advertising

“But wait, there’s more!”: The clever tricks of commercials

PNRJ cognitive science, heuristics and biases, market failure , , , , , , , , , , , , , , , ,

JDN 2457565

I’m sure you’ve all seen commercials like this dozens of times:

A person is shown (usually in black-and-white) trying to use an ordinary consumer product, and failing miserably. Often their failure can only be attributed to the most abject incompetence, but the narrator will explain otherwise: “Old product is so hard to use. Who can handle [basic household activity] and [simple instructions]?”

“Struggle no more!” he says (it’s almost always a masculine narrator), and the video turns to full color as the same person is shown using the new consumer product effortlessly. “With innovative high-tech new product, you can do [basic household activity] with ease in no time!”

“Best of all, new product, a $400 value, can be yours for just five easy payments of $19.95. That’s five easy payments of $19.95!”

And then, here it comes: “But wait. There’s more! Order within the next 15 minutes and you will get two new products, for the same low price. That’s $800 in value for just five easy payments of $19.95! And best of all, your satisfaction is guaranteed! If you don’t like new product, return it within 30 days for your money back!” (A much quieter, faster voice says: “Just pay shipping and handling.”)

Call 555-1234. That’s 555-1234.

“CALL NOW!”

Did you ever stop and think about why so many commercials follow this same precise format?

In short, because it works. Indeed, it works a good deal better than simply presenting the product’s actual upsides and downsides and reporting a sensible market price—even if that sensible market price is lower than the “five easy payments of $19.95”.

We owe this style of marketing to one Ron Popeil; Ron Popeil was a prolific inventor, but none of his inventions have had so much impact as the market methods he used to sell them.

Let’s go through step by step. Why is the person using the old product so incompetent? Surely they could sell their product without implying that we don’t know how to do basic household activities like boiling pasta and cutting vegetables?

Well, first of all, many of these products do nothing but automate such simple household activities (like the famous Veg-O-Matic which cuts vegetables and “It slices! It dices!”), so if they couldn’t at least suggest that this is a lot of work they’re saving us, we’d have no reason to want their product.

But there’s another reason as well: Watching someone else fumble with basic household appliances is funny, as any fan of the 1950s classic I Love Lucy would attest (in fact, it may not be a coincidence that the one fumbling with the vegetables is often a woman who looks a lot like Lucy), and meta-analysis of humor in advertising has shown that it draws attention and triggers positive feelings.

Why use black-and-white for the first part? The switch to color enhances the feeling of contrast, and the color video is more appealing. You wouldn’t consciously say “Wow, that slicer changed the tomatoes from an ugly grey to a vibrant red!” but your subconscious mind is still registering that association.

Then they will hit you with appealing but meaningless buzzwords. For technology it will be things like “innovative”, “ground-breaking”, “high-tech” and “state-of-the-art”, while for foods and nutritional supplements it will be things like “all-natural”, “organic”, “no chemicals”, and “just like homemade”. It will generally be either so vague as to be unverifiable (what constitutes “innovative”?), utterly tautological (all carbon-based substances are “organic” and this term is not regulated), or transparently false but nonetheless not specific enough to get them in trouble (“just like homemade” literally can’t be true if you’re buying it from a TV ad). These give you positive associations without forcing the company to commit to making a claim they could actually be sued for breaking. It’s the same principle as the Applause Lights that politicians bring to every speech: “Three cheers for moms!” “A delicious slice of homemade apple pie!” “God Bless America!”

Occasionally you’ll also hear buzzwords that do have some meaning, but often not nearly as strong as people imagine: “Patent pending” means that they applied for the patent and it wasn’t summarily rejected—but not that they’ll end up getting it approved. “Certified organic” means that the USDA signed off on the farming standards, which is better than nothing but leaves a lot of wiggle room for animal abuse and irresponsible environmental practices.

And then we get to the price. They’ll quote some ludicrous figure for its “value”, which may be a price that no one has ever actually paid for a product of this kind, then draw a line through it and replace it with the actual price, which will be far lower.

Indeed, not just lower: The actual price is almost always $19.99 or $19.95. If the product is too expensive to make for them to sell it at $19.95, they will sell it at several payments of $19.95, and emphasize that these are “easy” payments, as though the difficulty of writing the check were a major factor in people’s purchasing decisions. (That actually is a legitimate concern for micropayments, but not for buying kitchen appliances!) They’ll repeat the price because repetition improves memory and also makes statements more persuasive.

