Black pearls
Dec
10
How do we decide how much we are willing to pay for things?
Let’s take black pearls as an example:
The interesting thing about black pearls is that when they were first introduced to the market there was essentially no way to gauge how much they were worth: were they worth more or less than white pearls? Most people instinctually believed that white pearls were still more desirable. But then the black pearl discoverers had an lucrative insight: take these unfamiliar black pearls to a famous jeweler and have them displayed next to the more precious gems: rubies, sapphires, and so on. The result still lives with us today: black pearls are now worth more than white pearls.
The Honest Truth About Dishonesty: How We Lie to Everyone - Especially Ourselves
Well it’s like the old saying of knowing the price of everything and the value of nothing.
Dan, isn’t this all rather obvious? Can’t you give us something a little more interesting?
As an exercise why don’t you announce that you are going to let your readers decide what price they want to pay for your book? A bit like what Radiohead did.
Bet you don’t, though, no doubt saying that your publishers won’t allow it. Fair enough if that’s the case.
But when you publish your next book will you announce that you’ll let each buyer decide what they want to pay for that book?
It would certainly be putting your money where your mouth is!
“Isn’t that all rather obvious?”
“Isn’t that common sense?”
Frank, if I had a nickel for every time I heard someone make those remarks…
In reality many things are neither obvious nor common sense to many people. The world would be quite different if they were.
One of the things I enjoy most about Professor Ariely’s research is how it mythbusts/validates our error-prone intuitions. You feel his insights are not interesting. I disagree.
Well I and many people I know must live on a different planet then.
If people can’t see the difference between price and quality then we are in serious trouble!
Or maybe people have too much money now. The shrewd investor who buys art know that there is no connection between quality and price otherwise they would not risk paying huge sums of money if they did not think the work would increase in monetary value.
I find it difficult to believe your assertion that many or most people no longer possess common sense.
It’s not obvious at all. Years ago people debated about why things cost certain prices and what the value of certain things were. In fact there is a whole school of economic thought that says markets get prices right. That implies that there is an underlying value to things and this disputes that idea.
The last part about having buyers set their own prices makes little sense. Why would he have to put his money where his mouth is? What does “setting your own price” have to do with this video or how people think of value. If people could set their own prices they would obviously set the price at $0, but that doesn’t tell you anything about how much people value that object.
I ask Dan Ariely to put his money where his mouth is because in his book he talks about the way people value things.
So I ask again, is he prepared for his next book as an experiment to not put a price on the book but to ask people to pay what they think the book might be worth to them.
This is what the group Radiohead did with one of their albums.
@Frank Wood, Wrong! You don’t live in a different planet, though. Would you pay $0 dollar for a book? Better yet, Can you? Yes, you might answer, but do you know any of your planetmates already done a $0 dollar book deal, I would say not likely. About Radiohead, they are actually a better marketer than Dan (sorry Dan). They knew the fact that as soon as they music hit the air, it is “somewhere” available for download because they are more popular than Dan (sorry again Dan). So Radiohead’s donation trickery is guilt-based niche marketing. I don’t doubt that they have hired Boston Group for their tricks just for the sake of argument.
“In fact there is a whole school of economic thought that says markets get prices right. That implies that there is an underlying value to things…”
Not at all. “Getting prices right” means clearing the market, not arriving at some metaphysically “true” value. In fact, one thing most economists agree on is subjective value theory.
Hi Dan,
It would be interesting to see how we value different type of things.
I have always felt that the pricing of fashion and luxury items, jewelry in particular, is interesting and often artificial. They are based on perceived rarity, and amount of prestige it transfer upon our person. So, the pricing isn’t based on how useful or actually rare it is, rather how rare and value it is perceived.
I think it would be an interesting study to see how we value and price utility items versus luxury or fashion based items. And what happens to price when it one transition from one to the other. To see if we price one rationally and not the other, or we price both rationally, just with different criteria.
William Poundstone’s book, Priceless, says a great deal about this topic. Pricing and how much we’re willing to pay seems to be one of the most irrational things we do.
I think prices are derived from two basic factors, manufacturing cost and human associations.
Manufacturing cost is the total amount of money that it takes to develop and produce a certain product, from extracting raw material, to paying for research and employees etc.
Human associations, on the other hand, cover a huge range of highly unpredictable aspects of the values we associate to things. We have a tendency to associate everything, from words to objects, to actions with emotions; if our friend has a product we like, we will probably give higher value to it because we associate his happiness to it, to the happiness we might obtain upon purchasing that product. Because so many aspects of our lives depend on making rational associations, we simply ignore that there are certain contexts in which, the otherwise rational associations we make on a daily basis, might lead us to make poorer choices.
Has for allowing people to decide how much to pay for a book, I think a clear distinction needs to be made between what we call the “online world” and the “real world” because these worlds place people in entirely different situations. For example, if in the real world a certain product that you want has no fixed price, you might, donate more money than it is actually worth, simply to avoid having other people look at you and think that you’re a “bad” person. On the online world such conditions do not apply because there is no direct human contact, and you will feel much less inclined to pay for something even when you don’t have to.
