Chocolate cake, sex, and valuing behaviour

Vanilla fudge sundae, or raspberry ice cream with crushed nut sprinkles? What to wear in the morning. The best time to sell an investment. Take a weekend break or stay at home? Choose the 'lesser of evils' from two unpleasant medical choices. Stay in the EU or come out? It's choices, choices and more choices every day! How on earth do you decide?

The answer lies in valuing behaviour, and it is key to the choices you make. Furthermore, whether involving an intricate set of priorities or a basic selection, it is a psychological process far more advanced than any financial appraisal. And, fascinatingly, valuing behaviour doesn't only permeate human experience in a highly complex ongoing manner but is dynamic, moving you towards one direction rather than another through a variety of intriguing mediating influences that lie beyond any control you think you have.

From early influences to later notions of value

The cost of a house is affected by location. But if a celebrity lives next door that ups the price further, whether it's politicians like Barack Obama or David Cameron, or even TV personalities like Jeremy Clarkson of Top Gear fame. Delving deeper into this behavior, a study led by Yale researcher George Newman showed it's a similar story for the high prices associated with celebrity memorabilia – even down to their sweat!

This type of valuing behaviour, coming through what's known as 'celebrity contagion', cannot be said to be rational. Yet, it is strangely evident in children too; and for psychologists Bruce Hood and Paul Bloom it's been a phenomenon of major interest for investigation. In one of their experiments, when six-year olds were asked to give a price for an item they were told was owned by the Queen, they consistently valued it higher than for an identical ownerless copy. These valuations are therefore independent of the item itself, residing squarely in the mind of the child. And though the association of celebrity and price premium might have an element of social input, it nonetheless seems to be an effect in operation from a very young age.

This distinction towards favouring what is thought of as more meaningful isn't only by attachment to a famous person. In an ingeniously conceived illusion for a further experiment, Hood and Bloom showed children a 'copying machine', and told them it could copy any of their favourite toys, and they could then keep the copy. Nevertheless, many children chose to keep their original rather than a copy – or refused outright to let the experimenter make a copy. Asked why they wanted their original back they'd often say 'Because it's mine!'. This may be a response in the language of a very young child particularly attached to a loved toy, but it also speaks volumes about authenticity-seeking behavior: what's real to me as opposed to not real to me, and what prompts me to value one thing and not another. Experiments like this tell us a great deal about the origins of valuing behaviour and point to a hardwired evaluative mechanism in place in the brain early on rather than being learned as a child develops.      

A result of this type of object valuation can be readily observed in later life. University of Michigan psychologist Brandy Frazier and her colleagues found that adults with childhood attachments are more likely to assign higher monetary values for authentic objects presented to them, such as a favourite item of clothing, as against inauthentic objects, such as a brand-new shirt with the price tag still attached. Something personally meaningful on top of a hardwired predisposition feeds our cognitive calculations.

For many of us, though, authenticity means genuineness and that's the deciding factor in conferring value on things we desire. Auction houses satisfy this by going to great lengths to determine the real from the fake. But then again, if a copy of, say, a Picasso is identical in every respect to its original why should it matter? Somehow it does; and as Paul Bloom, this time working with George Newman, found, it's not even expert knowledge we use in valuing art but instead lay theories about the creative act. They presented non-expert participants with two paintings: the first said to be an original while the second could have been done by coincidence or as an intentionally made copy of the first. When the second painting was thought to be made by coincidence, it was perceived as having greater value than the copy. And it would seem because it's still thought of as embodying some level of creativity.

But oddly, the researchers also found that the original painting doesn't remain fixed in perceived value in both cases as the experiment proceeds. The original can actually increase in perceived value against its copy, rather than remaining unchanged. One explanation Newman and Bloom offer is that if someone goes to the trouble of producing a good fake then its original is likely considered a very good painting in the first place! In the minds of participants this ups the worth of the original genuine one just that bit more.

Under the cognitive hood

What about when something is unavailable because it is rare or scarce? Certainly, the idea of supply and demand in this context is what many people have traditionally thought of as one of the main factors underlying value, whether it is the price of food, houses or a Stradivarius violin. From an economic perspective, if an item is scarce it's going to cost more; if plentiful then less.

But things are not so simple. This was demonstrated back in 1975 by Stephen Worchel and his associates working at the University of North Carolina, in what's become known as the 'cookie study'. The researchers were intrigued about what happens to our thought processes during a trade. In a deceptively simple experiment using cookies and varying their abundance and scarcity, and hence supply and demand, it came as no great surprise that scarce cookies were valued higher than abundant ones. But what was a surprise was that cookies were rated as more valuable when their supply changed from abundant to scarce than when they were simply scarce all the time.

You'd expect the value of a scarce item to be the same however its scarcity comes about. The experiment showed that this isn't the case. The point at which perception changes is critical to the process, as the transition itself creates added value – a result Worchel and his team called new scarcity.