This is what we call psychological pricing, and it’s one of those enormous market distortions that once you realize it’s there, you see it everywhere and start to wonder how our whole market system hasn’t collapsed on itself from the sheer weight of our overwhelming irrationality. The price of a product sold on TV will almost always be just slightly less than $20.

In general, most prices will take the form of $X.95 or $X.99; Costco even has a code system they use in the least significant digit. Continuous substances like gasoline can even be sold at fractional pennies, and so they’ll usually be at $X.X99, being not even one penny less. It really does seem to work; despite being an eminently trivial difference from the round number, and typically rounded up from what it actually should have been, it just feels like less to see $19.95 rather than $20.00.

Moreover, I have less data to support this particular hypothesis, but I think that $20 in particular is a very specific number, because $19.95 pops up so very, very often. I think most Americans have what we might call a “Jackson heuristic”, which is as follows: If something costs less than a Jackson (a $20 bill, though hopefully they’ll put Harriet Tubman on soon, so “Tubman heuristic”), you’re allowed to buy it on impulse without thinking too hard about whether it’s worth it. But if it costs more than a Jackson, you need to stop and think about it, weigh the alternatives before you come to a decision. Since these TV ads are almost always aiming for the thoughtless impulse buy, they try to scrape in just under the Jackson heuristic.

Of course, inflation will change the precise figure over time; in the 1980s it was probably a Hamilton heuristic, in the 1970s a Lincoln heuristic, in the 1940s a Washington heuristic. Soon enough it will be a Grant heuristic and then a Benjamin heuristic. In fact it’s probably something like “The closest commonly-used cash denomination to half a milliQALY”, but nobody does that calculation consciously; the estimate is made automatically without thinking. This in turn is probably figured because you could literally do that once a day every single day for only about 20% of your total income, and if you hold it to once a week you’re under 3% of your income. So if you follow the Jackson heuristic on impulse buys every week or so, your impulse spending is a “statistically insignificant” proportion of your income. (Why do we use that anyway? And suddenly we realize: The 95% confidence level is itself nothing more than a heuristic.)

Then they take advantage of our difficulty in discounting time rationally, by spreading it into payments; “five easy payments of $19.95” sounds a lot more affordable than “$100”, but they are in fact basically the same. (You save $0.25 by the payment plan, maybe as much as a few dollars if your cashflow is very bad and thus you have a high temporal discount rate.)

And then, finally, “But wait. There’s more!” They offer you another of the exact same product, knowing full well you’ll probably have no use for the second one. They’ll multiply their previous arbitrary “value” by 2 to get an even more ludicrous number. Now it sounds like they’re doing you a favor, so you’ll feel obliged to do one back by buying the product. Gifts often have this effect in experiments: People are significantly more motivated to answer a survey if you give them a small gift beforehand, even if they get to keep it without taking the survey.

They’ll tell you to call in the next 15 minutes so that you feel like part of an exclusive club (when in reality you could probably call at any time and get the same deal). This also ensures that you’re staying in impulse-buy mode, since if you wait longer to think, you’ll miss the window!

They will offer a “money-back guarantee” to give you a sense of trust in the product, and this would be a rational response, except for that little disclaimer: “Just pay shipping and handling.” For many products, especially nutritional supplements (which cost basically nothing to make), the “handling” fee is high enough that they don’t lose much money, if any, even if you immediately send it back for a refund. Besides, they know that hardly anyone actually bothers to return products. Retailers are currently in a panic about “skyrocketing” rates of product returns that are still under 10%.

Then, they’ll repeat their phone number, followed by a remarkably brazen direct command: “Call now!” Personally I tend to bristle at direct commands, even from legitimate authorities; but apparently I’m unusual in that respect, and most people will in fact obey direct commands from random strangers as long as they aren’t too demanding. A famous demonstration of this you could try yourself if you’re feeling like a prankster is to walk into a room, point at someone, and say “You! Stand up!” They probably will. There’s a whole literature in social psychology about what makes people comply with commands of this sort.

And all, to make you buy a useless gadget you’ll try to use once and then leave in a cupboard somewhere. What untold billions of dollars in wealth are wasted this way?

