In the 2008 European Championship quarter finals, the Italian team let Spain go first for the end-of-game shoot-out. That was a big mistake.
Where are we going? To the influence of a reference point.
When a soccer game has no winner, a penalty shoot-out can conclude the match. All you have is a kicker, a goalkeeper and, with FIFA, five rounds (unless you need more). The team with the most goals wins. Because the ball travels to the goal in just .3 or .4 seconds, all strategy happens beforehand. There is no time for a reaction.
Discussing the kick, athletes say that they want to “lead in the score in order to put pressure on the opponent.” They get it. Shoot-out data indicate the first team’s scoring rate is higher than the team with the second kick. With a 60.5% chance of winning the penalty shoot-out, the “frontrunner” has an edge.
For some smiles:
Maybe 20 years ago, when bread machines were first introduced, one retailer started with a single model priced at $120. Faced with sparse sales, they increased interest by adding a second $80 machine.
What happens next though is what gets behavioral economists really excited. The retailer placed a $475 machine on the shelf and the $120 model sold like hotcakes.
Our Bottom Line: Frames
For penalty kicks and bread machines, our attitudes are shaped by reference points that behavioral economists relate to a frame. For shoot-outs, the first kicker creates a reference point for the team that is second. With the bread machines, the $425 machine signaled that $120 was a good price.
Perfect for proving that economics is about so much more than money, frames influence us everywhere. At the gas station we think $3.00 a gallon is a lot when the previous week we paid $2.75. But the same amount looks much better when we recently paid more. A student’s 90 does not look as good when she had 95 on the previous exam but is great when she had a 70 beforehand.
By telling us about gains and losses in sports, retailing, and beyond, reference points help us make the decisions that shape supply and demand. It is even possible that they can nudge us toward a less than optimal choice.
My sources and more: Focusing on the shoot-out, this academic paper and this overview on competitive pressure were excellent. I also recommend Dan Ariely’s Predictably Irrational where I read the bread machine story. Finally, if you read just one book, do look at Thinking Fast and Slow from Daniel Kahneman. His chapter on reference points is unequaled. Please note that several sentences on the bread machine were published in a past econlife post. Also, I added the video after publication.