Table of Contents
Passage
A In today’s hypercompetitive marketplace, companies that successfully introduce new products are more likely to flourish than those that don’t. Businesses spend billions of dollars making better “mousetraps” only to find consumers roundly rejecting them. Studies show that new products fail at the stunning rate of between 40% and 90%, depending on the category, and the odds haven’t changed much in the past 25 years. In the U.S. packaged goods industry, for instance, companies introduce 30,000 products every year, but 70% to 90% of them don’t stay on store shelves for more than 12 months. Most innovative products^those that create new product categories or revolutionize old ones—are also unsuccessful. According to one study, 47% of first movers have foiled, meaning that approximately half the companies that pioneered new product categories later pulled out of those businesses.
B After the fact, experts and novices alike tend to dismiss unsuccessful innovations as bad ideas that were destined to fail. Why do consumers fail to buy innovative products even when they offer distinct improvements over existing ones? Why do companies invariably have more faith in new products than is warranted? Few would question the objective advantages of many innovations over existing alternatives, but that’s often not enough for them to succeed. To understand why new products fail to live up to companies’ expectations, we must delve into the psychology of behavior change.
C New products often require consumers to change their behavior. As companies know, those behavior changes entail costs. Consumers costs, such as the activation fees they have to pay when they switch from one cellular service provider to another. They also bear learning costs, such as when they shift from manual to automatic automobile transmissions. People sustain obsolescence costs, too. For example, when they switch from VCRs to DVD players, their videotape collections become useless. All of these are economic switching costs that most companies routinely anticipate.
D What businesses don’t take into account, however, are the psychological costs associated with behavior change. Many products fail because of an universal, but largely ignored, psychological bias: People irrationally overvalue benefits they currently possess relative to those they don’t. The bias leads consumers to value the advantages of products they own more than the benefits of new ones. It also leads executives to value the benefits of innovations they’ve developed over the advantages of incumbent products.
E Companies have long assumed that people will adopt new products that deliver more value or utility than existing ones. Thus, businesses need only to develop innovations that are objectively superior to incumbent products, and consumers will have sufficient incentive to purchase them. In the 1960s, communications scholar Everett Rogers called the concept “relative advantage” and identified it as the most critical driver of new-product adoption. This argument assumes that companies make unbiased assessments of innovations and of consumers, likelihood of adopting them. Although compelling, the theory has one major flaw:It fails to capture the psychological biases that affect decision making.
F In 2002,psychologist Daniel Kahneman won the Nobel Prize in economics for a body of work that explores why and when individuals deviate from rational economic behavior. One of the cornerstones of that research, developed with psychologist Amos Tversky, is how individuals value prospects, or choices, in the marketplace. Kahneman and Tversky showed, and others have confirmed, that human beings’ responses to the alternatives before them have four distinct characteristics.
G First, people evaluate the attractiveness of an alternative based not on its objective, or actual, value but on its subjective, or perceived, value. Second, consumers evaluate new products or investments relative to a reference point, usually the products they already own or consume. Third, people view any improvements relative to this reference point as gains and treat all shortcomings as losses. Fourth, and most important, losses have a far greater impact on people than similarly sized gains, a phenomenon that Kahneman and Tversky called “loss aversion.” For instance, studies show that most people will not accept a bet in which there is a 50% chance of winning $100 and a 50% chance of losing $100. The gains from the wager must outweigh the losses by a factor of between two and three before most people find such a bet attractive. Similarly, a survey of 1,500 customers of Pacific Gas and Electric revealed that consumers demand three to four times more compensation to endure a power outage— and suffer a loss-than they are willing to pay to avoid the problem, a potential gain. As Kahneman and Tversky wrote, “losses loom larger than gains.”
H Loss aversion leads people to value products that they already possess those that are part of their endowment – -more than those they don’t have. According to behavioral economist Richard Thaler, consumers value what they own, but may have to give up, much more than they value what they don’t own but could obtain. Thaler called that bias the “endowment effect.”
I In a 1990 paper, Thaler and his colleagues describe a series of experiments they conducted to measure the magnitude of the endowment effect. In one such experiment, they gave coffee mugs to a group of people, the Sellers, and asked at what price point— from 25 cents to $9.25 —the Sellers would be willing to part with those mugs. They asked another group—the Choosers to whom they didn’t give coffee mugs, to indicate whether they would choose the mug or the money at each price point. In objective terms, all the Sellers and Choosers were in the same situation: They were choosing between a mug and a sum of money. In one trial of this experiment, the Sellers priced the mug at $7.12, on average, but the Choosers were willing to pay only $3.12. In another trial, the Sellers and the Choosers valued the mug at $7.00 and $3.50, respectively. Overall, the Sellers always demanded at least twice as much to give up the mugs as the Choosers would pay to obtain them.
