Psychiatry & Psychology--General/Psychology question
QUESTION: Mr. Auerbach,
I am in the sales/service profession. I have found that when I charge less for my services I seem to be treated poorly by my clients. It seems counter-intuitive to me in that, had I been charging a higher fee, my clients would have greater demands/expectations of me. Should I charge more for my services? Thank you in advance for your time.
ANSWER: Picture that you're in a museum or art gallery. You check the catalogue and notice that there is included the price that the museum paid for the work, or that the gallery is charging to sell it. Most are in the hundreds of dollars but one has a value of ten million. Which piece of art would you try to see first, stand in front of the longest, and pay the most respect to?
What you experienced is a basic human trait, David, that has been shown in psychology experiments and explained by the concept of "cognitive dissonance." That is, it would be dissonant (illogical, inconsistent) to pay a lot for something and not value it highly. People cannot change the perception of what they paid (because that is a matter of fact), but they can alter the value they place on it, so the more they pay they more they value it, in the service of logical consistency.
Of course, if you overcharge you can price yourself out of the market entirely. A solution might be to charge high but offer a special discount for whatever reason -- full payment on completion, senior discount, weekend work, or whatever.
Hope that answers your interesting question, and good luck in your profession.
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QUESTION: I have one more question if I may. I stumped another Expert with this question earlier (I didn't want to wear out my welcome by asking one expert too many questions). I have always found it interesting human nature that if a person starts with $0 and it increases to $100, then drops back to $50, one perceives this as a $50 loss rather than a $50 gain. Real world example: I buy Apple stock at $100, it grows to $200, pulls back to $150 where I sell. My brain feels a $50 loss rather than a $50 gain. And on top of that, as I watch Apple stock grow and grow, the mental loss continues to increase. Is there a psychological term that represents this? Could it be that the max price creates the cognitive bias of anchoring? Thank you in advance.
You are right, but I don't think that requires any psychological theory or terminology. All value is relative and subject to interpretation. You made a profit but it could have been bigger. Or smaller. You suffered a loss that could have been ....
Buy at the bottom, sell at the top. Sure. Anyone doing that consistently would be busy doing it, not discussing it or advising others.
Should you monitor the hourly fluctuations of your investments? Or should you, at the same time you make a trade, enter a stop-loss on one side and a sell order on the other, and forget it until the complete trade is completed (assuming the broker will accept an order for a distant price)? There's no agreement on the better strategy. And the size of the mutual fund industry shows how many others are feeling the same interpretation-based frustration as you.