Illusions of rationality

Anyone who's been paying attention (or even just breathing) knows that people do not always make decisions in their own best interest--from the working stiffs who vote for politicians in favor the elite class, to people who purchase $20 worth of books they don't need to save $3 in shipping fees.

A fascinating article in a recent New Yorker pointed to a new book titled Predictably Irrational in which an M.I.T professor in behavioral economics, Dan Ariely, reveals that "our irrational behaviors are neither random nor senseless--they are systematic."

In countless experiments--including one in which he asked kids to trade Halloween candy and found that they generally choose something that is "free" over the better deal, chocolate-wise--Ariely "offers a taxonomy of financial folly," according to Elizabeth Kolbert, author of the New Yorker article. One fascinating experiment involved having subjects write down the last two digits of their Social Security number, then write what they would be willing to pay for a list of items. The results showed that those whose SSN ended in a larger number would be willing to pay more than those whose SSN ended in a smaller number.

This effect, called anchoring, shows that price is not just related to intrinsic value or to supply and demand; in some way the stated price establishes the value of the item. It's an interesting concept for retailers, who often ponder whether raising the price of their goods might make them more appealing. Similarly, Ariel's Halloween experiments and others like it belie the argument that "you're not fooling anybody" when you offer free shipping but jack the price of the item. Apparently, as marketers have long known, you can fool a lot of the people a lot of the time.