This early experiment has been followed more recently in the emerging behavioural economics field by a slew of cognitive biases uncovered when it comes to our financial evaluations. To name just two examples from the ever-expanding list, there's confirmation bias (the selective use of information supporting beliefs about where prices should be), and the endowment effect (characterising how people confer value on things where there is a personal connection or vested interest). As a rule, selling prices always exceed buying prices. Consider how buyers and sellers of properties behave; often poles apart in their assessments… if I own the house, I may have a vastly different view to a potential buyer of the green wallpaper with the artistically positioned purple circles.

Context too is vital to value perception. Get context wrong and many people simply won't see the value. Consider virtuoso violinist Joshua Bell when he played his Stradivarius violin at a Washington D.C. subway rather than his usual venue of a formal concert hall: most people just carried on walking by. It simply didn't register in their minds as an experience of value.

How then might valuing behaviour change when our sensibilities are activated? Observing eccentric wallpaper will no doubt do it, but what about a weightier concern, say, something that causes us to defend our cultural worldview concerning death? In an intriguing study by Abram Rosenblatt and his colleagues amongst municipal court judges, many recommended especially harsh bonds for a hypothetical prostitute when their mortality was made salient to them during earlier priming. Against a control group recommending a bond of around $50, judges in the experimental group recommended it should be in the region of $455. Further work by the group indicated that these judges may have had quite negative attitudes to prostitution initially, yet such a wide monetary difference is provoking, highlighting as it does how sensitive to external social influence the brain's valuation mechanism can be.

It's a similar story when you think you're in control but aren't, as psychologist Ellen Langer found in her study using lottery tickets. Participants all buy tickets initially for $1 each. But half selected their own ticket, and the other half were allocated one by the researcher. And that made all the difference. When offered the chance to sell their lottery ticket before a draw, compared to the 'allocated' group those in the 'selected' group asked over four times as much.

There is no outside power component involved in Langer's 'illusion of control' study, which is what makes it so interesting. You just simply think you're the one who has control of your choices. Nevertheless, as studies above indicate, more usually there is an interaction between your perception and the outside environment changing valuation. It's something that can also be thought of (as I've written about previously in 1999 in the context of behavioural finance and investors reacting to shifting conditions) as the interplay between your internal and external markets.

Chemical interference

Into this cognitive mix come hormones, and your ability to value is physiologically impacted in subtle ways. For example, in men with high testosterone levels examined by Terence Burnham at Harvard, it is found they're more likely than their lower-testosterone counterparts to reject low offers in bidding situations. Such individuals en masse are, as a consequence, often the cause of price floors in markets. Oxytocin, meanwhile, has been studied by Paul Zack. Though often associated with female physiology, when given as a nasal infusion oxytocin increases the generosity of offers by both sexes in transactions by an average 21 per cent. Unlike testosterone which is about minimum acceptable price levels, with oxytocin it's more about strategic manoeuvring in determining valuations.

Another facet to understanding the economic role of hormones comes from University of New Mexico psychologists Miller, Tybur and Jordan, who conducted a study that has achieved considerable notoriety in recent times. They examined how tip earnings of professional lap dancers working in 'gentlemen's clubs' were affected by their ovulatory cycle. Compared to average tip earnings per five-hour shift of $248.73, normally cycling participants, they found, earned around $335 a shift when experiencing their oestrus, around $260 a shift during the luteal phase, and $185 a shift during menstruation.

It's difficult to know exactly how the lap-dancing phenomenon operates, and the research has been criticised for this reason – perhaps the women just work with a bit more effort at certain times. But whatever the mechanism, in some subconscious way the men providing these tips apparently sense the sexual changes in the women that then impacts their valuing behaviour.

Mr Spock can't do it

If we've learnt one thing from research conducted in this field it is that because choices are not all equal, emotions – conscious or unconscious – are vital mediators in decision-making. They provide that extra element needed to decide to go one way or the other; indeed, to choose whether to have vanilla fudge sundae or the raspberry ice cream with crushed nut sprinkles. More than this, valuing behaviour needs emotion – even those simple expressions of liking or not liking, in addition to a logical-intellectual analysis – as it's together they form the basis of our ability to differentiate what's important. The archetype of perfection as the unemotional, totally logical being, epitomised by Star Trek's Mr Spock, is an impossibility; he would in reality, along with every other Vulcan, be stuck between choices and could not survive!

This is not supposition. Patients who lose the ability to experience emotions due to brain lesions, despite in many instances having high intelligence, may be unable to make even the simplest choices. Whether to eat an orange or an apple; and a choice between varieties of apples can lead to endless consideration. Underscoring the difficulties facing these individuals is the case discussed by neuroscientist Antonio Damasio, of Elliott's experience of ventromedial frontal lobe damage and the later removal of the tumor that caused it. Without sufficient emotion, the mechanism to apply decision mediation cannot function correctly; these patients cannot differentially value.
The wrong balance of emotions is equally problematic, as seen amongst narcissists. Their ability to mediate the valuing process as consumers, highlighted in a study by Seung Yun Lee and Russell Seidle, is such that they care little for the functional and practical aspects of a product or any inherent worth or rarity it might have. Narcissists buy rare or expensive products in order to display unique value against others, satisfying their own status, vanity and self-aggrandisement. In these individuals, wanting bling rather than utility, the ability to mediate valuing behaviour is emotionally skewed.

