The Price of Everything - Eduardo Porter [18]
PROTECT US FROM WHAT WE BUY
The understanding of humanity as a set of rational beings able to accurately evaluate costs against benefits, striving to maximize their well-being, remains immensely popular among economists. It is a bedrock belief of the conservative movement in the United States: if we understand our own preferences better than anybody else does, there is no reason for the government to butt into our decisions. It has powerful corollaries. We can’t be second-guessed. If we buy something for a given price, it must be worth at least that much to us. The market price of any given thing is the best approximation the world has of the thing’s real value to society.
The belief is not empty. It provides a reasonable approximation of real people in many situations. For instance, it provides a satisfactory explanation of why we prefer things we choose to things other people choose for us. Joel Waldfogel, an economist at the University of Pennsylvania, approached a bunch of university students and asked them to compare the value of presents they received with things they had bought themselves. To make the answers comparable, he asked for the minimum amount of money they would demand to give the items up. A total of 202 students responded, providing hypothetical prices for 538 things they had purchased themselves and 1,044 items they had received as gifts. Mr. Waldfogel found that people value what they bought about 18 percent more, per dollar spent, than what they got as a present.
As we will see in subsequent chapters, the model of rational humanity is a powerful tool that can help us understand the behavior of men and women in many walks of life. Yet, at the end of the day, belief in the inerrant ability of our choices to communicate our preferences is inconsistent with how we actually behave. As some of the prior examples might suggest, people often make decisions about prices and values that, upon careful consideration, are inconsistent or shortsighted. We change our minds and rue our actions only minutes later. We knowingly overindulge. We prize what we have more than what we don’t.
Students of Duke University, for instance, said they were willing to pay up to $166, on average, for a ticket to the big basketball game—when Duke was one of four teams vying for the championship. But those who had a ticket said they wouldn’t sell it for less than $2,411. Economists who trust human rationality see credit as an optimal tool to smooth consumption over our life cycle, allowing us to consume more when we earn less and pay it back later. The rest of us know credit cards can be dangerous. One study found that basketball fans in possession of a credit card would pay twice as much for tickets to a Boston Celtics game as those who had to pay in cash.
And we are often simply inveigled by prices. In the 1960s, the California businessman Dave Gold discovered that charging $0.99 for any bottle of wine in his liquor store increased sales of all his wines, including bottles that had previously cost $0.89 and even $0.79. He left the liquor business, launched the 99 Cents Only chain of stores, and made hundreds of millions. Since then, companies of every stripe have lured us by slapping $0.99 on the price tag. Steve Jobs revolutionized the music industry by persuading us to pay $0.99 for a song. Evidently, the number convinces us we are getting value for money.
Surveying the landscape of our idiosyncratic decision making more than fifteen years ago, Kahneman, the Nobel Prize-winning psychologist, suggested that the government should intervene to curb our tendencies toward the less than rational. We should consider, he wrote, “some paternalistic interventions, when it is plausible that the state knows more about an individual’s future tastes than the