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    07 Exaggerating Bias

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    rameshlkumkar34987
    The document discusses exaggeration bias, where people overestimate their willingness to pay for a product when directly asked. This is because stated preferences do not always match actual revealed preferences when money must be spent. To overcome this, indirect methods are needed to estimate willingness to pay instead of direct questions, though these also have shortcomings.

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    07 Exaggerating Bias

    Uploaded by

    rameshlkumkar34987
    6 views2 pages
    The document discusses exaggeration bias, where people overestimate their willingness to pay for a product when directly asked. This is because stated preferences do not always match actual revealed preferences when money must be spent. To overcome this, indirect methods are needed to estimate willingness to pay instead of direct questions, though these also have shortcomings.

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    The document discusses exaggeration bias, where people overestimate their willingness to pay for a product when directly asked. This is because stated preferences do not always match actual revealed preferences when money must be spent. To overcome this, indirect methods are needed to estimate willingness to pay instead of direct questions, though these also have shortcomings.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    6 views2 pages

    07 Exaggerating Bias

    Uploaded by

    rameshlkumkar34987
    The document discusses exaggeration bias, where people overestimate their willingness to pay for a product when directly asked. This is because stated preferences do not always match actual revealed preferences when money must be spent. To overcome this, indirect methods are needed to estimate willingness to pay instead of direct questions, though these also have shortcomings.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Video Title: Exaggeration Bias

    Hello and welcome back. Last week, we talked about the concept of value and how the marketer can
    tinker around with the 4 P's to deliver and communicate value to the consumer and hopefully make
    a profit in the process. We spoke about willingness to pay or the maximum amount a consumer
    would be willing to pay for a certain good or service and how knowledge of this can help you make
    better pricing decisions. This week we will talk about a trickier problem. How, if at all, can we
    measure willingness to pay?

    Imagine the following scenario. You're a product manager at Amazon and have developed a new E-
    book reader, The Kindle Voyage. It weighs 188 grams, which is about 13.4% lighter than the previous
    model, the Kindle Paperwhite. It also allows you to turn pages using the new page press buttons apart
    from the touch screen that both the paperwhite and your model have. The Paperwhite retails at
    rupees 10,499. How much would you charge for the Kindle Voyage?

    Marketing managers and product managers routinely deal with such questions. You can, of course,
    look at the cost of introducing the new features, and add a markup to the price of the Voyage. But
    how much can you add? And will consumers be willing to pay for these new features? At this point,
    you have only gut feeling to guide you.

    The next thing you could do is find a representative sample of consumers and ask them the following
    question. Here is my new product. How much will you be willing to pay for it? And each person tells a
    number, it could be 17,000, 21,000, 14,000, 12,000 etc. What if you were to use these numbers
    approximate a distribution and do a calculation like we did last week? Chances are that you would end
    up massively overpriced in your product, leading to a failure in the market, why? This is because of a
    phenomenon called Exaggeration Bias.

    A long line of research says that human beings are not good at sticking to the words. What you say is
    not always what you do. For example, you may have convinced yourself that you will exercise every
    day or cut out smoking, but in reality, you may shirk your activity or sneak out for an occasional smoke.
    Remember, an election, where people surveys indicated that nobody would vote for a certain
    candidate. But then, you saw him come to power or the time you promised someone you would see
    their amateur standup comedy show but ended up skipping it. What happened was that peoples'
    revealed preferences that is what they actually did, did not match the stated preferences. That is what
    they said they would do.

    In our pricing case our simple question may have caused you a respondent to simply overestimate her
    own willingness to pay. She was probably not lying, but genuinely believed she would pay 17,000 for
    the new Kindle Voyage. Those are her stated preferences.

    In real life, when she actually has to buy the 17,000 products, and it involves an actual expenditure of
    money she shirks from the decision. Her reveal preference is not to buy. This is known as the
    exaggeration bias and is common in willingness to pay service. So how do we overcome this? We
    resort to other indirect methods which have their own shortcomings but are a little more robust than
    directly asking.

    Copyright © IIM Bangalore. All rights reserved


    Copyright © IIM Bangalore. All rights reserved

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