Within the domain of science, these assumptions about our ability for perfect reasoning have found their way into economics. In economics, this very basic idea, called rationality, provides the foundation for economic theories, predictions, and recommendations.引自 Introduction
That’s a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.引自 The truth about relativity
As Mark Twain once noted about Tom Sawyer, "Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain."引自 The Fallacy of Supply and Demand
The basic idea of arbitrary coherence is this: although initial prices (such as the price of Assael’s pearls) are “arbitrary,” once those prices are established in our minds they will shape not only present prices but also future prices (this makes them “coherent”).引自 The Fallacy of Supply and Demand
The price the highest bidder paid for an item was based not on his own bid, but on that of the second highest bidder. This is called a second price auction. William Vickrey received the Nobel prize in economics for demonstrating that this type of auction creates the conditions where it is in people’s best interest to bid the maximum amount they are willing to pay for each item (this is also the general logic behind the auction system on eBay).引自 The Fallacy of Supply and Demand
The significance of this is that once the participants were willing to pay a certain price for one product, their willingness to pay for other items in the same product category was judged relative to that first price (the anchor).引自 The Fallacy of Supply and Demand
In their study they found that people who move from inexpensive markets (say, Lubbock, Texas) to moderately priced cities (say, Pittsburgh) don’t increase their spending to fit the new market. Rather, these people spend an amount similar to what they were used to in the previous market, even if this means having to squeeze themselves and their families into smaller or less comfortable homes. Likewise, transplants from more expensive cities sink the same dollars into their new housing situation as they did in the past. People who move from Los Angeles to Pittsburgh, in other words, don’t generally downsize their spending much once they hit Pennsylvania: they spend an amount similar to what they used to spend in Los Angeles.引自 The Fallacy of Supply and Demand
You're walking past a restaurant, and you see two people standing in line, waiting to get in. "This must be a good restaurant," you think to yourself. "People are standing in line." So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, "This must be a fantastic restaurant," and joins the line. Others join. We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people's previous behavior, and our own actions follow suit.
But there's also another kind of herding, one that we call self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior. Essentially, once we become the first person in line at the restaurant, we begin to line up behind ourself in subsequent experiences.引自 The Fallacy of Supply and Demand
