Why prices don’t always make sense

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Book: Priceless: The myth of fair value (and how to take advantage of it) Author: William Poundstone Volume: 182 Pages Publisher: Macmillan

So you managed to negotiate a good salary at your new job or possibly got the guy who sold you the Toyota Harrier to climb down by a whopping Shs 3 million. Well, may be then you are good at getting great deals - or maybe you are just easier to fool. In his new book, Priceless: The myth of fair value (and how to take advantage of it), American skeptic and best-selling author William Poundstone, re-examines the psychology of pricing.

Is the hawker who prices a pair of men’s socks at Shs 3,000 but quickly accepts Shs 1,500 smart? Why doesn’t Nando’s offer its medium pizzas at Shs 18,000 everyday if it makes sense to offer it on super-Tuesday? What are the psychological secret behind the many offers by the telecoms companies, supermarket chains, your corner shop in Bugolobi, and in the boardroom?

“Some of the most important psychology of the past fifty years deals with how we make decisions,” Poundstone explains on his website, “those findings are now beginning to be applied to the kind of price decisions we make every day. We’re always asking ourselves, ‘is that too much to pay?’ It turns out that this common decision can be influenced by all sorts of subtle psychological tricks. The science is affecting the design of price tags, menus, rebates, ‘sale’ ads, cell-phone plans, infomercials, tort demands, and corporate buyouts. In a lot of ways, prices are the most pervasive hidden persuaders of all.”

As one reviewer of the book said, we are hopelessly gullible, without a firm idea of what anything should cost. So advertisers, marketers, and salespeople regularly lead us astray. Those of us who are sure we are too smart for their pricing tricks, are actually dumber still - because we don’t even realize we’re being exploited.

For Poundstone, prices are fascinating because they sit squarely at the intersection of our desires and the objects of desire. What we’re willing to pay reveals much about the chaos inside our skulls.

In Econ 101, price is a clean concept. People know how much various things are worth to them, and they line up those personal valuations against what sellers are asking. In reality, writes Poundstone, “the numbers that make our world go around are not so solid, immutable, and logically grounded as they appear. In the new psychology of price, values are slippery and contingent, as fluid as the reflections in a fun-house mirror.”

People’s cluelessness about what goods are worth to them makes them vulnerable to what behavioral economists call “anchoring.” As every luxury retailer knows, an anchor is a high-priced product that may never sell but “makes everything else look affordable by comparison.” The Shs 35,000 prawns delicacy at your restaurant in Kampala might be an anchor. It makes the Shs 15,000 chicken wings in chilly sauce appear affordable.

The power of anchoring explains everything from why plaintiffs’ lawyers often demand ridiculous sums for pain and suffering (the more you ask, the more you get) to bubbles in the stock market (investors become anchored to high and rising prices no matter how out of line with fundamentals).

Poundstone is far from the first to spot and write about pricing tricks, some of which are centuries old. Recently we have seen a spate of books by pioneers of behavioral economics such as Richard Thaler and Dan Ariely, both of whom Poundstone liberally quotes. Where he excels is in explaining why age-old pricing tricks work long after we should have wised up. Citing psychological research, he says the human brain evolved for success in a world blessedly free of teaser rates, rebate coupons, and late-night infomercials. Optimised for quick decision-making, the brain “constructs desires and beliefs on the fly,” writes Poundstone. “This,” he says, “can lead to inconsistent prices and choices” that are ripe for exploitation.

Aside from his main counsel—know your limitations—Poundstone sprinkles Priceless with bits of consumer advice, like: Be the first to name a price in a negotiation, and don’t worry about being overly reasonable. Also: To neutralize the effect of anchoring on your judgment, stop and think of all the reasons that the proffered price might be unreasonable.

Pricing is a richer subject than you might imagine. The smile that creeps onto your face when a shameless marketing gambit reminds you of something you read in Poundstone’s book? Priceless.

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