Rationally Irrational

Human beings do not do well with decisions.  Whether we’re wrestling with who to start in fantasy football, which line to get on at the store, which stock to buy, or even what to choose from on a dinner menu, there are certain glitches in our brain that are really hard to avoid. We anchor to meaningless numbers, we make decisions that will minimize potential regret, we use information that comes to mind immediately, and we use simple rules of thumb. And all to our detriment. In William Poundstone’s Priceless, he shares some  incredible experiments that demonstrate how easily our brains are manipulated.

It’s hard to believe how different answers to the same question are when just one number changes.

 

Kahneman and Jacowitz tried asking:

(a) Does the average American eat more or less than 50 pounds of meat each year?
(b) How much meat does the average American eat in a year?

The median answer was 100 pounds of meat. They asked another group whether the average American ate more or less than 1,000 pounds of meat a year. For this group, the median estimate was 500 pounds.

I, like most people, give the “wrong” answer to the problem below. What makes these questions so fascinating is that even after it’s been proven that my decision doesn’t make sense, I still wouldn’t change it.

Imagine that you are about to purchase a jacket for $125 and a calculator for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $10 at the other branch of the store, located 20 minutes’ drive away. Would you make the trip to the store?

Most respondent said they would. Another randomly selected group heard a different version of the question in which the jacket was only $15 and the calculator was $125. The calculator was on sale for $120 at the other store. Was that worth the trip? Most said no….In both versions of the question, the buyer is planning to spend $140 total and the drive saves exactly $5. “Why are we more willing to drive across town to save money on a small purchase than a large one?” Richard Thaler asked.

Again, I’m with this. I am used to paying $8 for a beer at a bar, but I would never spend $48 for a six pack at a bodega.

One of Richard Thaler’s best-known thought experiments concerns a grocery store. You’re lying on a beach on a hot day and desperately want a cold beer. A friend offers to go get a beer from the only place nearby, a small run-down grocery store. He warns it might be expensive, so he asks how much you’re willing to pay. He’ll buy the beer only if the store’s price is no greater than your limit of $1.50…Another group heard the same story, except that the place selling the beer was said to be the bar of a fancy resort hotel. For this group, the average price was $2.65…The ambiance of the hotel was irrelevant because the beer was to be consumed back on the beach…The hotel bar that charged $2 was understood to be offering a fair price; for a run-down grocery, that $2 was price gouging.

We can all empathize with this one; I’m not buying that crappy T.V. for $300, but that $4,000 T.V. is outrageous. $800 sounds about right.

One of the key insights of behavioral pricing is that items that don’t sell can change what does. Amos Tversky liked to tell this story. The Williams-Sonoma chain, known for high quality and prices to match, once offered a fancy breadmaker for $279. They later added a somewhat bigger model, pricing it at $429…The $429 model was a flop…But sales of the $279 model nearly doubled…The only thing that stopped them from buying was the price. It seemed high at $279. Once the store added the $429 model, the $279 machine was no longer seen as such an extravagance.

Unfortunately, just being aware of our sub par mental software doesn’t necessarily lead to better decision making. Automation isn’t the answer to everything, but it certainly helps. Anything that you can do to reduce the number of decisions you have to make, the better off you’ll be.

Source:

Priceless

 

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