I can for example go online and download all of Radiohead’s albums (illegally) and feel no inclination to pay for them, on the other hand, in the real world because the conditions are different I would no doubt feel the need to at least offer some money. I also think this has to do with the value we place on physical/tangible objects in contrast with bytes of information. I think we irrationally place a higher value on a plastic DVD than on some megabytes that contain the same information but have no tangible form.
Sérgio, I’m not sure manufacturing cost is relevant here. We’re not talking about pricing as a result of labor, cost of materials and such. We’re talking about consumer perception of value and the prices we’re willing to pay.
I read a review just the other day on Amazon. A doctor paid ~$150 for a humidifier. Upon receiving it he clearly felt that it was not “worth” what he paid for it. He wrote about the materials used and the workmanship without any knowledge of the costs involved in manufacturing, packaging, marketing, selling and delivering the product to his home. He described it as just a couple fans and filters in a plastic box obviously ignorant of the effort that is involved in engineering and manufacturing the product.
His expectation of what he should receive for $150 was out of alignment with the reality of the quality of a $150 humidifier.
In a strange twist most of us value some things far more than we probably should (e.g. look at the markup on jewelry that we’re clearly willing to pay) and some things far less than we probably should (e.g. our finite time here on earth).
Regarding online versus offline, I believe our behavior online is similar to our behavior offline in situations where our online social presence and relationships mimic those offline.
If your online friends believe stealing is wrong and you reveal that you’re illegally downloading music, you’ll very likely feel the same as you might feel if you attempted to steal something from a store with the same friends present. I believe relationships transcend the medium and influence behavior.
Of course, these are only my opinions.
Well Joseph, I agree that manufacturing costs are mostly irrelevant to the price of products; I simply like to believe that they play a role. Even if in practical terms the price of manufacturing a product only influences 1% of its final cost, it still has an effect, regardless of how small it is. Again, it is now how much it affects the final cost, but simply that even if to a very small degree it still does.
Regarding online versus offline, I accept your view that when we experience situations online similar to those we experience offline, we mimic the offline.
I guess from a rational perspective your point of view makes perfect sense, after all, just because chances are we will never meet in real life, this shouldn’t affect how we behave. However reality is not so rational.
I have dozens of friends who constantly download illegal material off the internet and yet have never stolen anything in real life (in terms of similar monetary value). They have, in fact, very good morals, but when they turn to the online world, they find no moral objections in acting this way.
My point is that there are differences between online and offline, and that these differences even though we might not realize it do affect our behavior, I also claim that one of these differences is the amount of human interaction.
For example, ordering an online book for 15 dollars, or downloading it illegally for 0 dollars.
While the price may be different, the amount of human interaction in doing both tasks is practically 0 for both cases; on the other hand, if I have to walk into a store and steal something, the prices will still be different (paying 15 dollars for the book or stealing it for 0 dollars), but the amount of human interaction will be much higher.
“I believe relationships transcend the medium and influence behavior.” Yes online relationships can be has good or even better than real life ones, but I would say that this “transcendence” also comes at a cost.
You might find it easier talking to someone online about your problems, because you don’t have to be face to face, but you also might find it easier to insult someone for the same reason.
I’m not suggesting that people are “eviler” on the internet, rather, that because there are differences between online and real world interactions these differences have direct consequences on our behaviors and decisions, whether they be good or bad.
Sérgio, I would agree that manufacturers’ costs likely play a role no matter how small. I would be very interested in understanding to what degree those costs influence our decisions. I suspect the degree of influence varies from product to product and service to service. Marketing and sales certainly has a role in it. For example, as an advertisement or salesman describes the investments made in advanced manufacturing techniques, higher quality materials, highly skilled labor, etc I’m guessing most people would perceive higher quality and a higher price tag (even if the actual cost to produce the product decreased as the manufacturer’s economies of scale and productivity increased.)
By the way, I believe in Predictably Irrational Prof Ariely covered a scenario similar to your music and book examples. He conducted an experiment involving cash left in a dorm fridge versus soda. Apparently students were more likely to take soda than cash (it probably felt less like theft).
Out of curiosity, you state that you believe your friends have good morals but also that they are okay with downloading music illegally online. Clearly (and with all due respect to you and your friends) their morals aren’t quite as good as they or you might like to believe, and are instead contextual/situational. Objectively speaking, wouldn’t you agree?
An interesting trend I noticed while reading the comments above is the blurring of “price” and “value”. As a merchant by trade and an economist by education, I find it useful to often re-establish the delineation between the two. Price is simply a number assigned to amount of a resource we give up. I was once told “its impossible to complain about price”. At first this seems completely illogical, as you can easily say “but I complain about price all the time”. The counter to this is to simply ask someone to argue with a price of $500. On its face, that is an impossible task. $500 may be a great deal for a new TV, but a horrible deal for a new sweater. In order to complain about price, you have to imply value. Value in this sense is a measure of the utility of some object to the end user. You may find that a sweater does not have $500 worth of utility to you, in which case you are making an argument about the value of the sweater, not the price of the sweater.
