Tag: Priceless: The Myth of Fair Value (and How to Take Advantage of It)

💎 On how big numbers fail to move us (for charity fundraising)

In a 1992 survey by W. H. Desvousges and colleagues, people were told that birds were dying because they became mired in uncovered pools of oil at refineries. This (fictitious) problem could be solved by putting nets over the pools. The experiment asked participants to indicate how much they would be willing to pay for nets to save the birds The researchers tried telling different groups that 2,000 birds were being killed a year — or 20,000 birds, or 200,000 birds. The answers didn’t depend on the number of birds! In all cases, the average dollar amount was $80. Evidently, all that registered was A lot of birds are being killed. We should do something about it.

Excerpt from: Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone

💎 On how the money illusion affects our concept of fairness (a lesson on Wall Street bonuses)

A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment but no inflation. There are many workers anxious to work at the company.

The company decides to decrease wages and salaries 7% this year.

Sixty-two per cent judged the pay cut unfair.

In an another version of the question, the community was said to have ‘substantial unemployment and inflation of 12% . . . The company decided to increase salaries only 5% this year.’ Now 78 per cent said this was acceptable. But of course the workers’ lot is almost identical in both versions. Getting a 5 per cent ‘pay rise’ when prices rise 12 per cent translates into nearly a 7 per cent cut in buying power.

One conclusion is that inflation is the Scroogish employer’s best friend. A similar principle applies to bonuses. It was judged acceptable for a troubled company to skip an annual 10 per cent bonus it had been in the habit of paying, but not to cut pay by 10 per cent for a year. (Wall Street employers, at the mercy of a volatile market, have long made use of this.)

Excerpt from: Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone

💎 On how priming lowers our threshold of attention (Baader-Meinhof phenomenon)

Have you ever learned a new word (or heard of an obscure sea mammal or an ethnic dance) and then encountered it several times in the space of a few days? You come across it in the news, you overhear it mentioned on the bus and on the radio, and the old issue of National Geographic you’re thumbing through falls open to an article on it. . .

This is priming (fortified with a few low-grade coincidences). When yon skim the newspaper, half-listen to TV, or drive on the motorway, you ignore most of what’s going on around you. Only a few things command attention. Paradoxically, it is unconscious processes that choose which stimuli to pass on to full consciousness. Prior exposure to something (priming) lowers the threshold of attention, so that that something is more likely to be noticed. The upshot is that you have probably encountered your ‘new’ word or car many times before. It’s just that now you’re noticing.

Excerpt from: Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone

💎 Anchoring – even when taken to ridiculous extremes – has an affect on people’s judgements

Psychologists Gretchen Chapman and Brian Bornstein tested this idea in a 1996 experiment, when Liebeck v. McDonald’s was much in the news. They presented eighty students from the University of Illinois, U.S.A., students with the hypothetical case of a young woman who said she contracted ovarian cancer from birth control pills and was suing her health care organization. Four groups each heard a different demand for damages: $100; $20,000; $5 million; and $1 billion. The mock jurors were asked to give compensatory damages only. Anyone who wants to believe in the jury system must find the results astonishing.

The jurors were amazingly persuadable, up through the $5 million demand. The lowball $100 demand got a piddling $990 average award. This was for a cancer said to have the plaintiff ‘almost constantly in pain… Doctors do not expect her to survive beyond a few more months.’

Excerpt from: Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone