In their write-up on Richard Thaler’s work on irrationality, one of the examples that the Nobel committee gave involved a woman trying to buy a watch. The important part: she would travel across town to save $10 if the original cost of the watch was $100 – but she wouldn’t do it if the original cost was $1,000. It seems that saving 10 bucks is not always saving 10 bucks.
The Irrationality of South Africa’s Starbucks Fans
So let me give you a local example. In April last year, South Africa’s very first Starbucks opened in Johannesburg. Here is a picture:
People were queued up from midnight.
That is: people missed a night’s sleep to stand outside a Starbucks in order to order a Starbucks latté.
Somehow, that was worth it.
When your saving depends on the price
Maybe you’re thinking that some people just get a kick out of being early adopters? As in: this was about more than just the coffee?
Or perhaps not. Perhaps people are just crazy, and live in a world in which:
Coffee ≠ Coffee
$10 ≠ $10
Here is an extract from Richard Thaler’s book “Misbehaving: The Making of Behavioural Economics”:
Linnea is shopping for a clock radio. She finds a model she likes at what her research has suggested is a good price, $45. As she is about to buy it, the clerk at the store mentions that the same radio is on sale for $35 at new branch of the store, ten minutes away, that is holding a grand opening sale. Does she drive to the other store to make the purchase?
On a separate shopping trip, Linnea is shopping for a television set and finds one at the good price of $495. Again the clerk informs her that the same model is on sale at another store ten minutes away for $485. Same question… but likely different answer.
Excerpt From: Richard H. Thaler. “Misbehaving: The Making of Behavioral Economics.” W. W. Norton & Company, 2015-05-10T22:00:00+00:00. iBooks.
It really calls everything into question, doesn’t it?
One minute, you’re coasting along, thinking that everyone is fairly rational and mostly consistent and trying to make the best decision within their realm of knowledge.
Next minute, you’re in a coffee queue for 8 hours.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.
Mark October 13, 2017 at 13:14
hmmm, in light of this can you explain why progressive tax systems aren’t irrational?
ultimately at some point humans worry less about absolute value and more about the value as a percentage, good marketers and ad people know this and play on it heavily. as do statisticians, politicians and economists!Reply