Tag: price

Placebos and Advertising

It isn’t just that expensive wine is more enjoyable, but actually paying more for wine makes it more enjoyable. Researchers from CalTech and Stanford found that the brain’s pleasure centre has more activity when tasting $90 wine compared with $10 wine, even when it is exactly the same wine.

I find it amazing that the brain has such sway over the body, but it’s something that the advertising industry has known for ages.

In Malcolm Gladwell’s Blink, I first read about the work of Louis Cheskin, whose work in advertising since the 1930s was revolutionary. His theory of sensation transference was used to design product packaging that would change the way people felt about, and even experienced the product. In one example with underarm deodorants, Cheskin sent the same identical formulation to testers in three different packs with unique colour schemes. The testers consistently reported differences in fragrance and effectiveness, and one colour scheme even resulted in rashes. Cheskin’s consultancy group was named the Color Research Institute, for obvious reasons.

So, given this background, I shouldn’t have been surprised by a recent article in Wired Magazine on placebos. It reported that the “placebo effect” is not a single effect at all, and using different colours or shapes of a pill can make that pill more or less effective in its treatment, even if that pill is just a sugar pill. In other words, the packaging of drugs, whether it is the form of the pills, or the design of the box, or how the medical practitioner gives it to a patient, can change how well a drug works.

While the placebo effect is associated with snake oil, it is considered to operate equally on legitimate drugs. That’s why in clinical trials, the main hurdle is to achieve levels of effectiveness higher than a placebo. But since the placebo effect itself can be made stronger or weaker, or achieve particular effects, you could imagine a trial where the placebo is chosen to have a weak effect so the drug stands a better chance of succeeding at trial. In fact, the Wired article claims that the placebo effect has become stronger recently, making it harder for drug trials to succeed. I can see a more worthwhile application of the placebo effect being to tailor packaging so that not only does it add to the drug’s effectiveness, but may even offset side-effects.

Perhaps in the future, the list of active ingredients on a drug’s packaging will also need to include aspects of the packaging like colour or shape. I may choose to avoid my paracetamol tablets if they are blue because it upsets my stomach. However, there’s one piece of information that’s already on the packaging that may yet be proven to work for other drugs (as it works for alcohol): the price.

And I will leave you with the thought that if more expensive drugs turn out to be more effective (purely on that basis), then may heavy subsidies of certain drugs be causing more harm than good?

Objects, Transactions and Value

This is a topic that I’ve been mulling over in my head for a little while now, but hang in there with me as I stumble through it, because the conclusions aren’t fully formed.

I’ve noticed that often the concept of the value of something is linked to its price. If someone is willing to pay $50 for an object, then it is considered that they value it as worth $50. If we add up all purchases across a country, it is equal to that country’s GDP, a measure of the value created by that country in that year.

However, the aspect of valuing things doesn’t sit well with me. When I buy something, I don’t feel that the more I pay, the more value I’m getting. In fact, the reverse is generally true, and I imagine most people feel the same. Also, I think different people may place different values on an object, even if they pay exactly the same price for it. It seems that price doesn’t explain value, at least not completely.

Another explanation that has occurred to me is that value is not tied to an object but to a transaction. Clearly a transaction (between a willing buyer and seller at arms-length, etc.) will go ahead only if it generates value for both parties. Otherwise there’s clearly no point. And there are obvious cases when a transaction won’t go ahead: when the price is too much for the buyer, or if the price is not enough for the seller. So, this gives us a framework to identify how much value is being created.

Value of a transactionExcuse my poor excuse for an illustration. Hopefully you can see that ‘A’ is the difference between the price of a transaction and the most the buyer would’ve spent, and ‘B’ is the difference between the price and the least the buyer would’ve accepted. So, in this interpretation, the value of the transaction to the buyer is A, then value of the transaction to the seller is B, and the overall value created by the transaction is A + B.

Out of A and B, it is probably B that is the best understood. In some way it corresponds to the seller’s profit, or perhaps risk-adjusted profit. But not always, since the seller may be willing to make a loss in order to recover some money for their stock. So, in this version of value, based on the fact that a transaction will occur only if both parties see some value in it, a technical loss (sale price less than nominal cost) must still be value positive.

The value A is not easily described since most people don’t explicitly calculate the most they would be willing to pay for their milk, eggs, petrol etc. and are even less likely to tell you about it. However, one exception is in auctions. (Hopefully) most potential buyers at an auction have figured out the most they would be willing to pay. Although, their upper limit may be more influenced by the amount of money at their disposal than by the benefit they will gain through possessing the item. (It may turn out to be impossible to accurately estimate A in most situations.)

As mentioned before, the overall value created from each transaction is A+B, which is also the difference between the most the buyer would pay and the least the seller would take. This number is independent of the price chosen for the transaction, and is clearly “better” the more the expectations of the buyer and seller diverge.

It would be interesting to see what figure we’d get if we added up the A+B numbers for all the transactions that occurred in a country for a year, and compared it to the GDP. I think it would provide a more accurate representation of the economic value created.

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