Richard Shotton (2:08)

I can remember reading ages ago. I think it was a Scott Galloway book and he talks about Prime's brilliant because the average Prime Member spends $38 more per month than the non prime member. And you know there's this argument that therefore introducing prime is amazing because it generated all this extra spend and I can remember thinking at the time wait a minute, is that really a fair analysis?

Richard Shotton (2:36)

You know, surely the people who spend loads are more likely to Pick Prime. So isn't this just kind of a fictitious growth in revenue? But actually, I think my initial reaction to Galloway's argument was kind of simplistic. And there is evidence that once you've spent on prime, you'll start spending more. Because we hate to think we've spent money, that we are wasting it by not using it. And the key point is we go to illogical lengths, silly lengths, to try and justify that investment.

Phil Agnew (3:12)

Richard's referring to a psychological bias known as the sunk cost fallacy, writes that this is a tendency to continue investing simply because money, effort or time has already been expended. It's called a fallacy because it's not necessarily rational. We see this with Prime. 200 million people subscribe. 2 out of 3 Internet users in the US subscribe for Prime. They feel it's a good deal. But you could argue that it's not. See, previously, Amazon offered free shipping on all orders over $25. That really was truly free shipping without the need to buy Prime. Prime was originally just $79 a year, but that price has increased three times in 2014, 2018 and 2022. And yet people are just as hooked as ever. They perhaps irrationally feel like prime is a great deal, even if it might not be. Here's Richard explaining this phenomenon by sharing a study about the sunk cost fallacy.

Richard Shotton (4:06)

It's a bit of a thought experiment, so treat with a pinch of salt, but it's a 1985 study by Hal Arcs, who's at the University of Ohio. And he says to people, look, imagine.

Richard Shotton (4:19)

You'Ve bought a ski weekend in Michigan for $100 and it's going to be good. A couple of weeks later, you buy a ski weekend in Wisconsin for $50, and it's going to be great. Unfortunately, a few days later, you realize you've accidentally put them on the same weekend. You cannot go on both and you cannot get your money back. So you cannot go on both and you cannot get your money back. Key question is, which would you choose to go on? Now, what is essentially being asked is, do you want to go on a good and expensive holiday or a cheap but brilliant holiday? Now, considering the money's gone, the logical thing is 100% of people should be very simple answer. They should all say, I'm going to go on the better holiday. But that is not what happens. A small majority go for the more expensive but worse holiday.

Phil Agnew (5:12)

In hal Ark's experiment, 54% of people opt to go for the pricier but worse Michigan ski trip. While only 46% the minority pick the rational choice, the cheaper but obviously better Wisconsin trip.

Richard Shotton (5:28)

Now Arx's explanation for this is the sunk cost effect. Once you've spent money on something we hate, the sense of feeling that we have wasted it. So people think to themselves, well, I can't bear the idea that I'm the type of person that is just the idiot that has wasted a hundred dollars. So I'm going to go on that holiday and I don't have to have that sense of regret.

Phil Agnew (5:51)

Richard makes the point in his book that it's probably not fair to draw conclusions from this thought experiment. So he shares a follow up study also by Hal Ox. Here the researcher approaches real people waiting to buy season tickets for Ohio University Theatre. Although the season tickets were advertised as $15, each buyer was randomly offered one of three prices when they reached the front of the line. The first group were offered the standard price, so $15. Second group were offered a slight discount of $13 and the third group was offered a heavy discount of $8. It's a pretty great deal, almost half the price. The researchers then tracked exactly how many plays each season ticket holder attended over the next six months. They wanted to see more or less for the season ticket made you more or less likely to attend, and it does. The sunk cost fallacy kicks in. Those who paid more for their tickets attended more shows. On average, the full price buyers went to 4.11 performances, while those who paid just $8 went to only 3.29 performances on average. That's 25% fewer. The researcher concluded that the higher ticket price, the stronger sunk cost effect. People who invested more felt a greater need to get their money's worth.

Richard Shotton (7:10)

Now think about Amazon Prime. Once you spend the I don't know, what is it, 99 or $109 per year buying prime, you will go to inordinate lengths to try and justify that. Spend yourself. And in fact, for the book we do a little study with John Paulston and Nicky Morley at Cantor where we say to some people, you can have a book. I think we might have said the.

Phil Agnew (7:36)

Choice about GP Cheeky.

Richard Shotton (7:37)

I can't remember 7.99 on Amazon or 6.99 from WHSmith and you'll get it a day later. If you go WHSMITH and we get our answers, then we get a new group of people and we say you've spent £100 on Amazon Prime. You can get your book from Amazon prime for £7.99 or wait a day and get it for 6.99 from WHSmith. Now, mathematically, when it comes to the economics and the finances, people are getting the same offers. But for one group we are reiterating they have invested in Amazon. That group who were reminded about the expense of Amazon, they were more likely to pick Amazon than the group who had no such reminder.

