Data & Research January 23, 2008

Mind Over Matters

They say you get what you pay for – but maybe it just feels like you do.
Reported by
Researchers from the California Institute of Technology and Stanford’s business school have found a link between the sensation of pleasantness that people experience when tasting wine – and its price.

According to a report on CNETnews.com, the researchers found that with the higher priced wines, more blood and oxygen is sent to a part of the brain called the medial orbitofrontal cortex – a part of the brain whose activity reflects pleasure. Brain scanning using a method called functional magnetic resonance imaging (FMRI) showed evidence for the researchers’ hypothesis that “changes in the price of a product can influence neural computations associated with experienced pleasantness,” they said, according to the report.

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In fact, the researchers found that people ranked taste of a $45 wine higher than the same wine priced at $5, and the same for a different wine marked $90 and $10 (this is ostensibly evidenced by the data in the chart to the right – but you couldn’t prove it by me).
Of course, that has some interesting opportunities for marketing campaigns. “Contrary to the basic assumptions of economics, several studies have provided behavioral evidence that marketing actions can successfully affect experienced pleasantness by manipulating nonintrinsic attributes of goods.’ Said another way, there are ways to enhance your perceptions of the quality of a product – that have nothing to do with the quality of the product.
“…knowledge of a beer’s ingredients and brand can affect reported taste quality, and the reported enjoyment of a film is influenced by expectations about its quality,” the researchers said.
It’s not just about feeling better about the product, either. The researchers also noted that “…changing the price at which an energy drink is purchased can influence the ability to solve puzzles.”
The study, by Hilke Plassmann, John O’Doherty, Baba Shiv, and Antonio Rangel, was published last week in the Proceedings of the National Academy of Sciences.
Compliance January 23, 2008

Merrill Accused of Wrongdoing in MA Town’s Investments

Accusations of mismanagement have been leveled against Merrill Lynch by government clients in a second state, the Wall Street Journal reported.
Reported by

Springfield, Massachusetts, officials contend that Merrill violated state law by not properly telling them what investments it was making on their behalf after finding out the financial services firm had put their money into risky positions backed by subprime mortgages, the newspaper said. A key Springfield investment had lost more than 90% of its value.

The city’s stake in three collateralized debt obligations (CDO) valued at $13.9 million as recently as July and is now valued at $1.2 million, according to Merrill’s account statements, the Journal reported.

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Springfield officials say Merrill only eventually informed them about the CDO sales by sending them a document issued by Centre Square, a Cayman Islands-based company. That document revealed that some of the CDOs could be backed by subprime mortgages and might not be easy to sell, according to the news report.

Merrill spokesman Mark Herr said the company did not provide Springfield officials with the CDO’s prospectus last spring when they were purchased because the Springfield transaction was after the initial offering. Under those circumstances, “there was no requirement for a prospectus at the time of the purchase,” he told the Journal.

For its part, the city is taking a hard line position. “I believe Merrill Lynch is responsible and will be obliged, in the end, to restore the city’s money,” Christopher Gabrieli, chairman of the Springfield Finance Control Board, which oversees the city’s finances, said in the news report.

City finance officials argue that state law limits cities to investing in safe, short-term, and easily tradable investments.

According to the news report, state securities regulators are probing Merrill Lynch about the sale, asking questions about the timing and whether the brokerage firm did enough to warn the city about the risks. The secretary of state has subpoenaed brokers responsible for the sales. The Massachusetts attorney general is also conducting an investigation.

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