J Kahneman and Tversky’s research also explains why people tend to stick with what they have even if a better alternative exists. In a 1989 paper, economist Jack Knetsch provided a compelling demonstration of what economists William Samuelson and Richard Zeckhauser called the “status quo bias”. Knetsch asked one group of students to choose between an attractive coffee mug and a large bar of Swiss chocolate. He gave a second group of students the coffee mugs but a short time later allowed each student to exchange his or her mug for a chocolate bar. Finally, Knetsch gave chocolate bars to a third group of students but much later allowed each student to exchange his or her bar for a mug. Of the students given a choice at the outset, 56% chose the mug, and 44% chose the chocolate bar, indicating a near even split in preferences between the two products. Logically, therefore, about half of the students to whom Knetsch gave the coffee mug should have traded for the chocolate bar and vice versa. That didn’t happen. Only 11% of the students who had been given the mugs and 10% of those who had been given the chocolate bars wanted to exchange their products. To approximately 90% of the students, giving up what they already had seemed like a painful loss and shrank their desire to trade.
K Interestingly, most people seem oblivious to the existence of the behaviors implicit in the endowment effect and the status quo bias. In study after study, when researchers presented people with evidence that they had irrationally overvalued the status quo, they were shocked, skeptical, and more than a bit defensive. These behavioral tendencies are universal, but awareness of them is not.
Questions
Questions 28-31 Use the information in the passage to match the people (listed A-C) with opinions or deeds below. Write the appropriate letters A-C in boxes 28-31 on your answer sheet.
A Richard Thaler
B Everett Rogers
C Kahneman and Tversky
28 stated a theory which bears potential fault in application
29 decided the consumers/ several behavior features when they face other options
30 generalised that customers value more of their possession they are going to abandon for a purpose than alternative they are going to swap in
31 answered the reason why people don’t replace existing products
Questions 32-36 Do the following statements agree with the information given in Reading Passage 3 In boxes 32-36 on your answer sheet, write
TRUE if the sataement agrees with the information
FALSE if the statement contradicts the information
NOT GIVEN if there is no information on this
32 The products of innovations which beat existing alternatives can guarantee a successful market share.
33 Few companies calculated the possibility of switching to new products more than in economic judgment.
34 Gender affects the loss and gain outcome in the real market place.
35 Endowment-effect experiment showed there was a huge gap between seller’s anticipation and the chooser’s offer.
36 Customers accept the fact peacefully when they are revealed the status quo bias.
Questions 37-40 Choose the correct letter, A, B, C or D. Write your answers in boxes 37-40 on your answer sheet.
37 What does paragraph A illustrated in business creative venture?
A above 70% products stored in warehouse
B only US packaged good s industry affected
C roughly half of new product business failed
D new products have long life span.
38 What do specialists and freshers tend to think how a product sold well:
A as more products stored on shelf
B being creative and innovative enough
C having more chain stores
D learning from famous company like Webvan
39 According to this passage, a number of products fail because of following reason:
A they ignore the fact that people tend to overvalue the product they own.
B they are not confident with their products
C they are familiar with people’s psychology state
D they forget to mention the advantages of products
40 what does the experiment of “status quo bias” suggest which conducted by Nobel prize winner Kahneman and Tversky:
A about half of them are willing to change
B student are always to welcome new items
C 90% of both owners in neutral position
D only 10% of chocolate bar owner are willing to swap
Answers
Below are the answers, key words, synonyms and full explanations for the IELTS Reading passage Psychology of New Product Adoption (Passage 3, Questions 28–40).
Questions 28–31: Matching People (A–C)
A Richard Thaler · B Everett Rogers · C Kahneman and Tversky
28. Stated a theory which bears a potential fault in application.
Answer: B (Everett Rogers)
Key words: “relative advantage”; the theory has one major flaw
Synonyms: potential fault = “Everett Rogers called the concept ‘relative advantage’ … Although compelling, the theory has one major flaw: It fails to capture the psychological biases”
Explanation: Paragraph E: Rogers’s “relative advantage” theory has a flaw (ignores psychological bias).
29. Determined consumers’ several behaviour features when they face other options.
Answer: C (Kahneman and Tversky)
Key words: responses to the alternatives … have four distinct characteristics
Synonyms: behaviour features facing options = “Kahneman and Tversky showed … human beings’ responses to the alternatives before them have four distinct characteristics”
Explanation: Paragraphs F–G: Kahneman and Tversky set out four features of choice behaviour.
