Priceless, by William Poundstone
Hill and Wang 2010
Priceless is about how people assign monetary value to things with no obvious price. Although those of us who remember college economics might think of price as cost plus ten percent, real prices are messier. That formula might work for fungible commodities such as gasoline and sugar, but what about dry-aged Waygu beef, or an Armani suit? Those prices are driven by a more complex set of economic, social, and psychological reference points. Economists have been slow to adopt that analysis, but marketers understand it perfectly well - Ralph Lauren doesn’t expect to sell a $14,000 purse. It’s supposed to make the $800 purse look affordable and reasonable. The $14,000 price acts as an anchor; an arbitrary figure that affects the way people assign some other value. Psychological experiments suggest that anchors affect not just estimates of money values but dates and geographical trivia.
Arbitrary values are especially significant when non-experts assign money values to nonmonetary things, as with a lawsuit tried to a jury. In that unique forum, values are assigned with no market, few reference points, and minimal effect on one another, so it helps to demonstrate the rationale (such as it is) underlying arbitrary values. The jury in the McDonald’s coffee lawsuit, for instance, awarded $2.7 million in punitive damages. (That figure was later reduced by the judge.) The plaintiff’s attorney had argued for that figure based on two days’ worldwide coffee sales. If you don’t think about it too closely, that sounds reasonable. But two days’ sales has nothing to do with the magnitude of McDonalds’s misconduct. Why not fifteen minutes’ sales? Or five years’? The two days’ sales figure (according to Mr. Poundstone) was selected as an anchor, and the attorney did a great job persuading the jury to consider that figure. And the judge, who was more familiar with the values typically assigned to noneconomic damages, thought the figure was too high.
Other experiments show that people are not economic automatons; they are guided by a sense of fairness even when contrary to their self-interest. For example, in one experiment (with many variations), one person could choose how to divide $10 with another, who could either accept the division or refuse it; in the latter case, no one got anything. The first person usually offered close to $4, and the second rarely accepted less than $3, even though that was not the rational choice for either one that traditional economics would predict. Further, being observed affected how the first person chose to divide the money; if the choice was hidden, they offerer acted more selfishly and with less regard for socially-agreed fairness.
Providing a rationale for an arbitrary valuation is a major part of what lawyers do: how much money is it worth if a drunk driver wrecks your car, or wrecks your car and breaks your leg, or wrecks your car and breaks your leg and you’ll never walk right again? Should identity theft lead to a longer jail sentence than passing a joint around at a party? There’s no obvious way to decide, and lawyers struggle with giving a judge or jury a reason to pick a specific number. The experimental evidence shows that our intuitive sense of how people make decisions is, at best, imperfect.
Those experiments have some obvious application to disputes over money values; people are reluctant to accept settlements that they see as unfair, even if those settlements are in their financial best interest. It may also be that those principles affect numbers and decisions to non-financial decisions, such as criminal sentencing. Whether the penalty for DUII should be two days in jail, or six months, or five years, is arbitrary in the same way that the right price for a gourmet meal in this week’s trendy restaurant is arbitrary. And those figures are affected more by anchors, by perceptions, and by relative values of similar things than by any absolute value. Understanding that counterintuitive psychology would help in writing demand letters, and I’ll keep it in mind when I write my next sentencing memorandum.
