Thinking and Deciding

308 CHOICE UNDER CERTAINTY
You are lying on the beach on a hot day. All you have to drink is ice
water. For the last hour you have been thinking about how much you
would enjoy a nice cold bottle of your favorite brand of beer. A companion
gets up to go make a phone call and offers to bring back a beer
from the only nearby place where beer is sold, a small run-down grocery
store. He says that the beer might be expensive and so he asks you how
much you are willing to pay for the beer. (Thaler, 1985, p. 206)
Your friend will buy the beer only if it is less than the price you state. The median
price that subjects given this description were willing to pay was $1.50. When “fancy
resort hotel” was substituted for “run-down grocery store,” though, the median price
went up to $2.65.
Thaler argues that subjects took into account the idea of a fair price for the beer,
given the type of establishment that was selling it. (Note that the consumer of the
beer would not consume any of the “atmosphere” of the fancy hotel — presumably
the factor that permits the hotel to charge more.) In addition to considering the value
of the money lost and the beer gained, we seem to take into account an additional
value having to do with the extent to which the price is above or below the reference
price.
This hypothesis explains a number of otherwise curious phenomena of the marketplace,
such as “discount prices” advertised as being below the “suggested retail
price.” When certain rather expensive goods are purchased once every few years, at
most, many consumers do not know what the price “ought” to be, so it is possible
to make them think that they are getting a 50% discount on a new camera, stereo
system, or set of silver flatware by mentioning a “suggested retail price” of twice the
asking price.
Another common device is to change the goods in some way so that the reference
price is unknown. Have you noticed that movie theaters sell unusually large candy
bars? This is handy for pricing, since we cannot recall what the price would be
elsewhere.
Conclusion
If our decisions were made by trying to maximize utility, they would not depend on
the way we are asked about the decision or on the presence of options that we would
reject. We may in fact try to maximize utility much of the time. But some of the time
we use various heuristics instead. Our decision utility, what would be inferred from
our choices, is thus different from our true (experienced) utility.
For example, we ignore small differences among options, integrate outcomes
when doing so increases the attractiveness of an option, make decisions according
to the most “important” dimension, weigh losses more heavily than gains, look for
simple reasons for choosing (such as dominance), and compare outcomes to convenient
reference points such as the status quo or the default. Because we do not attend
to all relevant attributes, our attention can be manipulated.