Super PACs are terrible—but ineffective

PNRJ current events, public policy , , , , , , , , , ,

JDN 2457516

It’s now beginning to look like an ongoing series: “Reasons to be optimistic about our democracy.”

Super PACs, in case you didn’t know, are a bizarre form of legal entity, established after the ludicrous Citizens United ruling (“Corporations are people” and “money is speech” are literally Orwellian), which allows corporations to donate essentially unlimited funds to political campaigns with minimal disclosure and zero accountability. This creates an arms race where even otherwise-honest candidates feel pressured to take more secret money just to keep up.

At the time, a lot of policy wonks said “Don’t worry, they already give tons of money anyway, what’s the big deal?”

Well, those wonks were wrong—it was a big deal. Corporate donations to political campaigns exploded in the era of Super PACs. The Citizens United ruling was made in 2010, and take a look at this graph of total “independent” (i.e., not tied to candidate or party) campaign spending (using data from OpenSecrets):

SuperPAC_spending

It’s a small sample size, to be sure, and campaign spending was already rising. But 2010 and 2014 were very high by the usual standards of midterm elections, and 2012 was absolutely unprecedented—over $1 billion spent on campaigns. Moreover, the only reason 2016 looks lower than 2012 is that we’re not done with 2016 yet; I’m sure it will rise a lot higher than it is now, and very likely overtake 2012. (And if it doesn’t it’ll be because Bernie Sanders and Donald Trump made very little use Super-PACs, for quite different reasons.) It was projected to exceed $4 billion, though I doubt it will actually make it quite that high.

Worst of all, this money is all coming from a handful of billionaires. 41% of Super-PAC funds comes from the same 50 households. That’s fifty. Even including everyone living in the household, this group of people could easily fit inside an average lecture hall—and they account for two-fifths of independent campaign spending in the US.

Weirdest of all, there are still people who seem to think that the problem with American democracy is it’s too hard for rich people to give huge amounts of money to political campaigns in secret, and they are trying to weaken our campaign spending regulations even more.

So that’s the bad news—but here’s the good news.

Super-PACs are ludicrously ineffective.

Hillary Clinton is winning, and will probably win the election; and she does have the most Super-PAC money among candidates still in the race (at $76 million, about what the Clintons themselves make in 3 years). Ted Cruz also has $63 million in Super-PAC money. But Bernie Sanders only has $600,000 in Super-PAC money (actually also about 3 times his household income, coincidentally), and Donald Trump only has $2.7 million. Both of these are less than John Kasich’s $13 million in Super-PAC spending, and yet Kasich and Cruz are now dropped out and only Trump remains.

But more importantly, the largest amount of Super-PAC money went to none other than Jeb Bush—a whopping $121 million—and it did basically nothing for him. Marco Rubio had $62 million in Super-PAC money, and he dropped out too. Martin O’Malley had more Super-PAC money than Bernie Sanders, and where is he now? In fact, literally every Republican candidate had more Super-PAC money than Bernie Sanders, and every Republican but Rick Santorum, Jim Gilmore, and George Pataki (you’re probably thinking: “Who?” Exactly.) had more Super-PAC money than Donald Trump.

Indeed, political spending in general is not very effective. Additional spending on political campaigns has minimal effects on election outcomes.

You wouldn’t immediately see that from our current Presidential race; while Rubio raised $117 million and Jeb! raised $155 million and both of them lost, the winners also raised a great deal. Hillary Clinton raised $256 million, Bernie Sanders raised $180 million, Ted Cruz raised $142 million, and Donald Trump raised $48 million. Even that last figure is mainly so low because Donald Trump is a master at getting free publicity; the media effectively gave Trump an astonishing $1.89 billion in free publicity. To be fair, a lot of that was bad publicity—but it still got his name and his ideas out there and didn’t cost him a dime.

So, just from the overall spending figures, it looks like maybe total campaign spending is important, even if Super-PACs in particular are useless.

But empirical research has shown that political spending has minimal effects on actual election outcomes. So ineffective, in fact, that a lot of economists are puzzled that there’s so much spending anyway. Here’s a paper arguing that once you include differences in advertising prices, political spending does matter. Here are two papers proposing different explanations for why incumbent spending appears to be less effective than challenger spending:This one says that it’s a question of accounting for how spending is caused by voter participation (rather than the reverse), while this one argues that the abuse of incumbent privileges like franking gives incumbents more real “spending” power. It’s easy to miss that both of them are trying to explain a basic empirical fact that candidates that spend a lot more still often lose.

