Predictably Irrational— The Fallacy of Supply and Demand

the fallacy of supply and demand

• arbitrary coherence: although initial prices are ‘arbitrary,’ once those prices are established in our minds they will shape not only present prices but also future prices (this makes them coherent). (26)

Initial prices are largely ‘arbitrary’ and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products (this makes them coherent). (30)

…anchors have an enduring effect for present prices as well as for future prices. (35)

…our first impressions resonate over a long sequence of decisions. First impressions are important… (35)

• herding: when we assume that something is good (or bad) on the basis of other people’s behavior, and our own actions follow suit. (36)

• self-herding: when we believe something is good (or bad) on the basis of our own previous behavior… we feel more strongly that we are acting on our own preferences based on past behaviors… we line up behind ourselves. (37)

According to economic theory, we base these decisions on our fundamental values— our likes and dislikes…Could it be that we made arbitrary decisions at some point in the past and have built our lives on them ever since, assuming that the original decisions were wise? (43)

We should pay particular attention to the first decision we make in what is going to be a long stream of decisions. When we face such a decision, it might seem to us that this is just one decision, without large consequences; but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention. (44)

Contrary to traditional economics, consumers willing to pay can easily be manipulated (by supply-side variables: advertising, promotions, displays, MSRPs, etc.), and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and services….instead of consumers’ willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers’ willingness to pay. What this means is that demand is not, in fact, a completely separate force from supply.(45)

…in many cases we make decisions in the marketplace that may not reflect how much pleasure we can get from different items. Now if we can’t accurately compute these pleasure values, but frequently follow arbitrary anchors instead, then it is not clear that the opportunity to trade is necessarily going to make us better off. (48)