30. Generalised that customers value what they own and must give up more than an alternative they would swap in.
Answer: A (Richard Thaler)
Key words: the endowment effect; value what they own … more than what they don’t own but could obtain
Synonyms: = “According to behavioral economist Richard Thaler, consumers value what they own, but may have to give up, much more than they value what they don’t own but could obtain. Thaler called that bias the ‘endowment effect'”
Explanation: Paragraph H: Thaler’s endowment effect.
31. Answered the reason why people don’t replace existing products.
Answer: C (Kahneman and Tversky)
Key words: also explains why people tend to stick with what they have
Synonyms: don’t replace products = “Kahneman and Tversky’s research also explains why people tend to stick with what they have even if a better alternative exists”
Explanation: Paragraph J: their research explains why people keep existing products (status quo bias).
Questions 32–36: True / False / Not Given
32. Innovations that beat existing alternatives can guarantee a successful market share.
Answer: FALSE
Key words: objective advantages … often not enough for them to succeed
Synonyms: not guaranteed = “Few would question the objective advantages of many innovations over existing alternatives, but that’s often not enough for them to succeed”
Explanation: Paragraph B: being objectively better does not guarantee success → FALSE.
33. Few companies calculate the costs of switching to new products beyond the economic side.
Answer: TRUE
Key words: economic switching costs that most companies routinely anticipate; what businesses don’t take into account … are the psychological costs
Synonyms: only economic judgment = “All of these are economic switching costs that most companies routinely anticipate. What businesses don’t take into account, however, are the psychological costs”
Explanation: Paragraphs C–D: companies weigh only economic switching costs, ignoring psychological ones → TRUE.
34. Gender affects the loss-and-gain outcome in the real marketplace.
Answer: NOT GIVEN
Key words: loss aversion; gains and losses — but no mention of gender
Synonyms: The passage discusses loss aversion but never mentions gender.
Explanation: No information about gender is given → NOT GIVEN.
35. The endowment-effect experiment showed a huge gap between the seller’s expectation and the chooser’s offer.
Answer: TRUE
Key words: Sellers priced the mug at $7.12 … Choosers were willing to pay only $3.12; at least twice as much
Synonyms: huge gap = “the Sellers priced the mug at $7.12, on average, but the Choosers were willing to pay only $3.12 … the Sellers always demanded at least twice as much”
Explanation: Paragraph I: sellers wanted far more than choosers would pay → TRUE.
36. Customers accept it peacefully when the status quo bias is revealed to them.
Answer: FALSE
Key words: they were shocked, skeptical, and more than a bit defensive
Synonyms: not peaceful = “when researchers presented people with evidence that they had irrationally overvalued the status quo, they were shocked, skeptical, and more than a bit defensive”
Explanation: Paragraph K: people react defensively, not peacefully → FALSE.
Questions 37–40: Multiple Choice
37. What does paragraph A illustrate about business creative ventures?
Answer: C (roughly half of new-product businesses failed)
Key words: 47% of first movers have failed; approximately half … later pulled out
Synonyms: about half failed = “47% of first movers have failed, meaning that approximately half the companies that pioneered new product categories later pulled out”
Explanation: Paragraph A: about half of pioneering new-product ventures failed → C.
38. What do specialists and beginners tend to think makes a product sell well?
Answer: B (being creative and innovative enough)
Key words: experts and novices alike tend to dismiss unsuccessful innovations as bad ideas destined to fail
Synonyms: good/innovative idea = success = “experts and novices alike tend to dismiss unsuccessful innovations as bad ideas that were destined to fail”
Explanation: Paragraph B: they assume a strong/innovative idea is what drives success → B.
39. According to the passage, many products fail because …
Answer: A (they ignore that people tend to overvalue the product they own)
Key words: People irrationally overvalue benefits they currently possess
Synonyms: overvalue what they own = “Many products fail because of a universal, but largely ignored, psychological bias: People irrationally overvalue benefits they currently possess”
Explanation: Paragraph D: firms ignore the overvaluation bias → A.
40. What does the “status quo bias” experiment suggest?
Answer: D (only 10% of chocolate-bar owners were willing to swap)
Key words: Only 11% … given the mugs and 10% of those … given the chocolate bars wanted to exchange
Synonyms: = “Only 11% of the students who had been given the mugs and 10% of those who had been given the chocolate bars wanted to exchange their products”
Explanation: Paragraph J: just 10% of chocolate-bar owners wanted to swap → D.
Answer Key (Quick Reference)
| Q | Answer | Q | Answer |
|---|---|---|---|
| 28 | B (Rogers) | 35 | TRUE |
| 29 | C (Kahneman & Tversky) | 36 | FALSE |
| 30 | A (Thaler) | 37 | C |
| 31 | C (Kahneman & Tversky) | 38 | B |
| 32 | FALSE | 39 | A |
| 33 | TRUE | 40 | D |
| 34 | NOT GIVEN |
