Tuesday, August 21, 2012

Were You Tricked By Clever Marketing?

If you bought an expensive engagement ring, then the answer is yes.

Economists develop models of how the world works based on the assumption that consumers are rational utility maximizers. Anybody that has seen a television commercial knows that the marketing industry operates on the assumption that this is not true. SUV's climbing near vertical walls, celebrities telling you that certain credit cards are great. Those celebrities will say the same about the leading competitor's product if that competitor had paid more. The appeal is completely irrational.

But at least a car is useful. What about the diamond engagement ring? I don't think so. The symbolism was concocted out of thin air as a means of enhancing profits for DeBeers Consolidated Mines, Ltd. And what's tough is that it's a financial burden placed on a person at a time in his life when it is generally harder for him to manage it. That's one of the issues discussed in this article: 7 Reasons Why Diamonds are a Waste of Your Money.

In fairness to economists, the "rational utility maximizer" is an understandable assumption. Assumptions are required in order to develop models that predict behavior. It's true that people generally don't buy things because they want to harm themselves. But our irrational consumptive tendencies must be kept in mind, because on unregulated free market capitalism we should expect companies with huge concentrations of wealth to seek to exploit those tendencies to improve their own profits. Even when the consumer is harmed.

As a related point, watch Derren Brown turn the tables on marketing executives, manipulating them in the way they manipulate their own customers.


Chad said...

Guilty as charged. I really thought that was a great You Tube video BTW and a nice change of pace.

My latest or I should say my wife and I's latest downfall where marketing sucked us in hook, line and sinker has been the Skylander series.

This is a game for X-Box and all the major game systems out there, but what is so unique about the game is that you have to collect different characters in order to use those characters in the actual game. You have to put the physical character on a portal for that character to show up in the game. Certain character types must be used to access new areas on the maps - without them you can not explore all the areas. There are 8 different elements and there are a standard 4 characters per element - Each new character costs approximately $9. The game system came with 3 characters leaving 29 more characters to buy if you want a complete set. Early on Activision must not have thought the game would be too popular because they didn't make enough characters - they were backed ordered and not available in the US so we began searching the internet. This actually became a passion - so for a character that cost $9 normally we were paying up to $50 per just to get new ones.

Of course - the Activision folks were brilliant once they saw they had something and started releasing 'special' versions of the standard characters as well. One of the main characters 'Trigger Happy' has 3 or 4 differnt versions. Other characters also have different versions. Mind you - the game can be played in full with just 8 characters, but we have been sucked in to the point now where the total cost is rather embarrassing to mention. There is not a single released character that we do not have - in total there is 50 I think.

2012 - they are releasing a new disk (new map/gameplay) and another handful of new characters (Giants) along with versions of the old characters that light up. Like a addict needing a fix - we are already negotiating to pre-buy all those as well.


Examinator said...

Have you read any Dan Ariely
He actually argues the exact opposite to your opening paragraphs "irrational economics". there is significant evidence to suggest he has a point.
There is a show on ABC TV Australia's
National Broadcaster (nick named 'Aunty' paid for by taxes! It's almost civil war territory for any govt to dethrone Aunty)Called the 'Gruen Transfer'. Essentially its a light hearted panel discussion with advertising execs chaired by a comedian about advertising,PR, image manipulation. While it's light its funny and at times very insightful into the above. If you go to abc.com.au ...TV then Iview you can watch the last episode.
They talk in detail about the techniques and for giggles they get two agencies to sell an nominated 'impossible' product.... the resultant ads are often hilarious.
Anyway they show how ads are geared at the emotions not substance.
The Derren Brown vid was fascinating.

Naturally I watched the first part and came up with a totally different response. Clearly the subliminal queues weren't as noticeable to me but my responses did give insight into my reasoning . It was largely functional... i.e. I looked at the potential uses for taxidermy ...i.e. stuffing your dead pet to put on a table etc and “PET MEMORIES”.
Which segways into your bit about engagement rings.
Simply put I was opposed to them as I am for elaborate (expensive) weddings, they are a waste of money as per the 7 reasons. However I did indulge my wife as she is hooked on this consumerist conditioning.
I did draw the line about a big white wedding dress and morning suits etc never to be worn again.
She was married in a yellow dress she made and wore it several times later.
Me it was a new suit which I also wore many times.
NB My marketing major in my business degree didn't come until 10 years after marriage.
BTW I don't believe in jewellery and have none. My pocket watch was a gift from my daughter and cost $50 7 years ago.

