I don’t mind loosing 100s today if I lost 1000s yesterday.
Everyday we make 100s of decisions without completely understanding the kind of analysis that happens inside our mind. Things we choose are driven by the comparisons we make in our mind. If we have some price already in mind and then we are offered a different price – we do comparison and make decision.
An experiment was conducted by one economist – he asked 5 students to tell last 3 digits of their cell number. This 3 digit is the minimum price they have to pay for each of the several items kept in front of them. for eg: if my cell number is 98696 63539, so last 3 digits are 539. Now I would be asked to pay Rs 539 or higher for each of the several items.
First item was placed in front of these 5 students – an antique clock. These 5 students were asked to bid for the price. After bidding for first item was completed next item was placed in front of them for bidding. Many items were placed in front of them one after the other – wireless keyboard, old wine bottle, jewelery etc.
It was found that person who had the biggest number from his cell phone’s last 3 digit was bidding higher price every-time. Person who had smaller number always gave smaller maximum bidding amount.
Students were reminded that phone number was a very random number and didn’t really give any concrete information but still it was found that person with bigger number gave higher bidding price.
During normal decision making, we overly rely, on specific information and then adjust to that value to workout other elements of the situation.
While buying a used car – we focus excessively on the odometer reading and the year of the car, and use those criteria as a basis for evaluating the value of the car, rather than considering how well the engine or the transmission is maintained.
While trading many people give excessive importance to discount price instead of thinking about overall value of the product at a given price.