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hapter 2: The Fallacy of Supply and Demand

This chapter is at the heart of Ariely’s argument. Classical economics says that our decisions about resource allocation reflect our relative valuationof the various investment alternatives. If I buy more wine than cheese it’s because I derive greater utility (more than just usefulness by the way) from the juice of the grape. There are clear limitsof course, I am unlikely to allow myself to starve and will occasionally buy cheese, or buy cheese when the price is low enough. But the general point remains, I am willing to pay more for those thingsfrom which I derive greater utility.

Not so says our man Dan. How much a person is willing to pay for something is determined or at least significantly affected by a variety of factors which havenothing to do with any benefit that he or she derives from that purchase. Do you remember what Tom Sawyer did with his chore, whitewashing a fence? Review that first and you’ll be more open to thesearguments.

He starts with the story of black pearls. There were essentially none on the market so there was no objective way of establishing price. What happened was they were shown in advertisingand in Harry Winston’s toney store along rubies and diamonds at a very high price. This initial association served to effectively anchor the price and therefore, going forward, future prices were highsince the initial frame in which people were introduced to the product was among high priced goods.

He likens this anchor price phenomenon to that of imprinting. We are all goslings, fixed on thatfirst object. He’s done a lot of really neat experiments to support his point. None of them are completely convincing but they certainly are thought provoking.

Consider, for example some reallyinteresting experiments suggesting that thinking about a number – any number – before considering what you are willing to pay for an item whose market price you do not know – actually effects what you...
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