The Myth Of Fair Value

September 9, 2012

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 that 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:

The field of 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.

If you’re interested in learning more, Poundstone occasionally blogs here; most recently about a $69 hotdog.

As for me, I feel better prepared to resist those holiday shopping bargains.