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(The Myth of Fair Value and How To Take Advantage of It)

William Poundstone

African nations in UN - what percentage? But before you ask the Q get them to spin a fairground wheel of fortune. A rigged one - it always gives either 10 or 65. So then ask the Q, and if it will be higher or lower than number that came up. Answers are anchored to the number. People who saw 10 guessed average 25%; those who saw 65 guessed average 45% (actual number is 23%).

This anchoring works even when you supply an absurd number. How many top ten records did Beatles have? Was it more or less than 100,025? Even though you know the higher number is absurd, it still drags your estimate a lot higher.

Even when you're forewarned about this anchoring effect, you think "Oh no it won't apply to me bc I'm too rational." - but it does for everyone (except for the Beatles anorak who happens to know the correct answer).

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Tourists going to a Broadway show don't know the real value of a seat, so if see a cheap price they assume show is no good, so don't go. But if they see very expensive seats, they assume it's a top show, so they go (though pay less than the top price displayed)

Which is more common: words that start with 'r' or words in which 'r' is the third letter. We can think of lots of words that start with 'r' so we choose that. But in fact there are lots more words with 'r' as third letter. Similarly kids will tell you that they can become a pop star or pro athlete because they know lots of successful examples, but virtually none of the multitude who tried and failed.

Contrast pricing. A $2000 handbag looks expensive, until you put it beside a $7000 one. A restaurant sells a $100 truffle-and-kobe-beef hamburger, not because they hope to make money selling them, but to make the $50 steak look like a bargain in comparison

Study of car dealers - clients who said they'd already test driven car got one $300 cheaper than one's who hadn't - dealers first offer better.

Oliver Cromwell's plea to the Elders of the Church of Scotland "I beseech thee in the bowels of Christ, think that ye may be mistaken!" 200 years later a Supreme Court judge in US said Cromwell's plea should be carved over the portals of every church,school,courthouse and legislature. ie, by considering how your judgement might be wrong, you might come up with an overlooked reason and change your mind.

New York Governor Nelson Rockefeller had the perfect NY apartment on Fifth Avenue with a panoramic view of Central Park. He also had a problem. There were plans to put up a skyscraper public housing that would be like a big middle finger blocking Rockefeller's sunset view. The guy pushing the project was Meade Esposito, the last of the old-time Democrat party bosses. Rockefeller got him round and explained his problem. "If you stop that project," said Rockefeller,"I'll give you that Picasso." He pointed to the painting on the wall. Esposito said he'd see what he cd do. The skyscraper never got built, Espisito got a Picasso, and Rockefeller got a story. For years after, Rockefeller lovingly recounted every detail of the bribery, capping it with the punchline "It was only a print!"

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Amarillo restaurant has huge sign outside "Free 72oz Steak!" It comes with salad, shrimp cocktail, baked potato and a roll .... and a big catch. If you can eat everything in an hour, it's free. Otherwise it's $72. Customers have to pay the $72 up front, they get the refund if they clean the plate. No third party is allowed to touch the plate.They have to sit on a special platform in view of everyone, and they aren't allowed to leave the table during the meal. And anyone who vomits is disqualified. A bucket is provided. Since 1960 (when the price was $9.95) 60,000 people have taken the challenge, and 8500 have succeeded.

It's not just an advertising gimmick. It's an anchor, subtly altering both how much you expect to eat, and how much expect to pay, even if you have no intention of trying the big one.

Beer pricing expt. Offer students a cheap beer or a premium beer. No-one wants the cheap beer. Now add a super cheap beer to the mix. This legitimises the cheap beer, and most students pick that one. Then add a super-premium one. 90% switch to the premium one. "It was like pulling strings on a marionette. Huber and Puto found they could make the students want one beer or the other, just by adding a third choice that few actually wanted. To change market preferences, simply add a decoy - cheaper if you want to move cheap beer, higher if you want to promote the premium one.

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Restaurants already exploit this. They categorize their menu into stars (popular, high profit), puzzles (high profit but unpopular), plowhorses (popular but unprofitable), and dogs (unpopular and unprofitable). Obviously the point of menu design and pricing is to push customers toward the stars. One tactic is bracketing - like 2 sizes of steak, where the smaller one is what they intended to sell you all the time. Or bundling, where a combo price convinces you to buy something you weren't originally seeking (but you eat it anyway).

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Don't wrap all the Christmas presents in one box. We value 3 $25 prizes a lot more than a single $75 prize. This is why you can't buy just one thing on the TV infomercial channels. But wait,.. there's more..!

Text messaging is the greatest ripoff going. Telco will charge you about $1 a megabyte for transmitted data. That shd make price for a text, 160 bytes, about 1/1000 of a cent. Rounded to the nearest cent: free. But they probably shouldn't even be that, because texts piggy-back on unused space in the control channel of the network.

Variation of the Ultimatum Game. Normally split $10 - if guy offers you $3 you compare it to the $7 he's keeping and decide it's unfair. But if you're offered "Will you accept $3 or just $2?", suddenly the comparison is between those two amounts, not between 7 and 3 dollars.

Magicians exploit the way we pay attention. We get used to what we're seeing and hearing, and then we only pay attention to what changes.

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