Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone
Sorry it's been so long, guys.
Priceless is a well-researched history of behavioral economics. Poundstone goes out of his way tell the stories of Sarah Lichenstein, Paul Slovic, S. S. Stevens and the other researchers who punched holes in neoclassical theory—and the result is a book that is thoroughly engaging.
Poundstone argues that prices are largely arbitrary. Just as people are relatively poor judges of absolute temperatures and weights but can easily estimate changes, so too do customers have little sense what goods should be worth. Instead, they judge whether prices are acceptable or not from environmental cues. Poundstone repeatedly demonstrates the power of anchoring: a high set price can pull subsequent estimations of value upward. For instance, amateur and professional real estate agents both conclude a house is worth more when the asking price is higher. Similarly, an overpriced watch in a designer goods store may never sell but serves to justify high prices on other products. And juries award more in damages when lawyers put arbitrarily high prices on their clients’ suffering. (Poundstone opens with an account of the landmark Liebeck v. McDonald’s case, in which a jury awarded Stella Liebeck $2.9 million in damages for the third-degree burns she received when spilled a cup of coffee on herself.)
Poundstone extrapolates the psychology of pricing to discounts in retail stores, menu layouts, and business negotiations. Some tips:
On a menu, center-justify items and list prices without dollar signs.
If an item is on sale, list the new price along with the original. The allure of a bargain may induce customers to spend more than they otherwise would. Instead of raising prices outright, “lower the discount” (232).
When negotiating a business deal with a man, examine his ring finger. If he is unmarried or has a ring finger close in length to his index finger, he is less likely to walk away from a deal.
In behavioral economics, the primary research tool is the classic ultimatum game. Poundstone describes several variations (competitions between genders or races; games played under the influence of oxytocin or alcohol) and their implications. Several experiments reveal biases subjects will not consciously admit to. Poundstone’s book is a powerful study of both pricing theory and modern society.