What monkeys can teach us about offers and pricing

Earlier this month, research that I had come across a year ago, in The Economist, received additional attention in Seed. This study of the economic behavior of capuchin monkeys suggests that the human response to various pricing strategies has been in our DNA for a very long time.

When these monkeys were trained to use special shiny disks as money (which could be exchanged for pieces of their favorite fruit), they tended to behave with this cash in exactly the same ways as us humans. In fact, looking only at the data, you would be hard-pressed to differentiate a human consumer from one of these monkeys.

The research sheds light on behavior that marketers have puzzled over, and exploited, for generations. These include:

Why are “premium” test offers so much more likely to out-pull non-premium packages in direct response, even when the price of the offer covers the cost of the premium?

Answer: We all love getting a free “bonus” with our purchase.

Why are gambling games with some of the worst odds, such as lottery tickets and slot machines, also among the most popular?

Answer: They give the player small rewards more frequently, and keep our losses incrementally small.

Why are bonds more popular than stocks, in spite of the latter always performing better over the long haul?

Answer: We are loss-averse, and would rather guard what we have than take short term risks for long term gains.

What do I mean by loss-averse? Human experiments in game theory have repeatedly shown that in two scenarios — one where (for instance) we lose half of our transaction every third time we trade, and another where we double our transaction every third time we trade — we tend to choose the second set of trades more often.

Even when the equation is altered significantly to favor the first set of trades over the long run, we still favor the occasional free prize over the less likely loss. It’s simply human nature. Now we know the same rules apply to capuchin monkeys. Go figure.

Parenthetically, there is one other way that these monkeys seem to be behaving a lot like humans. Last year I read an account of this study in The New York Times. There I read that these researchers witnessed what was “probably the first observed exchange of money for sex in the history of monkeykind.” Keith Chen, the Yale economist behind this study, said that he noticed the exchange out of the corner of his eye. Although he wanted to think skeptically, that the trade was coincidental, he conceded that “The monkey who was paid for sex immediately traded the token in for a grape.”