Jon said...

Ex, that was a great video. I didn't recognize the name Dan Ariely but after watching I realize I have seen him before. Will try and watch that show you mentioned.

According to the links I had regarding engagement rings apparently the marketing was directed towards Americans and not others. Is there perhaps some pressure in Australia to follow these conventions, or is it typical of people to ignore this? In the US almost nobody gets married without an expensive engagement ring.

If I could do it again I'd do what you did when you were married. My wife isn't going to go as far as me in terms of discarding some of these (what I consider) wasteful expenditures, but I'd have requested a lot more concessions than I ended up getting. Sounds like you figured this kind of thing out earlier than I did.

Now I do have a daughter, so I'm already laying the groundwork for a more reasonable affair if she does get married. I don't mind spending money to create an enjoyable experience. Having the people there and watching them enjoy themselves is worthwhile. But the expensive ring and wedding dress, flowers, a massive hall. To me these are not essential.

Examinator said...

Engagement rings (betrothal rings) are almost as old as settled society its self. Then it was “ a sign of ownership (of this woman) and status”, No women's lib involved.
FYI the world's largest consumer of gold jewellery is in fact India....most of it is associated with weddings. Part dowry and part status. They are really OTT . Virtually no wedding (apart from the horrendously poor doesn't involve gold. I've seen weddings in which the bride has been wearing over $500k of 'valuable” jewellery ! The daughter of a Dr. , Interestingly he has 3 other daughters. Eeek!

Good luck with convincing your daughter....PS don't be too disappointed when she ignores your reasoning when it's her turn. ;-)

I've been searching for an article that I've seen on DeBeers and its a cartel that artificially boosts the price of Gem stones and gold by limiting their release much like OPAC. In short, neither of the 'precious' minerals are as rare as one is led to believe.( and this is Capitalism that is predicated on the market dictating/level playing field? Sorry Chad but it proves the hypocrisy of Capitalism as it's practised).

Even Australia's Argo mine in Western Australia (the biggest source of Pink, Champaign and multi-colored diamonds in the world) prices are controlled by DeBeers . What isn't widely known is that Russian diamonds during the cold war and the South African (trade boycotted) apartheid time were controlled by DeBeers. Some African diamonds 'blood diamonds' (slave labor mined run by butchering war lords 'rebel armies') are out side the cartel but enjoy the artificially high prices...to fund their obscene wars. So as you can see to justify their prices their campaign is world wide.

I must admit that I think that corporations self interest and wantonly ignorant, self indulgent consumers have a lot to answer for by way of their exploitation of resources like diamonds in the third world. But then again it's not just confined to gems it's virtually all resources.

e.g. One could also, and I would throw utter contempt at US corporations like Freeport and their super mine in Western Papua (Irian Jaya ...Indonesia) . They should be a national embarrassment. It is the prime reason Indonesia holds onto Western Papua. The Military generals are all benefiting personally from the mine and subsequently Freeport gets vicious military support to put down any worker discontent. Much like Carnegie Steel Wars circa 1920's . Mark my words , this and USA unconditional support is the lit taper for another Vietnam.
Again capitalism (read plutocracy at it's worst) .

Examinator said...

Pursuant to your bit about somebody else serving prison terms look at this more recent one.

HispanicPundit said...

Consumers rationally buying diamonds makes sense if you understand what economists mean by utility.

Status, signaling, etc for many, is a valid utility.

Examinator said...

Valid (created?) emotional 'wants'(read insecurity) perhaps.....for pre 1950's
Haven't you heard of the sexual revolution? women's lib? I'm sure it was in the news papers for a while. :)

What you're missing is that it isn't a natural market. One that didn't exist when capitalism was written.
What this signifies is capital Malthusianism.

