What determines the price of an object? If you are buying an asset, it could be the present value of all cash flow from it. It could also be the meeting point between supply and demand curves (or the willingness to pay and marginal cost). Well, there is another factor – human irrationality.
Ariely et al. call it coherent arbitrariness induced by the anchoring effect. In one of their studies, the experimenters selected 55 students of the Sloan School MBA program and tried a bidding game for six products. The experimental design was as follows.
The researchers described six products – wines, chocolates, books and computer accessories. The students need to do the following:
1) Write down the last two digits of their social security (SS) number on top of the paper.
2) Write down the same number (SS) against each item and indicate their choice (as accept/reject) if it was the price of the product in dollars.
3) Write down the maximum willingness to pay for each item.
The results are in the following table. The values with the dollar sign represent the average willingness to pay mentioned by the subjects.
| Last 2 digits of SS –> | 00-19 | 20-39 | 40-59 | 60-79 | 80-99 |
| Cordless trackball | $ 8.64 | $11.82 | $13.45 | $21.18 | $26.18 |
| Cordless keyboard | $16.09 | $26.82 | $29.27 | $34.55 | $55.64 |
| Average wine | $ 8.64 | $14.45 | $12.55 | $15.45 | $27.91 |
| Rare wine | $11.73 | $22.45 | $18.09 | $24.55 | $37.55 |
| Design book | $12.82 | $16.18 | $15.82 | $19.27 | $30.00 |
| Belgian chocolates | $ 9.55 | $10.64 | $12.45 | $13.27 | $20.64 |
Look at how the average willingness to pay changed with the anchor (person’s social security number)!
Dan Ariely, George Loewenstein, Drazen Prelec, The Quarterly Journal of Economics, February 2003
