Fiona Severson

Have you ever heard about experiment relating wine and social security numbers? Subjects were asked to write down the last two digits of their social security number. Then they were asked if they would pay a specified amount (say $79 or $12) for a bottle of Côtes du Rhône 1998 and a bottle of 1996 Hermitage Jaboulet La Chapelle. The subjects were not wine experts but the lower their social security digits, the lower the price they were willing to pay for the wine. The correlation for social security numbers and the price they’d pay for the bottles of wine was 0.33.

Isn’t this finding fascinating? This is an experiment behavioral economist Dan Ariely wrote in his book Predictably Irrational. He and colleagues demonstrate the power of suggestion in establishing arbitrary values of goods and services as anchors. It’s all about psychology.

The standard economic framework assumes that everyone makes choices rationally. However, this is not always the case. Behavioral economics models integrate insights from psychology, neuroscience and microeconomic theory to analyze the world. In recent years, there are several famous books introducing the important findings in this area; Predictably Irrational is one of those books. Other books you might have heard about are Thinking Fast and Slow, Nudge, Freakonomics, etc.

The Wisconsin School of Business is integrating these new findings into our MBA classes such as Marketing Strategy, Negotiations and more. In these classes, we learned how psychology affects people’s behavior and how we can “nudge” people’s behavior. For example, after learning the effect of anchoring, you know how important the first number is in negotiation, thus you know how to take advantage of this effect to get a better position. In Marketing Strategy, we learned how to use behavior economics to shape marketing strategy. This departure from analytical approaches pushes us as MBA students to think about strategy in an emotional and behavioral way. Having this broader mindset will be very beneficial for us as we transitional into dealing with strategy related issues after graduation. Seeing the real-world application of our in-class learning has never been easier. Last semester, Kimberly Clark (K-C) spoke to us about their team which is currently working on how to take advantage of those behavior economics to facilitate their marketing and marketing research. This is the type of innovation that, thanks to our curriculum, we’re ready and eager to lead.