Chad said...

Hypocrisy of Capitalism? How? No one is forced to buy diamonds.

Referring to diamonds, they make my wife extremely happy - I don't purchase them as an investment, I purchase them because when she walks into a room she feels even more beautiful (and confident) that she already is. I buy Gold/Silver if meant to be an investment. There has been rarely an occasion that someone has not mintioned my wife's ring or other parts of her jewelry collection.

I like TV's/guns, she likes diamonds/jewelry.

Jon said...

Chad, as you saw with the Derren Brown video the advertising people weren't forced to create the marketing campaign they created. They were manipulated into creating that campaign and manipulated into thinking that campaign originally came from them.

No doubt diamonds make your wife happy and make her feel beautiful. And why do they do that? Because your wife (and mine) were subjected to a clever marketing strategy that manipulated their emotions in order to achieve huge profits for DeBeers.

Suppose instead of using diamonds DeBeers did the same with polished goat turds. Our wives would feel loved and beautiful if we spend a couple of months worth of our salaries purchasing goat turds for them. Yeah, they do feel beautiful and yeah they do like them. And yeah I just handed a man a couple of months worth of my salary in order to fulfill an emotional need that the goat turd manufacturers had contrived. Are you OK with that? Should we question that? I think so.

Jon said...

HP, I'd be curious to understand what in your mind would qualify as an irrational purchase.

In my opinion (at least for me) the kind of status I would get from having a large diamond ring on my wife's finger is not the kind of status that actually brings me happiness. I would rather earn status by developing intelligence, understanding my world, understanding the people of the world better, and developing relationships with them. Purchasing a large diamond actually gets in the way of my real goal, because it means I have to work more and when I'm working I'm not really doing the kind of learning/relationship developing that brings me real happiness.

So at least for me the purchase of a large diamond ring would be irrational. What I did in fact was I purchased that ring without understanding even my own wants and needs. Also without understanding how the emotional need for the ring was contrived by clever marketing. In my mind this plays a role in the kind of status I assign to others that wear a ring like that.

So would you agree that the purchase of that ring was irrational for me? I'm coming to the realization that the kind of status you get from posessions is not valuable to me. I think if you understand where the emotional need came from, you understand the kind of status you get from owning things, and you still decide that you want what that diamond brings, then fine, that's a rational purchase. But what I think is people generally don't understand that, and often don't understand the kind of happiness that actually comes with the ownership of things. That ignorance is exploited by profit seeking corporations, and I think it's worth it to improve awareness. Possibly stop the currently 15 years younger version of myself from making an irrational choice.

Jonathan said...


Natural market? By that definition, you and I aren't in the natural market :-). The goal of a natural, optimum, and "rational" market, are often times at odds with the desires and wishes of the people who live within the market.

What is the goal of a rational and efficient market? I don't, know I'm just asking - but I suspect that there is an underlying desire for elements of maximum happiness, most good for the most people, etc. etc. but when we start to move against the irrational wants and desires within the market, a tension arises as we try and find a balance I think...

Examinator said...

There in lies the hypocrisy....
Look at it this way. What is it that makes your wife look more beautiful the sparklies there are lot's of alternatives that 99% of the world couldn't tell the difference.
the fact is she feels more "beautiful?" because she believes them to be 'DIAMONDS', THAT is Jon's point.
In PNG some tribes used to see Face tattoos as a mark of beauty, Ancient Greek rich painted their faces white with bright red lips.....
My wife chose Gilson Emeralds (man made) as opposed to 'real' even though She had many options...her decider was the color.
To further emphasise the point 15 years later she confessed that she preferred rubies but was concerned about my afford ability....Today she has a ruby ring but rarely wears it ...it's not 'her engagement' ring.
She also said if it was ever lost/stolen she doesn't want a replacement for the same reason.
Can you see the difference.

Examinator said...

