I couldn't help but love Chris Yeh's Outline of Predictably Irrational: The Hidden Forces that Shape Our Decisions. It's a fascinating look into the surprisingly predictable psychology that powers human actions and reactions, and I think there are some definitive lessons we can take away from the piece and apply to web marketing. Let's run through the list:

I: The Truth About Relativity

When Williams-Sonoma introduced bread machines, sales were slow. When they added a "deluxe" version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain

When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7. When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7. The amount saved and time involved are the same, but people make very different choices. Watch out for relative thinking; it comes naturally to all of us.

Lessons to Apply to Web Marketing:

• Offer a premium version of your product/service and make it easy to compare
• Charging more has the added benefit of reducing the "bargain shopper" mentality

II: The Fallacy of Supply & Demand

Savador Assael, the Pearl King, single-handedly created the market for black pearls, which were unknown in the industry before 1973. His first attempt to market the pearls was an utter failure; he didn't sell a single pearl. So he went to his friend, Harry Winston, and had Winston put them in the window of his 5th Avenue store with an outrageous price tag attached. Then he ran full page ads in glossy magazines with black pearls next to diamonds, rubies, and emeralds. Soon, black pearls were considered precious.

Simonsohn and Loewenstein found that people who move to a new city remain anchored to the prices they paid in their previous city. People who move from Lubbock to Pittsburgh squeeze their families into smaller houses to pay the same amount. People who move from LA to Pittsburgh don't save money, they just move into mansions.

Lessons to Apply to Web Marketing:

• Want to be a premium product and charge a premium price? Set yourself against "premium" competitors in premium markets. Positioning is critical to the perception of value.
• Anchoring happens - plan for it in your sales models and be prepared that old customers will be resistant to new pricing, even when the circumstances are very different.

III: The Cost of Zero Cost

In the real world, this effect was demonstrated by Amazon's free shipping. After Super Saver shipping was introduced, Amazon saw sales increases everywhere except for France. It turned out that the French division offered 1 franc ($0.20) pricing instead of free pricing. When this was changed to free, France saw the same sales increases as elsewhere. Another real-world example: People will wait in line for absurdly long times to get something for free. Free is one of the most powerful ways to trigger behavior.

Lessons to Apply to Web Marketing:

• Offer free stuff, but make sure you get ROI from it (traffic/ad views/email addresses/etc)
• Be prepared for the fact that people will ENJOY free stuff more than normal, simply because it is free. Use this to your advantage and give away to those whose love & affection you need (reporters, bloggers, pundits, haters, etc.)
• Making people work to get something for free is a great way to trigger behaviors that might otherwise cost a fortune (think web surveys, information classification, data entry, etc.)

IV: The Cost of Social Norms

Vohs, Mead, and Goode: Participants were asked to unscramble sentences that were either neutral ("It's cold outside") or related to money ("High-paying salary").  Then they were asked to solve a puzzle.  The experimenter left the room, and the subjects were allowed to go to him for help.

• "Salary" participants waited 5.5 minutes to ask for help; "neutral" participants waited only 3 minutes
  • Thinking about money made people more self-reliant and less willing to ask for help.
  • On the other hand, they were less willing to help others.
• The conclusion is that thinking about money puts one in a market frame of mind.  Subjects were:
  • More selfish and self-reliant
  • Wanted to spend more time alone
  • Were more likely to select individual tasks rather than those that required teamwork
  • Chose to sit farther away from others

A real-life example: The AARP asked lawyers to participate in a program where they would offer their services to needy employees for a discounted price of $30/hour. No dice. When the program manager instead asked if they'd offer their services for free, the lawyers overwhelmingly said they would participate.

Conclusion: Market norms drive out social norms.

 Lessons to Apply to Web Marketing:

• Those who freely contribute to your site/business with recommendations, referrals, content (think blog comments or UGC articles), etc. might not be willing to do so if paid. Think twice before paying for what you might be able to get for free.
• The mindset of volunteers vs. employees is very different - consider which behavior set you want before deciding on the type of labor to attract.

V: The Influence of Arousal

Ariely and Loewenstein conducted an experiment on Berkeley undergrads (Ariely tried to do this at MIT, but couldn't get the necessary permissions).  They asked them a series of questions.  Then they had the undergraduates stimulate themselves to a state of sexual arousal, and asked them to answer the same set of questions. The results show that people simply don't realize how different their decision-making is during a state of arousal.

Implications - Someone may promise to just say no, but that promise is less likely to hold up during a state of arousal.

Lessons to Apply to Web Marketing

• There's a reason why AdultFriendFinder made an IPO last week, despite terrible economic conditions
• Arouse your audience and their behavior changes drastically (note: this is probably not universally applicable)

VI: The Problem of Procrastination and Self Control

Ariely conducted an experiment on his class.  Students were required to write three papers.  Ariely asked the first group to commit to dates by which they would turn in each paper.  Late papers would be penalized 1% per day.  There was no penalty for turning papers in early.  The logical response is to commit to turning all three papers in on the last day of class. The second group was given no deadlines; all three papers were due in the last day of class. The third group was directed to turn their papers in on the 4th, 8th, and 12th weeks.

