The Fallacy of Supply and Demand

Following are a few more nuggets from Dan Ariely’s excellent book on buying behavior, “Predictably Irrational”:

• The first price that people hear for a product or service is likely to become an anchor – they will strongly associate the value of the product or service with that price – no matter how the price fluctuates in the future. Everything becomes relative to that first price.

• We assume something is good or bad based on the behavior of others. Is “everyone” buying something? Of course, this can be a self-fulfilling prophecy. This is why it’s so important to surround a great product or service with buzz. Companies can create artificial buzz by giving the initial impression that everyone is buying something. Then everyone does buy it and all the company has to do is continually pump sales by advertising sales figures. This is what people suspect about Amazon did with Kindle.

• Many of the decisions we make are highly arbitrary (called arbitrary coherence), but we find ways to convince ourselves otherwise. In this way also, we tend to overvalue what we own. We make arbitrary decisions and end up building our lives around them.

• The way out of this is to become aware of vulnerabilities that affect decision making. This is especially when a primary decision (which may seem small) will have an effect on a long stream of decisions to follow. For example, choosing an operating system for technology.

• Most buyers don’t have a good handle on their preferences and what they are willing to pay.