Jonathan and others.
You are absolutely correct and there in lies the nuanced but serious difference.
One needs to consider the circumstances in which the doctrine/philosophy of capitalism was written. (Context)

key elements include that companies wouldn't set up O/S for lower costs because of patriotism.
He also didn't agree with Monopolies/cartels. He was also in favor of SS. There was a clear flavor of overall benefit, *distribution of wealth*. If one actually reads his book one can see his intentions/context out comes are all Very different to that of Capitalism as it is practised today.

Now given that all of the above are abandoned/ distorted beyond reasonable recognition I ask is it still 'Capitalism'?
Now here is the tricky part in keeping with Jon's emphasis on tricky marketing.
Very few lefties are opposed to Capitalism as writ. What most of us object to is the distortions that are associated with the term now.
However those who use the the distortions to thwart the distribution of a nation's wealth deviously associate them with a the term Capitalism. Then argue if you support Capitalism you must support our activities, if you don't you must be Socialist etc. ( a logical/factual false assertion....LIE). e.g. From a strict logic perspective what Chad is arguing isn't by definition a 'rational' market (rationality has nothing to do with it). It is a created/manipulated distortion of a term and the “market” and therefore (capitalism) .

The 'right' (sic) are always trying to extend (read distort) the boundaries of what determines a market by adding terms and definitions to accommodate their less than 'true capitalist' actives.

Hence we get evocative terms like 'rational' market and 'utility' are extended and the unwary (read unsophisticated thinker... one who sees only Black or White and then in Extremes) tend to use them in common terminological ways. The outcome they are manipulated (marketing) to accept the distortions as part of Capitalism even though many are the absolute opposite. In truth I reject those distortions of the market that consolidate wealth for wealth sake and to an ever decreasing minority. But to make the heroically silly leap to to say I'm anti Capitalism is the depth of inanity.
In short 'right wing' economists tend to start with a conclusion and manipulate/ choose the logic and terminology to fit that conclusion. Ergo they manufacture 'consent', 'conclusions' and more important stifle opposition.
As an extension of logic I would advocate that a market should be objectively controlled to best ape a natural market and eliminate the emotional spin that seeks to remove it from that rational (real meaning) tangible natural market.
I would postulate that the real emphasis of capitalism towards efficiency and innovation would be key drivers . Yes Chad, HP I think the current distorted Malthusian Capitalism is Inhumane/ undemocratic and contrary to false assertions it's more about excluding competition and profit than Capitalism was intended.

Chad said...

Still not following what you advocating/saying. Are you telling me that I do not have the ability to open a diamond store and to sell at a margin of 10%? Are you attempting to say that I could not start a diamond mining company and compete against whomever?

Or are you advocating that a group of people - unrelated to the market - gets to pick winners and losers? Or has the ability to slow the growth of the most successful company to allow a less effective company to catch up?

Chad said...

Jon - shouldn't we be saying congrats to DeBeers then? I still am not catching your point. Yes marketing played a role, so did the traditional aspect of marriage (giving a ring or rings), so did social acceptance, peer pressure and status. Are you advocating that people should not be able to market?

I personally believe that with the Internet, it is much more difficult to get 'swept' into a sale today. I can't recall in the last 10 years a moment where I or we made a purchasing decision without investigating on the net. Even for my wife's ring, we did a heavy amount of research prior to buying. When we got it appraised (for insurance) the appraisal value was 17% higher than what we paid just weeks before.

We still get pulled in by great marketing sure, but we go in with our eyes wide open and the net is the ultimate check and balance tool.

You kind of sound like the National Urban League asking Nike to pull the ads for their $315 shoes because they think the kids will buy the shoes instead of school supplies.

Jon said...

I'm saying on a free market we should expect companies to try and manipulate you into doing things that rationally are not in your best interest. I think that's happening constantly but in the case of engagement rings this is more obvious.

If I cleverly convince a person to harm themselves in a manner that delivers a profit to me is that praise worthy in your mind? Let's suppose I walk up to two homeless people and say if they like they can fight until one of them loses consciousness and the winner gets $20. They do it, one ends up dying and the other is severely injured, and I sell the video for $10K. Do you tell me congrats? What if it is one of your loved ones that was convinced to fight in this way? Seriously, do you think this is praiseworthy? I'm not asking whether you think it should be allowed. I know you'd probably say "It was their choice to do it or not, so we shouldn't stop them." I'm saying do you walk up to me and step over the dead body, shake my hand and say "Good job Jon, you made a great profit." Is that what you would do?

