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Thread: Price Manipulations!

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    Senior Member Array tomcat's Avatar
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    Price Manipulations!

    ...review of a book whose authors expose the chicanery of pricing:

    Boulud’s $150 Burger, $2.9 Million Coffee Stump Buyers
    Review by James Pressley

    Feb. 3 (Bloomberg) -- If you have money to burn, three gentlemen can help.

    Chef Daniel Boulud will serve you a $150 hamburger. Ralph Lauren is offering alligator bags for $16,995 apiece. And what about Damien Hirst’s platinum skull encrusted with diamonds? The original asking price was 50 million pounds, or about $100 million at the time.

    Just one warning: Those prices are decoys. Each is designed to make everything around it look more affordable, writes William Poundstone in “Priceless,” an entertaining look at how companies, restaurants and even artists exploit psychology to extract more cash from the rest of us.

    The trick is simple. Once you’ve seen a $150 burger on the menu, $50 sounds reasonable for a steak. At Ralph Lauren, that $16,995 bag makes a $98 T-shirt look cheap.

    This mental process has a name. It’s called “anchoring and adjustment,” a term introduced by a famous team of Israeli American psychologists, Amos Tversky and Daniel Kahneman. An initial value becomes a benchmark, “a starting point for estimating an unknown quantity,” says Poundstone, a prolific author of fun books that explore the intersection of academic research and real life.

    Anchoring appears to be built into our cerebral software, he writes. In experiment after experiment, humans try to resist anchors and fail. They can’t do it, “any more than someone can obey the instruction not to think of an elephant,” he says.

    Hot Coffee

    Lawyers use anchoring to win massive awards for clients. Remember the New Mexican jury that awarded 81-year-old Stella Liebeck $2.9 million in damages after she spilled a hot cup of McDonald’s coffee on herself?

    Companies use it for stealth price increases, Poundstone says. You toss a jar of Skippy peanut butter into the shopping cart, thinking the price hasn’t changed. Then you notice that the container has a new indentation in the bottom and now holds 16.3 ounces, not 18. Wait, did the price just go up 10 percent?

    This is no exception. In the past generation, price consultants such as Simon-Kucher & Partners have flourished by advising clients such as Coca-Cola Co., Procter & Gamble Co. and Microsoft Corp.

    People tend to be clueless about prices, Poundstone says. Contrary to economic theory, we don’t really decide between A and B by consulting our invisible price tags and purchasing the one that yields the higher utility, he says. We make do with guesstimates and a vague recollection of what things are “supposed to cost.”

    Menu Psychology

    Poundstone is a lean writer; he distills complicated concepts into quirky chapters that run just a few pages each. He begins with the intellectual underpinnings of price psychology, then applies them to Prada bags, Super Bowl tickets, phone bills and restaurant menus. (That $15 shrimp cocktail sure looks tempting compared with the $110 plateau de fruits de mer.)

    An anchor doesn’t have to be high; it can be ridiculously low. Poundstone takes us, for example, to the Big Texan Steak Ranch on Interstate 40 in Amarillo, Texas, where I was awed to learn as a boy that you could get a 72-ounce steak -- some two kilos of beef -- FOR FREE.

    The catch, my dad explained, was that you had to eat every last bite plus a shrimp cocktail, baked potato, salad, roll and butter within one hour. Otherwise, you paid the full price, which rose to $72 last year. I soon turned my attention to the cowgirl waitresses.

    Mystery Buyers

    Still, you shouldn’t underestimate the gravitational tug of an astronomical price tag, like the one Hirst slapped on his gaudy skull. When the piece went on display at London’s White Cube gallery in June 2007, it was priced at the equivalent of $100 million -- almost as much as the most expensive estate in East Hampton, New York, as a colleague reported.

    Two months later, Hirst’s business manager, Frank Dunphy, said the skull was being sold to an unidentified investment group. The mystery buyers, it turned out, included Hirst himself. What was that all about? We found out a year later.

    On Sept. 15, 2008 -- the day Lehman Brothers Holdings Inc. filed for bankruptcy -- Sotheby’s began a sale of 223 lots of new work by Hirst and his studio. The auction raised 111.5 million pounds, topping the presale high estimate of 98 million pounds.

    “It wasn’t hard to understand what happened,” Poundstone says. “The skull’s price was an anchor, a canny way of boosting the value of other Hirst pieces.”

    “Priceless: The Myth of Fair Value (and How to Take Advantage of It)” is from
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    acostumbrado equivocado Array happynz's Avatar
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    Quote Originally Posted by tomcat View Post
    The trick is simple. Once you’ve seen a $150 burger on the menu, $50 sounds reasonable for a steak. At Ralph Lauren, that $16,995 bag makes a $98 T-shirt look cheap.

    This mental process has a name. It’s called “anchoring and adjustment,”
    Damn...this is exactly how the National Party-led government works here in New Zealand. The recent ACC levies rise was sold in exactly that way. They trotted out absolutely ludicrous numbers, got everyone in a lather and then finally rolled back the hike to merely obscene and everyone breathes out a sigh of relief.

    Manipulative bastards do it all the time and like stupid fish the punters keep biting on the same old bait.

    Thanks tc for the interesting article.

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    Senior Member Array russellsimpson's Avatar
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    Thanks for the review TC.

    It's going to save me buying the book.

    Hell, I'm saving money already.
    When being run out of town, get in front of the crowd and make it appear like a parade.

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    And what about Damien Hirst’s platinum skull encrusted with diamonds? The original asking price was 50 million pounds, or about $100 million at the time.
    I don't care what you say, I'm not paying that much just to get a little head.
    This space for rent.

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    Tiny Bubbles Array Don Ho's Avatar
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    I saw this in action at the jade factory up by Doi Suthep in Chiang Mai. After leading your through a "tour" and giving you lots of interesting information on the different types of jade you are led to the showroom. I wasn't really interested in buying anything but I let a girl show me some rings. The first one she showed me was imperial jade set in white gold with saphires on the side. It was a nice piece, the price was over $1,500 I think. I told her it was nice but way out of my price range. No problem, take a look at this nearly identical ring, it's the same design but made of white gold plated silver. The price? Only $380 a bargain!
    "While Jim is milking the Russian Boar, I'm in the shade of a Baobab tree being served a cool drink by a beautiful young indigenous girl. "
    Marlin Perkins

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