Why we do economically stupid things

by Caleb Reading


“What the research revealed was that the maximum price the subjects assigned was driven largely by the random offer they had received only moments before” [The Compromise Effect]

“Companies have relied on this “compromise effect” to manipulate their product lines to increase sales of their most profitable items. [. . .] retailer Williams-Sonoma Inc. was able to increase sales of its $275 bread machine a decade ago by adding a second, slightly larger model to its catalogue at a price of just over $400.”

“Another well-documented tendency in people’s economic behavior is that they assign higher value to things they already have.” [The Endowment Effect]

“Thaler notes that most people think it fair for an auto dealer to suspend a $200 rebate program for particularly hot models that are in short supply. But only half as many thought it fair for the dealer to impose a $200 surcharge, even though the final price would be the same.”

The “Mental Accounting” and “Guilt and Spending” sections also have interesting examples.