When I was younger, I remember seeing toys and thinking the higher-priced toys were the better ones. I thought because the toy cost more, the materials, engineering and design used in the toys were better.
I don’t know if my dad was just trying to save a few dollars or knew better than me (or maybe both), but he would always want me to get the cheaper toys.
Do you think you’re a logical person? Do you usually act rationally? Let’s test this out.
Imagine you are thrown into a game show; it is you and John Doe as the two contestants. In this game show, you and John Doe decide how to share a specific sum of money. John Doe is given, let’s say, $200, and he is supposed to offer you any amount of money. If you accept, then you both keep that amount agreed upon, but if you decline, then neither of you get to keep the money.
So, in scenario number one, John Doe offers you $100, and he gets to keep the other $100. Would you accept a fair 50-50 split?
In scenario two, John Doe offers you $1, and he decides to keep $199. What would you do? Would you decide to decline his offer of $1 or accept it knowing John gets to keep to $199 out of that $200 they told him to split?
If you declined, it’s okay. On average, the less equal offers usually aren’t accepted.
Let me ask you now: isn’t a free $1 better than no money at all? So why do people on average decline the offers that are not equal, even if the offers are rational to accept?
Framing is a concept based on people’s objectives, trying to capitalize on biases that they have.
For instance, would you want to join a contest that has 4,999 losers or a one in 5,000 chance of winning? Would you support the Improve Our Community Act or the Increase Our Taxes Act? Why would any of that matter if everyone just acted rationally and people's decisions were made logically? It is because people’s decisions are not made logically, and framing has a big impact on us.
Similar things have happened at UT. I know that with a certain MBA program, they didn’t change the curriculum but increased prices. The number of applicants increased because the higher price changed people’s perceived value of that program.
A cool experiment was done at Caltech in 2008 by Antonio Rangel, an associate professor of economics. It showed that the price of wine not only had an impact on how the wine tasted but also had an impact on the region of your brain where you experience pleasure.
To show this, Rangel got volunteers and had them taste the same wine but put different retail prices on the wines. He asked the volunteers to rate the wine. When the subjects did this, the one which was priced at $90 tasted better than the $10 wine, even though they were secretly the same wine.
Cost should rationally influence our thought process. I mean come on, the law of supply and demand 101 says the lower the price, the more people want it. It’s a law, so why doesn’t that always apply?
To answer that we have to go back to the question of why people decline an offer that is not equal, even if it’s logical. When we make decisions, we lack information, and we have limited rational abilities, leading to differing consumer experiences.
So, when I have kids and they tell me the more expensive toy is better, I’ll set them straight and then say, “Ha you thought.” Hey, maybe I’ll still get it for them if it makes their experience that much better.
Adil Naqvi is a Senior majoring in Finance and Supply Chain Management. He can be reached at email@example.com.
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