Phil Agnew (8:20)

The underlying question for both groups was the same. Essentially, it's do you want to pay a premium to get a book quicker? But those reminded that they already invested in Amazon prime behaved very differently. They were 8% more likely to pick the more expensive Amazon prime option over the cheaper WH Smith option. This fallacy has been proven in multiple studies. A 2015 meta analysis of 98 different studies examined the sunk cost effect across gambling, business investments and even all you can eat buffets, and they found this bias to be consistently present. It seems to work again and again.

Richard Shotton (8:56)

So absolutely I think this principle is being applied by Amazon. You get people to put money down and then they will go to logical lengths. They'll keep on buying you even if there is an objectively better and cheaper alternative elsewhere.

Phil Agnew (9:12)

However, this sunk cost fallacy isn't the only behavioral bias benefiting Amazon. See, when Amazon prime first launched, customers could only pay annually. But today customers have the ability to pay month on month. And Richard thinks that that choice, that ability to month on month, might make the customers even more hooked on the platform. Evidence for this comes from a 1998 study by John Gorvel of Harvard University and Dilip Solman of the University of Colorado. They studied 200 gym members in Colorado who had the option to pay for their membership either on an annual, semi annual, quarterly or monthly cadence. So did those who paid annually behave differently from those who paid monthly? Well, yes. The data reveals a very clear pattern. Those who paid annually visited the gym most often immediately after paying, but their attendance soon dropped off. The same happened, although to a much lesser extent for the semi annual and quarterly members. By contrast, monthly payers showed more consistent attendance because they were reminded of the cost each month, they felt motivated to make their membership worth it, and they attended the gym far more than than those who paid on a yearly cadence. Amazon prime probably benefits from this too. Those who pay month on month will use the subscription more as they're constantly reminded of the sunk cost. And it also seems like breaking a price down from an annual fee to a monthly fee has some rather major benefits. And Richard says there's one brand who have taken this to the absolute extreme.

Richard Shotton (10:45)

11% of people thought it was good value when they saw the annual price. 51% of people thought it was good value when they saw the daily price. Now look at Klarna and that's exactly what they're doing.

Phil Agnew (10:56)

Hear all about that brand after this quick break.

Phil Agnew (11:00)

The Next Wave, your Chief AI Officer, hosted by Matt Wolf and Nathan Lanz, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Listen and you'll hear from leading AI creators who are your guiding light in the AI and technology frontier. AI technology is transforming the way we do business and the media landscape is fragmented. The Next Wave strives to be the leading podcast on AI technology and how you can apply it to growing your business. Listen to the Next Wave wherever you get your podcasts.

Phil Agnew (11:32)

Hello and welcome back. You are listening to Nudge with me, Phil Agnew. In September 2025 Stockbrokers saw the largest IPO of the year. The company raised $1.3 billion with its stock market debut, selling shares at $40. Each company doesn't sell an actual product. Instead all it does is helps you pay for your products up front and then lets you pay them back later.

Phil Agnew (11:58)

Pay now, later, or over time. Klarna Smooth shopping It's kind of incredible that the most successful new public company of 2025 doesn't even sell a product. And yet Richard Shotton is not surprised because Klarna leverages a couple of important behavioral science principles.

Richard Shotton (12:17)

So one thing they do is you go on a website, you're looking for a jacket for 99 pounds, say, and the retailer say, it's John Lewis. They will say you can buy the jacket for 99 pounds or you can pay with Klarna and it's three lots of £33. So 33 pound one month, 33 the next, £33 the next. Now this is interesting because it applies a couple of principles. The first is the pennies a day effect, originally studied by John Gorville at Harvard back in 1998. What he showed amongst charities was if you ask people for 365 pounds a year as a donation, people are not interested. If you ask them for a pound a day every day for a year, they are much more likely to donate.

Phil Agnew (13:05)

In fact, participants were 53% more likely to agree to a $1 a day donation request than than an annual one, even though the yearly amount was actually $15 smaller.

Richard Shotton (13:16)

Now, I reran that study in a more commercial setting. I think it was in 2015 and basically lifted Goreville's design and applied it to car rental and or car financing. Some people I told about a car, showed them a picture, described the benefits, and said it was £668 per year. Other people showed them the same car, the same picture, the same description, but said it was 4 pound 57 a day and you had to pay that for a year. Now, when people were questioned about how good value that car was, just as Goreville argues, we saw a very clear pattern. 11% of people thought it was good value when they saw the annual price. 51% of people thought it was good value when they saw the daily price. So even though £4.57 a day for a year adds up to 1668, people treat those two numbers very, very differently.

