The Peak-End Rule
By Manya Tulani
We human beings are subject to a multitude of cognitive biases that infiltrates the way we perceive reality and alter our recollection of past experiences. One such psychological heuristic is Peak-End rule which explains why we are irrational in our recollections of memories about an experience or a past event.
Now have you ever wondered why is it that you remember certain memories of your childhood more vividly than others? This is primarily because we humans tend to remember those episodes of past where we felt a heightened or a strong emotion such as fervour, excitement, outrage, or agony which makes it easy for us to link it to our memory and recall. We are limited in the amount of detail our memories will hold. To compensate, we tend to recall the peak experiences or highlights, as well as the endings, and make an evaluation of the overall experience.
Childbirth is a classic case of how a positive consummation takes away from a general negative encounter or difficult experience. Recollections related to pregnancy are affected by top feelings experienced during, and toward the finish of the birth. Subsequently, the positive memory of a child being conceived can overweigh the pain suffered all through the process. In contrast a relationship breakup, is an example of a negative ending, detracting from the overall positive experience. Though the relationship may have been good for a long time, an individual usually vividly remembers breakups, especially if they were painful, and recall heartbreak when thinking back to their relationship. This is because of the Peak-End rule. The peak-end rule affects how an individual remembers an event by simplifying the memory and emphasizing its peak and endings. An individual's representativeness heuristic bias and their tendency to remember emotionally intense moments lead to this rule. It means that our judgment is not based on the total sum or average of every moment of the experience but just on what we felt at its peak (the most intense point — best or worst) and on how we felt when it ended.
Varey and Kahneman (1992) and Fredrickson and Kahneman (1993) conducted a series of experiments to explore utility integration rules and concluded: "remembered utility" is based almost entirely on the most salient moments of extended experience, with the most salient moments occurring with the utility peaks of the experience and the ending. Other components of the experience may be remembered, but have little impact on remembered utility.
UNDERLYING PSYCHOLOGICAL CAUSES
The peak-end rule is a cognitive bias that develops in individuals for a multitude of reasons.
Representativeness heuristic
Based on work by Dr. Daniel Kahneman and Dr. Barbara Fredrickson, the peak-end rule happens as a result of the representativeness heuristic, which is a mental short-cut used to help individuals make quick decisions by prototyping people or moments.
Memory bias – Why the peak is memorable
Individuals demonstrate better memory for events that are more emotionally intense. Though the cause for this is unclear, it has been widely proven in various studies, experiments, and surveys. Additionally, individuals do not always perceive that the events they remember are more emotionally intense.
Recency bias – Why the end is memorable
Individuals typically remember both the beginning and end of memory better due to serial position effects, such as primacy bias and recency bias. Recency bias is a cognitive bias that causes individuals to more easily remember something that has happened recently. The peak-end rule is influenced by this bias, which is why we remember both the peak emotional moments and the end.
APPLICATION IN EVERYDAY LIFE
Examples of peak-demand and marketing techniques include surprise discounts at checkout, or providing small departure gifts as customers’ exit an establishment. By making the last impression a good one, customers are more likely to return and think highly of a product.
In product design, when designing interfaces and experiences, attention can be paid to the most intense points of a typical user journey (the peaks) and the final moments (the end). Various apps such as Duolingo and Counter-Strike make use of this to enhance the customer experience.
PEAK-END RULE IN REFERENCE PRICE FORMATION
A reference price is a psychological benchmark against which consumers evaluate offered prices. Many models are describing the potential mechanism of reference price formation in economics literature such as extrapolative expectations, rational expectations, and adaptive expectations. These economic models of reference price formation perform reasonably well empirically but have been criticized for not offering a plausible representation of consumers' cognitive processes, as we will discuss below. Reference prices are also subject to the peak-end phenomenon. The significance of the peaks in the peak-end rule is that they are highly salient. Similarly, extreme prices are likely to be salient to the consumer. Prospect theory (Kahneman and Tversky, 1979) predicts that high prices are particularly salient since consumers are more sensitive to losses (unexpectedly high prices) than gains (unexpectedly low prices). The peak-end model of reference price says that reference prices are based on the highest past price and the last observed actual price.
IMPLICATIONS:
This means that it may be to the benefit of the firm to occasionally raise the price of the brand above a level that might normally be considered desirable, as a tactic to restore the reference price. Based on the structure of the peak-end rule, this tactic needs to be used only sparingly and for a short period to be effective.
Manya is an economics student at Hansraj College, with a keen interest and motivation in academic research in the fields of decision theory, game theory and labour economics.
REFERENCES:
1. https://blog.daftcode.pl/the-peak-end-rule-in-products-behavioural-economics-in-ux-c0f08e0d5f31
2. https://thedecisionlab.com/biases/peak-end-rule/
3. http://positivepsychology.com/what-is-peak-end-theory/
4. Peter De Maeyer Hooman Estelami, (2013),"Applying the peak-end rule to reference prices", Journal of Product & Brand Management.
5. Briesch, R.A., Krishnamurthi, L., Mazumdar, T. and Raj, S.P. (1997), “A comparative analysis of reference price models”, Journal of Consumer Research.