I think engagements rings deliver profit to DeBeers and harm regular people. Not as much as the hypothetical I described, but they do harm people in that they place a tremendous financial burden on young people when many of them can scarcely afford it. So no, I don't think we should congratulate them.

Nor do I think we should congratulate Dow Chemical for making tremendous profits developing chemical weapons which were sprayed on Vietnamese civilians. That would only make sense if profits were the only thing that mattered and harm to others was irrelevant.

And by the way, your appraisal in no way reflects the price you would actually get if you attempted to sell your ring. I went through the exact same thing. They appraised it much higher than what I paid. Part of that though is the replacement cost, not the price you could get if you tried to sell. Yeah, to replace it you'd need that kind of money, but you'd never get that kind of money trying to sell it. "A diamond is forever." People don't want used diamonds. That's part of the clever marketing.

Chad said...

Interesting points Jon - I think the scenario you described with the homeless would be a criminal act if I am not mistaken correct? It is also kind of an extreme/obtuse example don't you think?

How about changing your extreme situation to something more realistic - how about if you approached 2 homeless people or a group and allowed them to bid on the cost to wash your car for money. If the final bid was $5 then yes I would say that you did a good job. It cost $5 to run it through a gas station wash and instead you gave the money directly for a service rendered.

Since we have no plans of ever selling her ring the evaluation of the ring was for insurance purposes only and we were pleased with the results. BTW - I believe you may be incorrect here anyhow - as we approach our 10 year I took her ring in for a "cleaning" with the true intention of designing her 10 year band and I asked the jeweler what I could sell her ring for and he there was very little depreciation - (within $500 of original purchase price nearly a decade ago). Maybe it was because of the titanium band and not the diamond, but it was very close.

About Dow - goodness you must get really tired finding all the negatives about these profitable companies. If not Dow - it would be another company, but Dow does much much more than produce chemicals for weapons. It is a portion of their business - one that I could have some agreement with you is difficult and dangerous, but they do far more than just that. Many aspects of their company focus on the 'green' stuff.

Jon said...

Unfortunately what I described is not illegal and has actually been done. See here. Not sure if anyone actually died but they obviously could have.

The problem with the washing your car analogy is that people aren't harmed by washing your car. You have to offer an example where one party is harmed for the profit of another party. That's the point of the discussion related to diamond engagement rings.

Regarding Dow, you're actually incorrect to say others would do the same. All other companies discontinued producing napalm and Agent Orange in reaction to the protests (see here). Dow continued, and gained substantial profits over it's rivals. Is this commendable in your view?

Examinator said...

You are unable to DIG the diamonds and sell them for less than the cartel price. Their margins are horrendous.
They control the price to the dealers who sell to the shops.
They artificially keep the user price up by their emotional sell to the public.

It's the same as Mercedes ...they limit their production of the top models to push the price up.... they are 'ego' sells.

A bit like executive vehicles paid for by the company.
Ask yourself is this the most efficient use of capital? NO.

I've already told you of my experience when I rejected an up market vehicle in favour of a van that could double as a work vehicle.
My point is that executive egos are valid expenditure of capital but stuff the workers or the share holders....This is doubly true of most exec jets.
That's not Capitalism its Malthusian Capitalism ...plutocracy hiding behind distorted Capitalistic traits.

To call that Capitalism is BS

Examinator said...

As for Dow and 'agent orange'.... what about all the US soldiers who have suffered too? Ask their families.

Now if the USA hadn't gone back on their deal with Ho Chi Minh there would never been the need for the product at all.

Oh yes what about the recently discovered US army's secret Dump of unused mustard gas in Queensland Aust
from WW2. Guess who had to pay for the clean up ?
Chad, nothing happens in a vacuum/ bubble. The problem with the current version of Capitalism (read plutocracy) is that it doesn't pay a fair price.