Fooled by Heteroscedastic Randomness: Local Consistency Breeds Extremity in Price-Based Quality Inferences

In some product categories, low-priced brands are consistently of low quality, but high-priced brands can be anything from terrible to excellent. In other product categories, high-priced brands are consistently of high quality, but quality of low-priced brands varies widely. Three experiments demonstrate that such heterosce-dasticity leads to more extreme price-based quality predictions. This finding sug-gests that quality inferences do not only stem from what consumers have learned about the average level of quality at different price points through exemplar memory or rule abstraction. Instead, quality predictions are also based on learning about the covariation between price and quality. That is, consumers inappropriately con-flate the conditional mean of quality with the predictability of quality. We discuss implications for theories of quantitative cue learning and selective information pro-cessing, for pricing strategies and luxury branding, and for our understanding of the emergence and persistence of erroneous beliefs and stereotypes beyond the consumer realm. Consumers frequently need to make a guess about aproduct’s quality before buying, and this guess is ofte