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

By Morrison, Rowan | Financial Management (UK), December 2014 | Go to article overview

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


Morrison, Rowan, Financial Management (UK)


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 behavioural economics is that creating pricing strategies that are informed by its insights requires a cross-disciplinary approach between finance and marketing, said Leigh Caldwell, author of The Psychology 9f Price and a partner at the UK's The Irrational Agency. "Only by combining those two sets of expertise can you really use customer psychology and understand the numbers that you should set."

Gneezy added: "Anyone involved in pricing has to understand people. It is wrong to think about pricing as a number discipline. It interacts with people, so if you don't understand how they think, what bugs them and makes them happy, then you can't make them buy."

Gneczy offers the findings of a pricing study she conducted at a California winery as an example. It involved two bottles of wine--a high-quality wine and a low-quality wine. Increasing the price of the low-quality wine from $10 to $20 increased profits by 3%. But profits fell 10% when the price of the same bottle was increased to $40. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

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
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.