Priceless: how our unknowing irrationality confounds the price of everything

I just finished William Poundstone's Priceless: The Myth of Fair Value (and How to Take Advantage of It), a popular book on the history and present state of the art in analyzing how people arrive at prices (Poundstone's publisher, Hill and Wang, were kind enough to send this along).

As with other behavioral economics texts, Poundstone is setting out to demonstrate how our own cognitive blindspots cause us to behave irrationally, and how this pervasive irrationality has more to do with the price of goods than any "rational consumer" (as posited in the traditional economic model). Poundstone liberally cites the greats of the field, notably, Dan "Predictably Irrational" Ariely, but even if you've read other recent books on the subject, Poundstone's book brings some new material to the discussion.

First, Poundstone's treatment of the history of behavioral economics is both funny and fascinating, a kind of counterpoint to the history set out in Myth of the Rational Market. The mavericks who set out to investigate the ways in which we are both a) weird, and b) ignorant of how weird we are, were themselves very weird in an enormously entertaining way.

Poundstone's subtitle hints that there will be some kind of Dale-Carnegie-style set of tips and tricks for exploiting pricing weirdness, or at least not falling prey to them. And there are a few of these -- such as taking the time to seriously set out all the reasons an item isn't worth the price you're considering -- but by and large, the book's cautionary tales about how bad we are at understanding our own irrationality are the best tool of all. As Poundstone reiterates throughout the book, experimental subjects, high-priced corporate clients, and friends and relatives just don't believe that their idea of a fair price can be reliably moved by exposing them to random numbers prior to negotiation (high numbers make us willing to accept high prices; low numbers, low prices), even when they've just participated in an experiment showing them exactly that.

Poundstone's explanations make sense of everything from flat-rate mobile phone pricing to packaged goods box-sizes to the insane complexity of those same "simple" flat-rate phone plans. He goes a long way to explaining the way that prices ending in 9s are oddly attractive, and to showing up the dirty tricks involved in rebate pricing and other tricks of the price-gun.

In some ways, Poundstone's thesis -- we make irrational purchases all the time -- should be self-evident. After all, advertisers have spent a century extolling irrational cases for buying their products (what do cowboys have to do with Marlboros?), even as they argued to regulators that everyone who bought a harmful or overpriced product did so on the basis of their rational free will. But the pervasive game-theory story of rational actors acting rationally on the micro, macro and intermediate scales persists, and more importantly, it guides our policy-making and our economic thinking.

I don't think we're always irrational. But I think that we probably spend as much time kidding ourselves, misremembering, mispredicting, and misapprehending, as we do accurately gauging the circumstances and behaving accordingly. I think that our social system has long favored those who understand how to exploit cognitive failures, and that the subtle evolutionary pressure has created a world where the opportunities to be fooled in ways big and small are nearly everywhere.

Priceless: The Myth of Fair Value (and How to Take Advantage of It)