The results? Group 3 (imposed deadlines) got the best grades. Group 2 (no deadlines) got the worst grades, and Group 1 (self-selected deadlines) finished in the middle. Allowing students to pre-commit to deadlines improved performance. Students who spaced out their commitments did well; students who did the logical thing and gave no commitments did badly.

"These results suggest that although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommitment and by doing so, help themselves overcome it."

Lessons to Apply to Web Marketing:

• Procrastination is an extremely common human behavior - plan for it in your business and take advantage of it where it can help (trial offers that turn into paid services, for example).
• By setting up early controls and making people recognize this weakness, we can reduce its negative impact. You can apply this to contractors, employees, vendors, etc.

VII: The High Price of Ownership

The "endowment effect" means that when we own something, we begin to value it more than other people do.

Ariely and Carmon conducted an experiment on Duke students, who sleep out for weeks to get basketball tickets; even those who sleep out are still subjected to a lottery at the end.  Some students get tickets, some don't. The students who didn't get tickets told Ariely that they'd be willing to pay up to $170 for tickets. The students who did get the tickets told Ariely that they wouldn't accept less than $2,400 for their tickets.

There are three fundamental quirks of human nature. We fall in love with what we already have. We focus on what we might lose, rather than what we might gain. We assume that other people will see the transaction from the same perspective as we do.

Lessons to Apply to Web Marketing:

• In contrast to the recommendations for offering something for free, be aware that users who get your product/service for "free" will place less value on it than those who've worked for it or bought it themselves.
• It's easier to get more money from your existing customers than it is to attract new ones (this marketing wisdom has been around forever, but applies particularly well given this psychology).

VIII: Keeping Doors Open

In 210 BC, Xiang Yu led an army against the Ch'in Dynasty.  While his troops slept, he burned his ships and smashed all the cooking pots.  He explained to his troops that they had to either fight their way to victory or die.  His troops won 9 consecutive battles.  Eliminating options improved the focus of his troops.

We feel compelled to preserve options, even at great expense, even when it doesn't make sense.

Lessons to Apply to Web Marketing:

• Narrow your customers' choices and they'll be more likely to commit.
• Narrow navigation options to the most important/desired behaviors - it may seem counter-intuitive, but if you want users to click, reducing pathways may actually increase interaction (page views, sales, etc).

IX: The Effect of Expectations

Ariely, Lee, and Frederick conducted yet another experiment on MIT students. They let students taste two different beers, and then choose to get a free pint of one of the brews.  Brew A was Budweiser.  Brew B was Budweiser, plus 2 drops of balsamic vinegar per ounce.

When students were not told about the nature of the beers, they overwhelmingly chose the balsamic beer. When students were told about the true nature of the beers, they overwhelmingly chose the Budweiser. If you tell people up front that something might be distasteful, the odds are good they'll end up agreeing with you--because of their expectations.

Not only do we react differently based on stereotypes of others, we react differently based on stereotypes about ourselves. Shin, Pittinsky, and Ambady conducted an experiment on Asian-American women.  A first group was asked questions related to their gender, then given a math test. A second group was asked questions related to their race, then given a math test.

The second group did better on the math test than the first. "Blind" presentation of the facts (presenting the facts, but not revealing which party took which actions) might help people better recognize the truth.

Lessons to Apply to Web Marketing:

• Take advantage of expectations - if you're selling a product or service and can enhance the perception of value/enjoyment, your market is likely to follow along and actually get more value/enjoyment.
• Branding is a powerfully ally in value creation - position your brand so that users expect great things, and they'll get them.

X: The Power of Price

Ariely, Waber, Shiv, and Carmon made up a fake painkiller, Veladone-Rx. An attractive woman in a business suit (with a faint Russian accent) told subjects that 92% of patients receiving VR reported significant pain relief in 10 minutes, with relief lasting up to 8 hours.

When told that the drug cost $2.50 per dose, nearly all of the subjects reported pain relief. When told that the drug cost $0.10 per dose, only half of the subjects reported pain relief. The more pain a person experienced, the more pronounced the effect. A similar study at U Iowa showed that students who paid list price for cold medications reported better medical outcomes than those who bought discount (but clinically identical) drugs.

Lessons to Apply to Web Marketing:

• Higher pricing means higher expectations, but also more fulfillment, even if the product isn't actually more fulfilling! Raise your consulting prices, people.
• The Placebo effect is strong - don't abuse it, but leverage this knowledge to be smart about your own purchases and investments and as a potentially valuable tool to use in comparisons with competitive products/services/companies.

Your turn - go read the full piece and see if there are any terrific snippets of advice/knowledge that you'd apply to marketing online. I've only covered the surface level, so I suspect there's a great deal more value to be gleaned.

p.s. Posting will remain light through January 5th, but YOUmoz is more active - and at its highest readership levels yet!