August 22 2011 09:26AM
What can consumer response to fluctuations in the price of eggs tell us about the behavior of NHL General Managers?
It turns out that consumers and NHL GMs are both chickens.
Professor Daniel Putler a former U.S. Department of Agriculture researcher knows a lot about eggs. Looking at cash-register data from Southern California he noticed something peculiar. Generally speaking "people should react to price fluctuations with equal intensity whether the price moves up or down." More plainly, "economists wouldn't expect people to be more sensitive to price increases than to price decreases." But when Putler look at his data he found that people basically freaked out when the price of eggs rose. His numbers showed that when the price of eggs was reduced people bought slightly more eggs. When the price of eggs rose people "cut back their consumption by two and a half times"
What all this egg data boils down to (pun intended) is that "we experience the pain associated with a loss much more vividly than we do the joy of experiencing a gain."
Well that's all well and good for people looking to save a few bucks, but NHL GMs wouldn't be so fickle when it comes to making important decisions. Would they? Unfortunately for them, "the more meaningful a potential loss is, the more loss averse we become." Raise the stakes, and we respond by becoming more irrational.
The Agony of Defeat
Loss Aversion influences GMs who refuse to trade aging impact players. Two separate GMs have been reluctant to trade away either Iginla or Kiprusoff. In the short term both players are keeping the Flames relatively competitive. Both are on the wrong side of 30 and will not contribute at their current level much longer. The Flames could turn both those assets into a collection of young players or prospects that could provide them with a foundation on which to rebuild. Due to the influence of loss aversion, the fear of potential loses, in terms of both games won, goals, and fans looms much larger than the potential gains. Keeping both may well end up being the best move for the franchise, however unlikely. The point is that when forced with a decision people tend to avoid taking risks to avoid the pain associated with loss.
The eternal hand wringing over the Kessel deal is a product of loss aversion. The loss of Seguin, Knight, and Hamilton is more significant than the gain of Phil Kessel in the minds of fans. People only think of what was lost and ignore the gains. From my own experience I tend to dwell much more on a Leafs loss than I celebrate a win. I still hate Jeremy Roenick.
Loss Aversion is related to both the Endowment Effect, and the Status Quo Bias. What these three biases illustrate is that people naturally abhor change; whether we're overvaluing what we own, sticking with the devil we know, or buying fewer eggs.
- The story about Professor Putler and his egg data comes from the book Sway by the Brafman brothers, Ori and Rom.
- For more on just how powerful Loss Aversion can be read this post/excerpt from the Book How We Decide by Jonah Lehrer.