Surely, though, for the rest of us, we can still apply reason and have some commonsense input to our choices? Well then, faced with a choice between chocolate cake and fruit salad, what would you do? When researchers Baba Shiv and Alexander Fedorikhin tested this – even going to the extent of labelling both the tasty treat of chocolate cake and the more nutritious fruit salad with the same value price tag – they found it depended on cognitive load, the processing resources participants were able to allocate to a task (something manipulated by having to memorise sequences of numbers). The striking results showed that under conditions of high cognitive load chocolate cake was favoured, but under low cognitive load participants were more likely to go for the fruit salad. Given the opportunity we are able to make more informed, thought-out decisions, and perhaps even healthier ones. But often we're dealing with a whole range of environmental cues affecting our brain's valuing mechanism, not least from advertising, a potent social mediator. With less cognitive capacity available it's not about true decisions any more. Rather, we make an emotional choice: we lead with our hearts.

To be sure, emotions are a powerful influence on financial decisions. So much so in fact that, as Mathias Pessiglione discovered, choices concerning money (for example, a pound versus a penny) made subliminally can have real-world physiological effects (like pumping a hand-grip more for the pound), though we're not aware we're doing it. More overtly, if feelings of sadness are generated in subjects, as Jennifer Lerner's group did at Carnegie Mellon, the expected way the endowment effect works can even be reversed; with prices study participants are willing to buy at suddenly exceeding the selling prices of others. Why it happens isn't clear, but the implications are enormous, as the experimenters point out, because it means that emotionally charged, catastrophic events – like floods, economic crashes or terrorist attacks – could in fact lead to increased consumer spending instead of a decrease as would be intuitively expected. And if enough investors have enough of a particular emotion a similar logic can be applied to the unexpected gyrations of stock markets in response to financial or political events.

She has more than me

Financial markets, or auctions, are based on our ability to make comparisons of prices, values or goods which other people are producing within environments of changing complexity. Moreover, with multiple players involved we apply a reference point for our valuation against others and then – though we have a cognitive predisposition for maintaining the status quo – keep resetting as new information repeatedly comes into our possession and is processed. Indeed, many of the behavioural biases discovered stem from this intricate referencing behaviour. For example, confirmation bias could not take place unless prior information can be referenced and compared with new information.

The ability to accomplish this referencing and comparing seems to emanate from our brain's valuing mechanism at a fundamental level. Evidence for this comes from the astonishing research of Laurie Santos at Yale and her work with capuchin monkeys. Give the monkeys aluminium tokens and they can be taught to spend them on food, just like money. They can also learn to choose the 'bargain' option from foods presented to them (whether a Jell-O cube or an apple slice), and when the prices change so too does their buying behaviour. And interestingly, further studies show that not only do monkeys watch the human providers of the food to assess the cheapest on offer but also other monkeys to see what they're getting – if they don't think they're getting a good deal because another monkey is getting, say, a piece of prized melon for the same number of tokens, they'll get irritated and throw their formerly accepted fruit out the enclosure.  It's a 'monkey market', and one that points to a process so primal in comparison-making for valuation there would appear to be an evolutionary element involved.

The psychology of priority

For valuing behaviour to occur, one other critical mediator is time. Time, however, is not only important in referencing and comparing with a past event but also with the future. Within that cauldron of our minds influenced by all those psychological and physiological influences, we have the capacity to set up a mental scenario to consider possible outcomes. Walter Mischel's paradigm of getting children to delay instant gratification for one marshmallow versus two if they wait, is classic, strikingly demonstrating our early tortuous attempts to implement this mechanism in order to weigh up the best course of action. That we frequently can't is due to a present-focus bias. And for a variety of reasons, as we've seen, not all adults get it right either, as evidenced too by the way predictions of financial advisers are often no better than index fund investing where buying is according to the averages.

But though we may have a baseline we reference, there is, as Nobel Laureate Daniel Kahneman stresses, an additional difference between decision value (the initial choice made) and experience value (the eventual outcome of what we do). Time passes, and with it changes to our perceptions, often in a type of tug-of-war. As a result, what it all boils down to is this: You may really want to eat that piece of chocolate cake, and that piece therefore takes on a particular value in your mind; it has a certain priority. Then, against a background of all the developmental, cognitive, hormonal, emotional and evolutionary mediators – many of which can be expressed economically – you give in. And once you've eaten it you are satiated and a piece of identical chocolate cake embodies a lesser value… at least for a while!

About the author

'That psychology might throw light on how the stockmarket works sparked my initial curiosity, though in time what intrigued me greatly wasn't simply the relevance to good investment decisions or market functioning but the cognitive mechanism we employ. I've come to see that this mechanism is something more than economic – though the financial effects of which we often view in the news – and is in fact fundamental to the human condition. We would not be able to function at all, in any shape or form, I believe, without the ability it bestows, and that fascinates me and makes me want to know more.'

- Jonathan Myers is a specialist in behavioural finance
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