Irrational exuberance

The Wall Street journal reviews “Priceless”, today, a book about, natch, pricing and the tricks used to befuddle consumers. Or, put more nicely, why “psychology counts as much as logic in many simple economic decisions.” Lots of interesting examples (Skippy Peanut Butter, for instance, put an indentation in its jar, cutting volume 9% to avoid a price increase that would scare off shoppers) and I recommend the entire review or heck, order the book itself.

For the purpose of this column, however, I found this paragraph illuminating, if not exactly unexpected:

Whatever the pain of an irrationally expensive breakfast, it pales in comparison with buying an over-priced house. To avoid that mistake, however, a buyer may need to cover up the price tag and appraise the house without being influenced by the seller’s number. In one experiment, a group of licensed real estate agents were shown a house and told that it had been listed for $119,900. When asked to estimate a reasonable purchase price, their average was $111,454. When a different group of agents was told that the listing price for exactly the same house was $149,900, their average estimate was $127,318. The agents had subconsciously used the listing price as a reference point for their appraisals—even though they knew it was irrelevant.

That’s kind of what I try to do here: take away the price tag and try to give readers a chance to make a logical, sound decision. Not that I’m infallible, but those asking prices are almost always wrong.

3 Comments

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3 responses to “Irrational exuberance

  1. Anonymous

    very common phenomenon. you see what you expect to see. bird watchers, told of a recent sighting of a rare species, will almost always find that bird; but if not told of that rare bird sighting, they will not spot it. the joke here is that the rare bird was NOT sighted in the experiments. we’re suggestible, that’s all.

  2. Pete

    When I first started appraising, early 70’s, banks hired the appraiser but the sale price was not disclosed. The banks wanted an unbiased appraisal estimate.

  3. XYount

    Interesting, Pete.

    In the good old days of which you speak, it seems banks weren’t the “suggestible” (tip o’ the hat to Anonymous for that one) fools they became shortly thereafter.

    Must be why they found themselves in so much trouble à la Meltdown 2008.