On October 17, Commonwealth Honors College economics professor, Diane Flaherty, lectured at the first “Pizza and Profs” event of the semester. While students enjoyed an assortment of different pizzas, Flaherty led a discussion on behavioral economics and how it affects decision making in the common consumer. Professor Flaherty’s lecture involved plenty of audience interaction, challenging students to make economic choices.
“What is a rational decision?” Flaherty asked the audience. She then delved into a hypothetical situation involving a sweater and a car, the premise being that most people would trek to another store if they could save $10 on buying a sweater, but would not do the same if they were buying a new car.
“Consider the context,” Flaherty said. “We don’t make decisions in a vacuum. In this case, the context is the size of the price of the item that you’re buying. That is going to change your behavior. Decisions that are rational in one context are not in another.”
The context we consider often depends on social and market norms. For example, knowing when it is appropriate to pay for something someone gives you, such as chipping in for gas on a road trip, and knowing when it is not appropriate to do so, like going to your aunt’s house for Thanksgiving dinner.
“Tipping can be [an example of the importance of context,]” Flaherty said. “In a foreign country, even if you know the customs, somebody can help you out of kindness and then offering a tip is an insult because they didn’t do it for money, they did it out of a social norm that ‘I need to be kind.’ ”
Professor Flaherty also examined the “hot state”—the pressure felt in a group where everyone is doing the same thing, forcing bad decisions to be made. While we may believe a decision is rational in the hot state, we often recognize that we made an irrational decision after the fact.
She then discussed into the idea of decoys. According to Flaherty, marketers utilize price decoys to drive certain decisions, fooling consumers into spending more. This kind of marketing is utilized predominantly in subscription services and restaurants.
“We make bad decisions when we get trapped by decoys,” Flaherty said. “When you go to make a buying decision, think: ‘Is there a decoy in here? Am I thinking I am getting a really good deal when there is really a decoy?’ You can recognize a decoy by the fact that it’s something you would never choose.”
“Free” isn’t always actually free, Professor Flaherty emphasized. “Buy one, get one” examples often lure you into a price trap, sucking you into spending your money no matter what. Printer sales are a good example of this, as Flaherty pointed out. Printers can often be advertised as free, neglecting the cost the consumer will spend on pricey ink.
Price anchoring was another key concept elaborated by Flaherty. Companies such as Dunkin Donuts, Starbucks, and Apple will anchor you into their brand, essentially forcing consumers to stick with one company for a given commodity.
“Once you’re anchored it can be habit forming,” Flaherty said. “It’s very good for you to think, ‘This is the context of which I’m making this decision. Is this a context that’s going to lead me to make a good decision?’ ”