By TERRY STAWAR
Local Columnist
July 11, 2008 03:04 pm
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It seems like you can't have a conversation today without talking about the high price of gasoline and food. Comedy writer Robert Orben has said that at least inflation is democratic, since for the first time in history luxuries and necessities are the same price.
But were do these prices come from? Most of us are pretty lousy at figuring out how much things should really cost, since we are easily diverted by status, bargains, and the complicated economics of supply and demand. Often it seems that prices are totally arbitrary.
My wife, Diane, has a lot of experience with pricing, since she runs a used bookstore and oversees the pricing of books. She has learned that the pricing can be a remarkably idiosyncratic endeavor. Depending on a person's interests and preferences, they may be perfect willing to give away some books, while charging through the roof for others. For example, some people view romance novels as totally worthless, while placing an enormous premium on other genres, such as science fiction, biography, or history. The prices people set often tell you more about them than the items themselves.
You can also see the influence of individual difference when couples go shopping together. Often both think their partner must be an irresponsible spendthrift who doesn't realize the value of things.
If individuals are capricious about prices, businesses don't seem much better. At one department store where we shopped, the couches had price signs attached to them, that were designed to be turned over whenever they went on sale. The regular prices were nearly twice the sale prices. After the sale they would just flip the signs over. Once I saw this, I never trusted any of the prices in that store again.
Sometimes you can't even tell what the price of an item is. Television commercials like to put the price in terms of “eight easy payments if you act today,” hoping you won't add them up and realize that what you are really paying for that great new kitchen gadget or collectable you simply must have. And price tags themselves have becomes more confusing and elusive. While I like that “cost per ounce” feature at the grocery store, often I can't tell what price goes with what item. A lot of businesses have installed price scanners in their stores, but they are often difficult to find and one survey indicated that 10 percent of them don't work anyway. Only ten states (Indiana is not included) require that price tags be placed on individual items.
Our emotional states also have a lot to do with how we think about prices. People typically set a much higher price for items they own, than they themselves, would be willing to pay. For example, Duke University students who acquired highly coveted basketball tickets, estimated their value at 14 times the price that students not owning tickets thought they should cost.
University of Chicago economist Richard Thaler calls this tendency to be prejudice in favor of our possessions “the endowment effect.” Realtors, car salesmen and e-Bay devotees see this effect daily. This phenomena accounts for why it is so hard to throw away that old chair. It also explains the outrageous prices people sometimes ask for things they own, as well as why we are so devastated when we lose our lifelong possessions. Such loses are why many never fully recovery from disasters such as fires, floods, and tornadoes or even when they must move into assisted care or nursing homes.
Using brain scan technology Dr. Brian Knutson from Stanford found that the endowment effect is not so much a result of enhanced attraction to our own possessions, but rather a fear of being separated from them. In Knutson's study, those areas of the brain associated with loss are the ones most active when people are asked to value their possessions. Since loss is so prominent, some economists have suggested that the effect should be renamed “divestiture aversion,” reflecting as it does, such a strong bias for maintaining the status quo.
Once an item is no longer in your possession, you may either romanticize its memory or use the “sour grapes rationalization” to devalue it. My wife Diane and I went to an auction, where the auctioneer did his best to convince bidders how valuable his merchandise was. However, the second any item was sold, he would immediately say to the buyer in a nasty tone, “Now get your junk off my table.” While this line usually got a big laugh, I'm not sure it helped his sales.
I have always thought that price has a lot to do with how satisfied people are with their purchases. Everyone loves a bargain and even if they can afford it, when prices are too high, most people just can't enjoy shopping. Neuroscientist George Lowenstein from Carnegie Mellon found that high prices activate those areas of shopper's brains associated with pain.
We once had a dinner at a very trendy Miami restaurant (ironically named Lucky's) that we didn't enjoy at all because of the outrageous prices. And I have been to more than one conference where the $28 pot of coffee dominated all other conversations.
It is equally true that our moods can determine what we think are fair prices. Research shows that unrelated emotional states, can significantly influence how we value our possessions, as well as how much we are willing to spend on new items. Emotions are even able to counteract the endowment effect.
Jennifer Learner, a professor at Harvard, and her colleagues found that when sad feelings were evoked by having people watch a tear jerking film clip, they were suddenly willing to pay much higher prices to obtain goods and were inclined to sell possessions at much lower prices than usual.
Sadness apparently makes people desperate to make some sort of change. Whether this change involves buying or selling doesn't seem to matter much. Along similar lines, psychiatrists have found that certain antidepressant medications can be very effective in treating compulsive shopping behavior
When people were shown a film clip that evoked feelings of disgust, they were inclined to sell their possessions at bargain prices and were not willing to spend much to acquire anything new. Disgust induced a reversal of the usual endowment effect. It was as if the participants wanted to expel whatever they already owned and symbolically cleanse themselves. None of the participants in these studies were aware that their economic decisions had anything to do with the emotions they felt, so this process appears to be mostly unconscious in nature.
You might rightly conclude that pricing can get pretty complicated. According to the New York Times, a federal government directive on pricing cabbage was almost 27,000 words long, while all contain less then 300 words.
Terry L. Stawar, Ed.D. lives in Georgetown and is the CEO of LifeSpring in Jeffersonville. He can be reached at tstawar@lifespr.com or 812-206-1234.
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Terry L. Stawar, Local columnist