The value of emotions: we think we can rationally assess the true value of something, but we are strongly influenced by our emotions and the comparative price of other goods and services. by understanding such behavioural science, businesses can ensure they are maximising their profits.
| Author | Morrison, Rowan |
Behavioural scientist Ayelet Gneezy is an expert on how we assign value to goods and services. One of her starkest insights into just how inconsistent we are when we do this came not in a study she devised, but when her mother-in-law was diagnosed with cancer in Israel. After spending time uncomplainingly in a barely acceptable public-sector hospital, Gneezy's mother-in-law was moved to an expensive and far more luxurious private hospital. "Within 20 minutes of checking in, she started complaining even though objectively everything was better," Gneezy said. "She had good food, a clean room, and privacy, but she was essentially happier at the first place, which was free but not that great."
It is a reminder that we are not the purely rational actors of economic models. Notions around how we attribute value to something and make decisions around price have been transformed in recent decades by behavioural economics and behavioural psychology from the likes of Gneezy, an associate professor at the Rady School of Management at the University of California, San Diego.
Behavioural science has revealed the extent to which we negotiate a world of complex and conflicting information by using mental shortcuts (often using unconscious processes) to make decisions that are often highly relative or emotional. Because of this, we are suggestible and subject to influence in the decisions we make.
"We like to think we know what price is the right one, but the fact is that we make relative comparisons," said Bill Pouncistone, author of Priceless: rhe Ridden Rycholog of Value. "Behavioural economics has found that perceptions of price are like those of physical quantities, like dark or brightness and heavy or light. If you don't have a benchmark for price, your willingness to pay is fluid and contextual, which is something companies can use."
The small but growing number of specialist pricing consultants using behavioural economics theory suggests it is becoming a new area of competitive advantage. But for the most part, businesses are not yet working to systematically apply these lessons and insights, nor are they making the most of the increasing amount of pricing data available.
All too often they use conventional and sub-optimal ways to set prices. "Common rules of thumb such as 'x per cent over cost' do not consider what the customer is willing to pay or what they are thinking," Pounds tone said.
Part of the reason for this lack of engagement with...
To continue reading
Request your trialCOPYRIGHT GALE, Cengage Learning. All rights reserved.