Political advertising can be effective at changing minds, but only to a point.

The candidate who spends the most usually does win—but that’s because the candidate who spends the most usually raises the most, and the candidate who raises the most usually has the most support.

The model that makes the most sense to me is that political spending is basically a threshold; you need to spend enough that people know you exist, but beyond that additional spending won’t make much difference. In 1996 that threshold was estimated to be about $400,000 for a House election; that’s still only about $600,000 in today’s money.

Campaign spending is more effective when there are caps on individual contributions; a lot of people find this counter-intuitive, but it makes perfect sense on a threshold model, because spending caps could hold candidates below the threshold. Limits on campaign spending have a large effect on spending, but a small effect on outcomes.

Does this mean we shouldn’t try to limit campaign spending? I don’t think so. It can still be corrupt and undesirable even if isn’t all that effective.

But it is good news: You can’t actually just buy elections—not in America, not yet.

No, advertising is not signaling

PNRJ critique of neoclassical economics, heuristics and biases, market failure, Uncategorized , , , , , , , , ,

JDN 2457373

Awhile ago, I wrote a post arguing that advertising is irrational, that at least with advertising as we know it, no real information is conveyed and thus either consumers are being irrational in their purchasing decisions, or advertisers are irrational for buying ads that don’t work.

One of the standard arguments neoclassical economists make to defend the rationality of advertising is that advertising is signaling—that even though the content of the ads conveys no useful information, the fact that there are ads is a useful signal of the real quality of goods being sold.

The idea is that by spending on advertising, a company shows that they have a lot of money to throw around, and are therefore a stable and solvent company that probably makes good products and is going to stick around for awhile.

Here are a number of different papers all making this same basic argument, often with sophisticated mathematical modeling. This paper takes an even bolder approach, arguing that people benefit from ads and would therefore pay to get them if they had to. Does that sound even remotely plausible to you? It sure doesn’t to me. Some ads are fairly entertaining, but generally if someone is willing to pay money for a piece of content, they charge money for that content.

Could spending on advertising offer a signal of the quality of a product or the company that makes it? Yes. That is something that actually could happen. The reason this argument is ridiculous is not that advertising signaling couldn’t happen—it’s that advertising is clearly nowhere near the best way to do that. The content of ads is clearly nothing remotely like what it would be if advertising were meant to be a costly signal of quality.

Look at this ad for Orangina. Look at it. Look at it.

Now, did that ad tell you anything about Orangina? Anything at all?

As far as I can tell, the thing it actually tells you isn’t even true—it strongly implies that Orangina is a form of aftershave when in fact it is an orange-flavored beverage. It’d be kind of like having an ad for the iPad that involves scantily-clad dog-people riding the iPad like it’s a hoverboard. (Now that I’ve said it, Apple is probably totally working on that ad.)

This isn’t an isolated incident for Orangina, who have a tendency to run bizarre and somewhat suggestive (let’s say PG-13) TV spots involving anthropomorphic animals.

But more than that, it’s endemic to the whole advertising industry.

Look at GEICO, for instance; without them specifically mentioning that this is car insurance, you’d never know what they were selling from all the geckos,

and Neanderthals,

and… golf Krakens?

Progressive does slightly better, talking about some of their actual services while also including an adorably-annoying spokesperson (she’s like Jar Jar, but done better):

State Farm also includes at least a few tidbits about their insurance amidst the teleportation insanity:

But honestly the only car insurance commercials I can think of that are actually about car insurance are Allstate’s, and even then they’re mostly about Dennis Haybert’s superhuman charisma. I would buy bacon cheeseburgers from this man, and I’m vegetarian.

Esurance is also relatively informative (and owned by Allstate, by the way); they talk about their customer service and low prices (in other words, the only things you actually care about with car insurance). But even so, what reason do we have to believe their bald assertions of good customer service? And what’s the deal with the whole money-printing thing?

