Economics, Pricing, and Monkey Whores
June 9, 2005
From this month's Inc, in an article called "Is It Time to Raise Prices?" comes the following bit of insight:
In one classic study, researchers asked consumers whether they would be willing to travel an additional 20 minutes to save $5 on a calculator that costs $15. Most said yes. Then they were asked the same question about a $125 jacket. Most answered no. Now, rationally, $5 is $5, whether you're buying a calculator or a jacket. But it's seldom that simple, according to Richard H. Thaler, a professor at the Graduate School of Business at the University of Chicago and author of "Mental Accounting Matters," an article published in 1999 in the Journal of Behavioral Decision Making. "People make [purchasing] decisions piecemeal, influenced by the context of the choice," writes Thaler, who won a Nobel Prize for his work in behavioral economics.
Meanwhile, in the NYTimes sunday magazine, a story called Monkey Business discusses a revealing economics experiment performed with capuchin monkeys:
In the first game, the capuchin was given one grape and, dependent on a coin flip, either retained the original grape or won a bonus grape. In the second game, the capuchin started out owning the bonus grape and, once again dependent on a coin flip, either kept the two grapes or lost one. These two games are in fact the same gamble, with identical odds, but one is framed as a potential win and the other as a potential loss.
How did the capuchins react? They far preferred to take a gamble on the potential gain than the potential loss. This is not what an economics textbook would predict. The laws of economics state that these two gambles, because they represent such small stakes, should be treated equally.
So, does Chen's gambling experiment simply reveal the cognitive limitations of his small-brained subjects? Perhaps not. In similar experiments, it turns out that humans tend to make the same type of irrational decision at a nearly identical rate. Documenting this phenomenon, known as loss aversion, is what helped the psychologist Daniel Kahneman win a Nobel Prize in economics.
So, people aren't the only primates who are irrational about money: Monkeys are too. That's not the only thing we have in common, though. The Times story also reveals the scientific evidence documenting the existence of monkey whores who trade sex for money. Monkey whores! That's the reason the blogosphere needs the New York Times.
Also, we've learned that, if you (re-)discover that people are unwilling to be rational about money, you can win a Nobel prize. And neither of the linked stories mentions anything about face-slapping as a pricing technique, but I'm sure that's just an oversight.