To prepare for the upcoming holiday shopping season, I’m reading ‘Priceless: The Myth of Fair Value (and How to Take Advantage of It)‘ by William Poundstone. Poundstone references a wide variety of psychology studies which show consumers are unable to accurately estimate fair prices and are “strongly influenced by the unconscious, irrational, and politically incorrect.” In fact, he makes the enticing claim that prices are a collective hallucination.
One of my favorite stories describes what happened when Williams-Sonoma added a $429 premium breadmaker on the shelves next to their normal $279 model. While they sold very few of the premium model, sales of the $279 breadmaker more than doubled. In post-purchase surveys, shoppers reported the lower-priced model seemed like a bargain.
Poundstone also explains why nearly 2/3 of all retail prices end in the number 9 and why the profit margin of the 99 Cents Only store is twice as high as Wal-Mart. Here’s a video of him discussing the phenomenon:
Decision theory tries to explain these examples of people making seemingly illogical buying decisions. As Poundstone himself says,
although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.
Poundstone has lots of stories, including why a $69 hotdog increases sales of an $18 hamburger. These are examples of the cognitive phenomenon of anchoring. When we try to estimate a numerical value, we are unconsciously influenced by related numbers. An $18 hamburger seems reasonable compared to a $69 hotdog, even through it’s probably not fairly priced.
Now that I better understand the myth of fair value, I feel better prepared to resist those holiday shopping bargains.