And of course I could deluge you with examples from other companies, from Coca-Cola’s polar bears and Santa Claus to this commercial, which is literally the most American thing I have ever seen:

If you’re from some other country and are going, “What!?” right now, that’s totally healthy. Honestly I think we would too if constant immersion in this sort of thing hadn’t deadened our souls.

Do these ads signal that their companies have a lot of extra money to burn? Sure. But there are plenty of other ways to do that which would also serve other valuable functions. I honestly can’t imagine any scenario in which the best way to tell me the quality of an auto insurance company is to show me 30-second spots about geckos and Neanderthals.

If a company wants to signal that they have a lot of money, they could simply report their financial statement. That’s even regulated so that we know it has to be accurate (and this is one of the few financial regulations we actually enforce). The amount you spent on an ad is not obvious from the result of the ad, and doesn’t actually prove that you’re solvent, only that you have enough access to credit. (Pets.com famously collapsed the same year they ran a multi-million-dollar Super Bowl ad.)

If a company wants to signal that they make a good product, they could pay independent rating agencies to rate products on their quality (you know, like credit rating agencies and reviewers of movies and video games). Paying an independent agency is far more reliable than the signaling provided by advertising. Consumers could also pay their own agencies, which would be even more reliable; credit rating agencies and movie reviewers do sometimes have a conflict of interest, which could be resolved by making them report to consumers instead of producers.

If a company wants to establish that they are both financially stable and socially responsible, they could make large public donations to important charities. (This is also something that corporations do on occasion, such as Subaru’s recent campaign.) Or they could publicly announce a raise for all their employees. This would not only provide us with the information that they have this much money to spend—it would actually have a direct positive social effect, thus putting their money where there mouth is.

Signaling theory in advertising is based upon the success of signaling theory in evolutionary biology, which is beyond dispute; but evolution is tightly constrained in what it can do, so wasteful costly signals make sense. Human beings are smarter than that; we can find ways to convey information that don’t involve ludicrous amounts of waste.

If we were anywhere near as rational as these neoclassical models assume us to be, we would take the constant bombardment of meaningless ads not as a signal of a company’s quality but as a personal assault—they are needlessly attacking our time and attention when all the genuinely-valuable information they convey could have been conveyed much more easily and reliably. We would not buy more from them; we would refuse to buy from them. And indeed, I’ve learned to do just that; the more a company bombards me with annoying or meaningless advertisements, the more I make a point of not buying their product if I have a viable substitute. (For similar reasons, I make a point of never donating to any charity that uses hard-sell tactics to solicit donations.)

But of course the human mind is limited. We only have so much attention, and by bombarding us frequently and intensely enough they can overcome our mental defenses and get us to make decisions we wouldn’t if we were optimally rational. I can feel this happening when I am hungry and a food ad appears on TV; my autonomic hunger response combined with their expert presentation of food in the perfect lighting makes me want that food, if only for the few seconds it takes my higher cognitive functions to kick in and make me realize that I don’t eat meat and I don’t like mayonnaise.

Car commercials have always been particularly baffling to me. Who buys a car based on a commercial? A decision to spend $20,000 should not be made based upon 30 seconds of obviously biased information. But either people do buy cars based on commercials or they don’t; if they do, consumers are irrational, and if they don’t, car companies are irrational.

Advertising isn’t the source of human irrationality, but it feeds upon human irrationality, and is specifically designed to exploit our own stupidity to make us spend money in ways we wouldn’t otherwise. This means that markets will not be efficient, and huge amounts of productivity can be wasted because we spent it on what they convinced us to buy instead of what would truly have made our lives better. Those companies then profit more, which encourages them to make even more stuff nobody actually wants and sell it that much harder… and basically we all end up buying lots of worthless stuff and putting it in our garages and wondering what happened to our money and the meaning in our lives. Neoclassical economists really need to stop making ridiculous excuses for this damaging and irrational behavior–and maybe then we could actually find a way to make it stop.

Advertising: Someone is being irrational

PNRJ critique of neoclassical economics, public policy , , , , , , , , , , , , , , ,

JDN 2457285 EDT 12:52

I’m working on moving toward a slightly different approach to posting; instead of one long 3000-word post once a week, I’m going to try to do two more bite-sized posts of about 1500 words or less spread throughout the week. I’m actually hoping to work toward setting up a Patreon and making blogging into a source of income.

