Karucaka and Zaman – preferences and anchoring

Karucaka and Zaman (2012) summarise an extensive body of literature which suggests that neoclassical assumptions about preferences and behaviour may not coincide with observations in the real world. In this extract from pp.385-386, they summarise the phenomenon of ‘anchoring’:

The phenomenon of anchoring demonstrates how values attached to objects are arbitrary, instead of being related to built-in preferences which are exogenous…Savvy marketing experts are aware of the phenomenon of ‘anchoring’ and use it to generate favourable prices for new products. Ariely (2008) lists several striking examples:

• After failure of initial efforts to sell black pearls, marketers displayed them on Fifth Avenue at an outrageously high price, in the company of similarly expensive jewelry. This had the desired effect of creating a high price anchor for the product, and many sales were made at these prices.
• In a classroom exercise, Ariely offered a session of poetry reading to his students. Half the class was asked how much they would pay to attend the session, while the other half was asked how much they would require as payment in order to attend. All members of the first half offered to pay a positive amount, while all members of the second half asked for some positive payment to attend. Based entirely on the arbitrary anchor provided by the question, students evaluated the poetry reading as a ‘good’ or as a ‘bad’ (experience).

These experiments demonstrate that the economists’ model of price setting via supply and demand is seriously in error. Goods do not come with demand curves attached, and demands are generated by contextual references and subject to a very high degree of arbitrariness.

Ariely, D. (2008) Predictably Irrational: The Hidden Forces That Shape Our Decisions, Harper
Collins, New York.

Karacuka, M., & Zaman, A. (2012). The empirical evidence against neoclassical utility theory: a review of the literature. International Journal of Pluralism and Economics Education, 3(4), 366-414.

Commentary added, 10 November 2014