in larger quantities (such as water), it is preferred to serve or consume them from short glasses with a large base.

Even if this is strait forward and bars and restaurants will soon use “test-tube like” glasses, the second implication is not used at all. If we think that particularly during hot summer days water is sold and served as in winter days it is a bit awkward. It is more the case to use these behavior building insights for large events that take place in open air at 30+ degrees in the burning sun or at beaches or for people that work in high temperature conditions such as construction workers. Even if by using short and “fat” recipients people will drink more (in actual volume) than they (perceive) need, this is not actually an issue since they will lose a lot of water due to the heat… 

Here's a nice example: One glass and one 300ml bottle of beer. Which one is bigger?

Now let's see when the beer was poured into the glass...

The entire content of the beer bottle (300 ml) was poured into the glass... The glass has a volume of a little above 330 ml. I can fit a 330 ml can of juice in it and still can drink it without spilling.

Enjoy your drink!

Later Edit: Here is a brief article on how the shape of a glass influences the speed of drinking beer (but not soft drinks). The key idea is that a curved glass does not make it easy to evaluate how much has been drank already, while a straight glass facilitates this evaluation. http://www.bbc.co.uk/news/health-19436926 Thank you Cornelia   

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Bad Apples or Bad Barrels?

When some undesired behavior such as cheating, corruption etc. is discovered and at least one person is considered to be guilty, there is a saying that it’s just a “bad apple” that influenced the behavior of the group. Moreover, many people think that simply removing (and punishing) the “bad apple” is enough to get the behavior back on the desired path (for example honesty or hard work).

But, is it really just a problem of “a few bad apples”? For sure a few “bad apples” can lead to a generalized feeling that the inappropriate behavior is the “social norm” or in other words acceptable behavior, thus others (the apples that were not bad, but became bad) follow the norm and subsequently behave inappropriately but somehow acceptable. We can call this social contagion…

There is absolutely no doubt that people follow other people’s behavior. This is even truer when the followed ones are figures of authority, close or similar to the followers. However, this does not answer two major questions: First, what made the “bad apples” bad in the first place? Second: how come that the “good apples” imitated so easily the “bad apple’s” behavior?

The most important question is what made the “bad apples” bad in the first place? Objectively speaking there are very few people in the world that are intrinsically “Bad”. These are usually people with serious psychiatrically problems and very seldom get to be integrated in social structures such as public authorities, schools, businesses etc.

So if most likely the “bad apples” are not originally intrinsically bad, what made them become “bad”? It could be other “bad apples”, but that’s not actually answering the question. My opinion is that “bad apples” are simply people that are more predisposed to “get infected” by “bad barrels”. My (educated) guess is that (desired or undesired) behavior is contagious and the “bad apples” are simply the people with the weakest “immune system”. Bad apples are simply the first to exhibit the inappropriate behavior.

The key issue is the “barrel”. But first what is a barrel? In a very few words it is a system in which people are engaged (a company, a school, a social club, a government authority etc.). This system can be designed better or worse in terms of what type of behavior it wants to promote. A “bad barrel” is a system that makes it easy to exhibit undesired behavior. A “good barrel” is a system that actively discourages inappropriate behavior while promoting the appropriate one. The “apples” inside will behave as the “barrel” guides them. 

If the barrel is “bad” then at the beginning a few “apples” will become “bad” by behaving inappropriately and the other “apples” will follow their example. If the barrel is a good one at the beginning a few “apples” will become “golden” and subsequently the other “apples” will follow their example.

The second question “how come that the “good apples” imitated so easily the “bad apple’s” behavior?” has two answers: First, it is social contagion, namely people do what people around them do. However, this is not the only force acting here. Second, the “barrel” itself influences how the “apples” behave. 

Remember that a “barrel” influences all the “apples” inside it. If by a very small chance in a “good barrel” an “apple” goes “bad” the other “apples” most likely will not follow its behavior and even counter attack by taking measures of punishment or even kicking the “bad apple” out of the “good barrel”.

Now there is a very extensive discussion about what a “good” or a “bad barrel” actually is. Likewise, there is a huge array of tools to design “barrels” and many times they are ignored. This is a topic for another post.

The conclusion is that when you see an undesired behavior expanding, don’t blame and punish just the “bad apples”, start Redesigning your “barrel”. Unless you do so, simply punishing will make the behavior come back. 

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Turn Off Your Engine…

Last week-end my beloved wife and I went to visit the North of The Netherlands (mainly the city of Groningen). On the way we encountered at least twice “open bridges” which in simple language means that the road was closed and traffic was stopped for several minutes (between 5 and 10) so that one ship could pass from one side of the bridge to the other. As you may know in The Netherlands there is a lot of water and there are many bridges and situations of traffic stopping are encountered quite often.

On the second stop waiting for the bridge to come back down I’ve noticed a road sign that said in pictures “turn off your engine while waiting for the bridge”… Suddenly it made a lot of sense to turn off the engine; after all one will wait for at least 5 minutes and will go nowhere, so there is no need to keep the engine on and waste fuel. However, I’ve noticed that sign only after I’ve passed it, namely only after the bridge was back down and we were on our way and of course after keeping the engine running for about 5 minutes without moving.

Here’s how decision design can lead to the desired behavior – turning off the engine while waiting for the bridge (or in parking areas where people keep the engines running even if they don’t move).

First, we can agree that turning the engine off while standing for more than 1 minute makes sense and public authorities have all the reasons to encourage such a behavior, particularly that it helps reduce pollution and keep air quality and noise standards.

Second, we can agree that this type of behavior is not actually the “social norm”.

Third, here’s how this behavior can be promoted (encouraged):

a. Make the sign that encourages drivers to turn off their engines BIGGER… People don’t look around for small sings that tell them what to do. They have in mind their destination and are annoyed because of the delay. Moreover, usually at opened bridges long lines of cars are formed and for the drivers in the back it is very hard to see a small sing.

b. Use loss aversion to encourage people to turn off the engine by saying that “If you turn off the engine you will stop losing money”.  Telling people how much money they lose is not a good idea because it depends on the car (a SUV burns more fuel than a small city car) and because the actual sum of money lost is not that big… the car probably burns less than 100 ml of fuel in 5 minutes standing which translates into about 14-18 euro cents.

c. Say that by a simple gesture (turning the ignition key) one can help protect / save the environment. In general people want to be environmentally friendly, but very often they don’t realize that they can “save the planet” just by making a very simple thing.

This is how with very small costs and with some intelligent measures air pollution can be decreased…

And as a bonus, in the city of Groningen I saw a very nice way of reducing annoyance (at least for some) when people have to wait for the bridge to come back down. In Groningen a pedestrian bridge has the bottom side painted with some art-like things. This way, the people that wait on one side of the bridge look at the painting and don’t think (at least not that much) about the fact that they have to wait several minutes. 

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