Ever so often, I will head to a bubble tea shop to satiate my thirst with one of my favourite drinks. Because I am thirsty, I am willing to pay the price on the menu, and will go ahead to make the purchase.
However, most bubble tea shops offer different sizes of bubble tea. So, if I’m feeling really thirsty, which size should I choose? The largest one?
But hold up. Economic theory states that rational consumers will be willing to pay a price only up to the point at which their thirst is quenched.
Yet, any bubble tea shop worth its salt (or sugar, in this case) knows that other than getting their customers to purchase that drink, the other objective is to convince people to purchase a larger drink – and they usually entice you to do so by offering a price that’s only slightly higher. Hence, getting many to spend just a bit more than they had planned.
So, the question now becomes: Would I value a slightly larger portion of the drink at the incremental price? If I do, no problem. I purchase the larger cup. So, what’s the issue?
Most businesses understand something about rational or, in many cases, the irrational behaviour of its customers. Thirst tends to cause people (especially me) to over-estimate the future value of taking that additional sip of delicious bubble tea.
In Behavioural Economics, this is known as a time inconsistency or the hot-cold empathy gaps problem. It is when our present self, which is in a “hot” state of hunger, pain or thirst, fails to predict accurately the preferences of our future self – when we are in a “cold” state of satisfied hunger or thirst, or our pain soothed.
Since we tend to purchase a drink before taking a sip of beverage, going by the theory above, many often end up upsizing their bubble tea. However, after that first sip, the marginal value placed on the larger drink we had wanted immediately decreases! (Recall, a similar moment when you were so hungry that you upsized your meal only to find that you could not finish it and felt sick of eating it towards the end of your meal?)
My point is not that we should never upsize our drinks. But that if we consider how our current state might be affecting our perceptions, we’d learn to adjust for it and make better choices from a rational standpoint. We may even do a better job avoiding “hot” situations that provoke rash behaviours. (Ah, that’s why people say acting in the heat of the moment.)
A good tip to overcome this is to have a sip of water before ordering the cup of bubble tea. This will reduce the “hot” state that we will be in and help us to better predict our preference in the “cold” state. Hopefully, you will not over-estimate the future satisfaction you get from the drink.
Now, all this thinking and writing has made me thirsty again…
