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Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

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Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#11

Post by mechanical_fish »

nopassrecover wrote: post #5

A clever idea but I worry what happens to the people that miss out. They are either aware they've paid $2X (if you tell them) or they are aware that they've been "ripped off" (you are prepared to give it away for $0 so you must have at least 50% markup. Kind of like jewellery stores putting half price sales on $10-20k diamond rings). Either way you are associating negative feelings immediately and a sense of buyer's…

On a practical note, what stops them getting a refund and repurchasing until they get it for free.

Your other observation is good, too, but I think this sentence gets to the heart of the problem. The double-or-nothing transaction is irreversible, which is what makes it a bad one.

People like commercial transactions that can be reversed. Ideally, both parties should walk away feeling like they got a fine deal, but that if the deal goes sour at any point in the near future (because a part was broken; because the customer had second thoughts) they would be both be willing to "undo" it without much harm done.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#12

Post by dxjones »

I like the lottery ticket analogy some people have made, but here is my twist.

My service costs $X per month. So if you like it, you'll want to pay $X. ... But for a just this month, there is a 1/10 chance your $X will get you the service for the entire year!! ... and if you don't "win", you still get what you paid for.

I think this might encourage people who are on the edge to sign up now, and still feel good no matter what the outcome, plus they might tell their friends about it.

-- David Jones

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#13

Post by byrneseyeview »

No. A lottery ticket is a way to buy a fantasy: if you're a housekeeper who doesn't speak much English and already has two kids, you know you'll never be rich -- but for $1, you can spend a couple hours thinking it's a possibility.

To take advantage of this, you might charge 1.1X with a 10% chance of getting 10X worth of similar goods. But that wouldn't be too exciting, either.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#14

Post by nostrademons »

dxjones wrote: post #12

I like the lottery ticket analogy some people have made, but here is my twist. My service costs $X per month. So if you like it, you'll want to pay $X. ... But for a just this month, there is a 1/10 chance your $X will get you the service for the entire year!! ... and if you don't "win", you still get what you paid for. I think this might encourage people who are on the edge to sign up now, and still feel good no mat…

That version's been done, eg. Jordan's Furniture's "If the Red Sox win the pennant, all furniture is free!" promotion. And it works pretty well. I'd imagine that the publicity Jordan's got from that was well worth the money their insurance company paid out.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#15

Post by sachinag »

dxjones wrote: post #12

I like the lottery ticket analogy some people have made, but here is my twist. My service costs $X per month. So if you like it, you'll want to pay $X. ... But for a just this month, there is a 1/10 chance your $X will get you the service for the entire year!! ... and if you don't "win", you still get what you paid for. I think this might encourage people who are on the edge to sign up now, and still feel good no mat…

Just a note: we don't sign our posts/comments here. Your username does that for you.

http://news.ycombinator.com/item?id=198817

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#16

Post by gmazzola »

lunchbox wrote: post #10

As omegazero pointed out, there might be a selection bias if you don't do it right -- people will back out if they see they are in the unlucky group of folks who will get charged $2X. If you make people commit before revealing the amount, the issue is trust: how do customers know that the odds are actually 1/2 that they'll pay $0? How do they know you aren't just charging everyone $2X? You'd have to use some verifiab…

I'm sorry if this response is off-topic, but your last question piqued my curiosity so I would like to answer it.

There is an authoritative source of random numbers. In 1955, The RAND Corporation (a Cold War-era think tank) published a wonderful book entitled "A Million Random Digits with 100,000 Normal Deviates". Amazon.com has a copy of it, including some amusing reviews: http://www.amazon.com/Million-Random-Digits-Normal-Deviates/... .

For a good source of truly random numbers accessible from an API, I personally use http://random.org . They use atmospheric noise to create random numbers, which ultimately boils down to the true randomness that is Quantum Mechanics. It's not suitable for high-security applications -- I could do some network trickery and redirect your API request to my server that always returns 1.0 -- but it's better than the PRNGs on modern computers.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#17

Post by nsrivast »

nostrademons wrote: post #9

I think you're interpreting people's irrationality in the wrong way. People are often irrationally risk averse : most people would much rather pay $X with probability 1 than $2X with probability 1/2 and $0 elsewhere. The reason lottery tickets sell is because utility functions are nonlinear. After buying a $1 lotto ticket, they're still poor; they don't miss the dollar. But if they win, suddenly they are rich , which…

Actually people are thought to be risk seeking when it comes to losses instead of gains.

http://www.jstor.org/pss/1914185

Unlike most people in this discussion, I like the idea and think it might work under certain circumstances (probably goods with low prices and high price inelasticity).

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#18

Post by amichail »

nostrademons wrote: post #9

I think you're interpreting people's irrationality in the wrong way. People are often irrationally risk averse : most people would much rather pay $X with probability 1 than $2X with probability 1/2 and $0 elsewhere. The reason lottery tickets sell is because utility functions are nonlinear. After buying a $1 lotto ticket, they're still poor; they don't miss the dollar. But if they win, suddenly they are rich , which…

If they don't like this scheme, you could allow them to pay $X with prob 1.

More generally, you could let them specify the pay probability p or price $Y >= $X. Given p, have them pay $X/p. Given $Y, make them pay with probability $X/$Y.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#19

Post by azbob »

nostrademons wrote: post #9

I think you're interpreting people's irrationality in the wrong way. People are often irrationally risk averse : most people would much rather pay $X with probability 1 than $2X with probability 1/2 and $0 elsewhere. The reason lottery tickets sell is because utility functions are nonlinear. After buying a $1 lotto ticket, they're still poor; they don't miss the dollar. But if they win, suddenly they are rich , which…

Actually, people play the lottery because they can't do math.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#20

Post by cubicle67 »

azbob wrote: post #19
nostrademons wrote: post #9

I think you're interpreting people's irrationality in the wrong way. People are often irrationally risk averse : most people would much rather pay $X with probability 1 than $2X with probability 1/2 and $0 elsewhere. The reason lottery tickets sell is because utility functions are nonlinear. After buying a $1 lotto ticket, they're still poor; they don't miss the dollar. But if they win, suddenly they are rich , which…

Actually, people play the lottery because they can't do math.

Q: How do you increase your odds of winning Lotto by 0.0000001%?

A: Buy a ticket

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