Phil Agnew (14:11)

In 2022, Richard Shotton and Michael Aaron ran additional studies on the pennies a day effect. They asked 282 consumers to imagine they saw a Sierra Nevada pale ale for sale in the supermarket. Half the participants were told the pale ale cost $18.99 for 12 bottles. However, the other half were given an additional piece of information saying that the $18.99 price $1.58 per bottle. People were then asked whether they thought that price represented good value. And the results showed that those who were shown the per unit equivalent were more than twice as likely to think that the ale was good or very good value compared to those who were only presented with the total amount.

Richard Shotton (14:56)

People put too much focus on the headline number, the kind of 1668 or the £99 for your jacket. They don't pay enough focus to the unit of time. So if as a brand you want to make your products feel better value, you can easily apply this. Now, you sell a time based software, don't say you cost 3650 a year, say you cost 3650 a year. That's the same as £10 a day. If you're selling beer, don't say you cost $24 for a 24 pack. Say you cost $24 for a 24pack. That's the same as $1 a bottle. Break your cost down and they become more acceptable, more palatable. Now look at Klarna. And that's exactly what they're doing. If I'm being asked about a jacket for $99, sounds a bit expensive. I'm gonna have to give up. I don't know, probably a fancy meal for two if I'm told it's three lots of 33. The sacrifice that springs to my mind relates to the 33. It's I don't know, maybe like a pizza just myself, Pizza Express. It feels much better value. And once we have that emotional or intuitive reaction about value, we then use logic to justify the purchase to ourselves. So Klarna is a real opportunity. I think for a lot of retailers it might feel like just an additional cost, but by turning your £99 jacket into something that feels like just cost three dots of 33, that's working with human nature rather than against it.

Phil Agnew (16:34)

Amazon and Klarna have both seen incredible growth in the E retail space. Not necessarily because they always offered the best product or service, but because they used behavioural science to make their offers seem irresistibly good. Klarna helps you break down the cost of your expensive goods to make them seem more palatable and better value, while Amazon makes you pay up front to make all subsequent purchases seem pretty cheap and reasonable. And that is why so many of us are loyal to Amazon Prime. That is all we have time for today. But before we go, I asked Richard to share a little bit more about his latest book. In Hacking the Human Mind, Richard and Michael Aaron explain the behavioral science secrets behind 17 of the world's most successful brands.

Richard Shotton (17:18)

Here's why and the reason I think that approach is useful is as a marketer, it's quite hard to get inspiration or accurate inspiration. But one of the things that we all do is we'll often identify an amazing brand in our category or a close category like Amazon or Facebook or.

Richard Shotton (17:40)

Snickers, and we'll think, okay, what have they done? And what are those tactics that I can emulate? But the problem is with any complex brand, they do thousands of things or hundreds of things concurrently. So how do you know which of the tactics Amazon or Snickers have used are powering their success and which ones are just incidental? So what we did with this is look at what the brands did, these successful brands, and then we whittled it down to the couple of things that had also been proven in peer reviewed, observed, controlled experiments. So hopefully all the ideas that we generate can be much more easily used to power other people's success.

Phil Agnew (18:26)

The book is tremendous, one of the best books I've read this year. So search for hacking the Human mind wherever you get your books and pick up a copy. We have covered a few important principles in today's episode, principles like sunk costs and hyperbolic discounting. Some of you might be thinking about applying these principles to your work, but you might not know where to start. We've spoken about these principles at a High level, you might need more tactical advice to apply it to your business. Well, that is where my new app the NudgeVaults comes in. The Nudge Vaults is packed with 452 insights you can apply to your business with 85 different principles. Sunk costs and hyperbolic discounting are just two of those principles. These insights are varied. For example, there's an insight from Predictably Irrational that found how saying you could lose out on pension benefits increased savings by 27%. And then there's Elliot Aronson's 1998 study with 404 homeowners where half were told they would save 75 cents a day by insulating their home and another half were told they are losing 75 cents a day by not insulating their home. Those who were told the latter loss framing variant were 56% more likely to sign up. Each of these insights comes with tips on how you could apply the insight to your work. For example, if you are running a promotion, writing one day before you lose this offer is more effective than saying one more day to use our offer. Now, I've just shared a small part of two of the 452 insights currently in the Nudge vaults. If you listen to Nudge and you want to apply some of these insights that I share on the show to your work, then I think you should take a look at the vaults. I have built the vaults for you. There is a free preview where you can go and take a look at 50 insights at absolutely no cost. And if you do subscribe, there's 30 day money back guarantee and you can cancel at any time. So if you're Interested, head to nudgepodcast.comvaults. that's nudgepodcast.comvaults. you can sign up today to have a look or you can just take a look at the free preview. All right, that's it for me. I'll be back next Monday with another episode of Nudge. Cheers.