The Market Decides
The funniest part of arbitrary coherence is that the brain will hook onto random anchors.
In one experiment, Ariely had his students bid on a number of items listed on a sheet of paper — a cordless keyboard and mouse; a bottle of wine; a design book; and a box of chocolates. But first he had the students write down the last two digits of their Social Security numbers at the top of a page.
Weirdly, the students who had Social Security numbers that ended in high digits — from 80 to 99 — bid from 216 to 346 percent higher than students whose social security numbers ended in the lowest numbers (1 to 20).
The bottom line is that what consumers are willing to pay can be easily manipulated because we don’t have a good handle on our preferences, or the prices we’re willing to pay, Ariely notes. Standard economic theory suggests that forces of supply and demand are independent, and that consumers’ willingness to pay is what influences market prices. In reality, it’s the market prices themselves that influence consumers’ willingness to pay.
Thus first decisions resonate over a long sequence of subsequent decisions. “You can’t say, ‘Well, I’ll just try it once and see how it is,’” says Ariely. “We have to realize that the first decision we make actually matters a lot. And the second thing is to look back into our habits and say, ‘How did we get into this situation that we have this many cars or this size house? Do we really value things in the way we pay for them, or was it a random starting point?’”
Anticipating Irrationality
Moreover, be conscious about “trading up” to a new level of consumption, because it’s unlikely you’ll ever go back, Ariely says. And take time to occasionally inventory your anchors. Look at choices that once seemed completely reasonable; do they still make sense in your current financial situation?
In some money situations, thinking should be removed from the process — like saving for retirement, Ariely says. A variety of studies have found that forcing constructive behavior by automating a decision — such as having money taken out of a paycheck and invested for retirement week after week — solves the problem of procrastination.
Although irrationality is commonplace, Ariely writes, it doesn’t mean we’re helpless: “Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings.”
Quoted from: Yahoo financeLaura Rowley
