Behavioral Finance and Economics- Comparatives

People are funny in many ways. Here is one which may be of interest to you.  We can’t decide if we want something unless we see it in a comparative context.  We have a compulsive desire to compare before deciding.  We want to compare things that are easy to compare. On the other hand we dislike (and avoid) comparing things that are not compared easily. Marketing folks know this tendency all too well and manipulate us with it.  For example take the three levels of gasoline at the pump. Depending on underlying conditions (such as supply and profit margin on each octane) the price spread is sometimes altered to have two closer in price. That price spread then gives us an impulse to buy one of two octanes (not uncommonly the highest priced gasoline and if not then the second highest price gasoline).   Another example occurs frequently in a men’s store when shopping for ties¹.  They inevitably bring out three ties, two basically red and one blue.  The vast majority of us will select one of the red ties.  Reverse things and we will pick a blue one.  Marketing folks insert a third choice in our selection and purposely make the third choice similar to one of the other choices but slightly inferior in terms of value.  This choice is actually called the “decoy” in marketing circles.
   
This propensity is a good example of the operation of a judgmental heuristic or mental short cut.  It is also a reflexive (and not a reflective) mental process.

You may wish to consider the foregoing in the future in managing your risk². 

1.  This does not apply when women are looking at shoes in which case no marketing techniques are necessary.  There is no truth to the rumor that "must buy shoes" is a subliminal message sent out over "muzak" in the women's shoe department of Nordstrom.
 2.  In July 2008 an Organization called The Edge Foundation, Inc. held a symposium taught by three preeminent scholars in Behavioral Economics, Richard Thaler, Sendhil Mullainathan and Daniel Kahneman (the winner of the 2002 Nobel Prize in Economics). The attendees included founders of firms such as Amazon and Google. The symposium lasted several days with a seminar on one topic presented each day. The seminar on the first day was presented by Dr. Thaler on the topic of "Libertarian Paternalism: Why it is impossible not to nudge". A quote from Dr. Thaler in this symposium sums up his message: "If you remember one thing from this session, let it be this one: There is no way of avoiding meddling. People sometimes have the confused idea that we are pro meddling. That is a ridiculous notion. It's impossible not to meddle. Given that we can't avoid meddling, let's meddle in a good way." Along with Cass R. Sunstein, Dr. Thaler is the author of a book entitled: Nudge: Improving Decisions About Health, Wealth, and Happiness.