Priceless

"The overarching message of this book is that monetary valuations are rather arbitrary. People don't really know how much things are worth. Even though we generally agree on relative ratings between things on such scales as enjoyability or unpleasantless, we are inconsistent in translating these into monetary amounts. In negotiations, the more you ask for, the more you get. Whichever amount is named first skews the whole future negotiation. <br/><br/>Poundstone begins with a look at psychophysics&mdash;how we perceive stimuli of varying intensities. He explains that most things we perceive follow a power rule, meaning that doubling the intensity of the stimulus increases its perceived intensity by a set factor, regardless of the intensity of the stimulus. The factor is different for different stimuli: for money, the focus of the book, it's about two. (To double the pleasure of unexpected money, four times the money must be received (p. 43).)<br/><br/>The middle section of the book is about Prospect Theory, Tversky and Kahneman's ideas about the importance of reference points, loss aversion, and certainty upon decision making. Poundstone reveals a historic divide between scholarship in economics and psychology, and shows how prospect theory is helping to reconcile the two.<br/><br/>To demonstrate the implications of prospect theory, Poundstone considers many variations on the "ultimatum game" (where one person offers a way of dividing some money and the other person must either accept the offer or decide that neither person gets any money). These variations demonstrate aspects of monetary negotiations with regards to race and gender as well as various social primes.<br/><br/>Some of the book's more interesting details are:<br/><spoiler><br/> * The more money a plaintiff asks for, the more she is likely to get. There doesn't appear to be a point where the jury decides that a request is so unreasonably large as to create a boomerang effect upon their estimate. No matter how much the amount requested is increased, the amount awarded only increases as well (18). Asking for a larger award can also increase the presumed likelihood of the defendant's guilt (19).<br/> * People tend to place higher value on bets with larger possible sums to win but to prefer bets with a larger probability of winning, leading to an inconsistency between their preference and the price they're willing to pay (63-6).<br/> * People judge it acceptable for a troubled company to skip bonuses for a year but not for a company to cut an equal percentage of wages (107).<br/> * People in the US spend more when they shop in a counterclockwise direction (149-50).<br/> * People are willing to pay more for the same drink when that drink is ordered out from a fancy resort than if it's ordered out from a run-down grocery, even though they don't go to the physical location in either case (150).<br/> * People prefer gains divided into several smaller gains (169-71) but prefer losses lumped together (174) because the pleasure or unhappiness from individual things is larger than from the aggregate of those things.<br/> * Batteries being labeled with voltage is like if gas were labeled with an octane rating but without telling you how many gallons you bought (179).<br/> * The perceived value of things scales almost linearly with the advertised reference price, even when that ARP is up to 2.8 times the normal market value (204-5). In other words, label something as selling for $10 marked down from $28 (at some other store or other time) and people will think that it actually is worth $28. Real estate agents will use this trick so that they can make houses appear "discounted" after an unrealistically high initial listing (205).<br/> * People tend to ignore inflation, treating a higher price in the current day as a gain in value rather than just an increase in price (225-8).<br/> * Stock market bubbles occur after inflation because people get used to prices rising and assume that they will continue to rise (264-5).<br/> * Money is overweighted in decision making, possibly because it is a number, and numbers are easily compared (287).<br/></spoiler>"