Today’s bite-sized post is about advertising, and a rather simple, basic argument that shows that irrational economic behavior is widespread.

First, there are advertisements that don’t make sense. They don’t tell you anything about the product, they are often completely absurd, and while sometimes entertaining they are rarely so entertaining that people would pay to see them in theaters or buy them on DVD—which means that any entertainment value they had is outweighed by the opportunity cost of seeing them instead of the actual TV show, movie, or whatever else it was you wanted to see.

If you doubt that there are advertisements that don’t make sense, I have one example in particular for you which I think will settle this matter:

If you didn’t actually watch it, you must. It is too absurd to be explained.

And of course there are many other examples, from Coca-Cola’s weird associations with polar bears to the series of GEICO TV spots about Neanderthals that they thought were so entertaining as to deserve a TV show (the world proved them wrong), to M&M commercials that present a terrifying world in which humans regularly consume the chocolatey flesh of other sapient citizens (and I thought beef was bad!).

Or here’s another good one:

In the above commercial, Walmart attempts to advertise themselves by showing a heartwarming story of a child who works hard to make money by doing odd jobs, including using the model of door-to-door individual sales that Walmart exists to make obsolete. The only contribution Walmart makes to the story is apparently “we have affordable bicycles for children”. Coca-Cola is also thrown in for some reason.

Certain products seem to attract nonsensical advertising more than others, with car insurance being the prime culprit of totally nonsensical and irrelevant commercials, perhaps because of GEICO in particular who do not actually seem to be any good at providing car insurance but instead spend all of their resources making commercials.

Commercials for cars themselves are an interesting case, as certain ads actually appeal in at least a general way to the quality of the vehicle itself:

Then there are those that vaguely allude to qualities of their vehicles, but mostly immerse us in optimistic cyberpunk:

Others, however, make no attempt to say anything about the vehicle, instead spinning us exciting tales of giant hamsters who use the car and the power of dance to somehow form a truce between warring robot factions in a dystopian future (if you haven’t seen this commercial, none of that is a joke; see for yourself below):

So, I hope that I have satisfied you that there are in fact advertisements which don’t make sense, which could not possibly give anyone a rational reason to purchase the product contained within.

Therefore, at least one of the following statements must be true:

1. Consumers behave irrationally by buying products for irrational reasons
2. Corporations behave irrationally by buying advertisements that don’t work

Both could be true (in fact I think both are true), but at least one must be, on pain of contradiction, as long as you accept that there are advertisements which don’t provide rational reasons to buy products. There’s no wiggling out of this one, neoclassicists.

Advertising forms a large part of our economy—Americans spend $171 billion per year on ads, more than the federal government spends on education, and also more than the nominal GDP of Hungary or Vietnam. This figure is growing thanks to the Internet and its proliferation of “free” ad-supported content. Insofar as advertising is irrational, this money is being thrown down the drain.

The waste from spending on ads that don’t work is limited; you can’t waste more than you actually spent. But the waste from buying things you don’t actually need is not limited in the same way; an ad that cost $1 million to air (cheaper than a typical Super Bowl ad) could lead to $10 million in worthless purchases.

I wouldn’t say that all advertising is irrational; some ads do actually provide enough meaningful information about a product that they could reasonably motivate you to buy it (or at least look into buying it), and it is in both your best interest and the company’s best interest for you to have such information.

But I think it’s not unreasonable to estimate that about half of our advertising spending is irrational, either by making people buy things for bad reasons or by making corporations waste time and money on buying ads that don’t work. This amounts to some $85 billion per year, or enough to pay every undergraduate tuition at every public university in the United States.

This state of affairs is not inevitable.

Most meaningless ads could be undermined by regulation; instead of the current “blacklist” model where an ad is legal as long as it doesn’t explicitly state anything that is verifiably false, we could move to a “whitelist” model where an ad is illegal if it states anything that isn’t verifiably true. Red Bull cannot give you wings, Maxwell House isn’t good to the last drop, and Volkswagen needs to be more specific than “round for a reason”. We may never be able to completely eliminate irrelevant emotionally-salient allusions (pictures of families, children, puppies, etc.), but as long as the actual content of the words is regulated it would be much harder to deluge people with advertisements that provide no actual information.

We have a choice, as a civilization: Do we want to continue to let meaningless ads invade our brains and waste the resources of our society?