So how is this relevant at all to the article above? Well, I’m not really sure, but I kept thinking about it while reading the comments and it seemed worth noting.
SKP,
Outside of academia, when is price discussed without some context that implies value to a buyer or seller? I’ve not once been involved in a conversation where the participants debated price without context.
Price and value are inextricably linked in the minds of the buyer and seller.
I respectfully disagree, sir. Take the example of an in-home salesperson selling an installed home improvement. Salesman A works for a company that competes in the bottom tier of the market and uses “price” as a differentiator. He presents a price to the customer of $1000, however, his company uses inferior materials and workmanship. Salesman B works for a company that offers a higher quality installation and presents the customer with a quote for $1500. Because the customer has already seen a price of $1000, they immediately say “your price is too high”. The well trained salesperson will then make the distinction between price and value. The customer would like to argue about “price” when in reality, the discussion should be about “value”. If the customer does not feel there is an incremental $500 of value, that is one case, but to simply say “that price is too high” is a flawed argument.
Joseph, to answer your question:
Yes, I suppose. No one is perfect after all, and to a greater or lesser degree I think we all overvalue our friends.
I’ll simply ask you the same question that I felt puzzled by. Why is it that people who volunteer to help children and to gather food for the poor, find no problem in committing online theft?
Perhaps this has more to do with moral issues than the internet itself so the next logical question would have to be: Is our moral behavior affect by the presence of other people? And if so, what happens when we go on the internet?
SKP, thanks for pointing that out. I think it is relevant to know that, and I will try to avoid making the same mistakes in the future.
“Why is it that people who volunteer to help children and to gather food for the poor, find no problem in committing online theft?”
I think we’re getting pretty far off the topic of this blog post, but I’m not sure what you’re talking about here.
If you’re talking about appropriating intellectual property without paying for it, I believe that you are mistaken that this does not occur “offline”. It does all the time. The difference that you seem to be perceiving isn’t created by online vs offline, but rather by tangible objects (which most reasonable people would agree you should not steal) and information (about which reasonable people will disagree whether the word “steal” even applies).
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Marc.
Mark, I never suggested that people don’t steal in real world, but rather, questioned why people find easier to steal online content rather than offline one; and also if this is due to the fact that in the online world no one is ever (physically) around to judge our behavior?
That’s my point, though, Sergio. People don’t find it easier to steal online content rather than offline. Rather, they find it easier to “steal” Intellectual Property, rather than physical property. They do this just as often (more often, I would say) in “real life” than they do online.
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Marc.
things are worth what you want to believe or what someone will pay for them. It all depends what you want to do with the item.
same as with pay for work.
price and value are linked, yes.
the same? no.
used together in most transactions, because most buying is not directly negotiated between buyer nad seller.
Jewelry prices seem rather artificial to me in general. Take precious stones like diamonds. They’re nothing more than compressed carbon which could be produced in a lab much cheaper and at a higher quality. And yet we’ve become trained to associate a very high value with them. Makes absolutely zero sense to me.
I would like to reflect on part of the story where the value was associated and ask 2 questions:
• Is this why famous people buy expensive stuff to ‘get’ more value?
• Is this how value is added to a product – by being commercialized by someone who is valued (example: movie star)?
Let me know your thoughts…
SKP,
There is no doubt in my mind that price and perceived/expected value are linked in the minds of most consumers (especially in anticipation of an experience/outcome). It is little more than an academic exercise for us to differentiate between the two when discussing the way consumers behave in the real world.
I invite you to try to explain the difference to the average consumer. In their minds they often equate the two. That’s just the way it is.
An experienced salesman uses this to his/her advantage. No experienced salesman would ever lead with a discussion about price. Yes, because it makes no sense to do so. A salesman will lead with a discussion of the customer’s needs and exactly how his company’s product/service addresses those needs. Only after setting value expectations will he reveal the price.
All of this to say that I believe you and I agree but we’re looking at it through two different lenses.
On a different note…Prof. Ariely, might you be able to share your thoughts about the providence paradox and how it relates to this discussion?
http://blogs.hbr.org/video/2010/12/how-to-build-a-brand-like-coro.html
Why are we not as willing to pay a fair price for a product that may, in fact, be superior just because of its place of origin? Is it because we perceive the costs are lower in say Venezuela versus Switzerland, and therefore we are not willing to pay as much for Venezuelan chocolate despite the product delivering equal or greater value?
In my previous comment I meant to write “provenance paradox” but apparently I had Rhode Island on my mind.
Walking in the presence of giants here. Cool thinnkgi all around!
We may recall that once upon a time tulips were used as currancy and highly valued. It all depends on where we stand and how much we like living up to the Jones’ of the world. Value like beauty is in the eye of the beholder!
Dan I think you are a wonderful speaker and a very intelligent, interesting man!