Often in economics (and certainly in marketing) researchers ask consumers their willingness to pay (WTP) for an item. This can be done following an experimental manipulation to assess the impact of some variable or simply to determine how to price an item. I often use such a question in my own research and generally don’t think much of it.

Recently, however, I had an experience which makes me question the degree to which people truly know how much they are willing to pay for anything. I was bidding for an item on eBay and, being the behavioral scientist that I am, thought about what I should set as my maximum bidding price (I’m far too lazy to snipe). I knew that the item was selling for about $60 in other auctions so I quickly anchored on that value and bid about the same.

Unfortunately, a few hours later I was outbid. At this point, I started asking myself: “well am I really only willing to pay $60 for this item? What about $70?” And the truth was that I had absolutely no clue what I valued this item. From a purely economic point of view, I didn’t know how much utility I would extract from using the item. Would the marginal in crease in cost be offset by the utility I would derive?

There already is a tremendous amount of research on context effects in judgments (i.e. our subjective enjoyment/utility is highly variable and influenced by the environment that we are in), but to what degree is the uncertainty of willingness to pay understood? In auctions we know that people get attached to their item they are bidding on (i.e. endowment effect) and bid more than they should. But this applies a normative standard on how much they “should” bid.

First, I’m suggesting that people have a range that they might be willing to pay for an item rather than an absolute number. This is nothing new of course since we know that variance exists in people’s responses to just about everything. But if we stop here we would say that if we wanted to assess someone’s WTP by using a stepwise elicitation procedure where we ask a person if they would be willing to pay $1, $2, $3, etc… for an item and that would yield a maximum WTP.

However, I think that there’s more to the story. Even after a person has given his/her maximum WTP using this procedure (or any other) they still are uncertain about the utility they will derive from an item and so might adjust up or down based on some contextual cues (endowment in my auction example). If this is true, then price setting is as much of an art form as it is a science.

And please, don’t start on the supply/demand arguments as that will only make me whip out a list of ~500 papers that show how poor the demand side (people) is at figuring out anything.

So what do you think? Do people know what they are willing to pay for items?

Recently I needed to buy a large volume of M&Ms (for research…don’t ask). So I go to my local grocery store and see two different sized packages of plain M&Ms:

1. Small Size (9.4 oz) for $3.19
2. Medium Size (14 oz) for $4.99

(And no, they didn’t have the large size and there was no sale).

Something about those prices didn’t quite seem right. I know that I should get a volume discount when I purchase the larger size, but the numbers seemed off. So I whipped out my trusty cell-phone calculator and did the math.

It turns out that the M&Ms in the small bag cost $0.33936 per ounce, but M&Ms in the medium bag cost $0.35642 per ounce! So I was, in fact, losing out by buying the larger bag! Granted, we’re not talking about a lot of money here, but this is ridiculous. Consumers expect to receive a volume discount and yet here is a perfect example of the opposite, a volume surcharge!

And of course, I doubt many consumers would waste the energy to do the calculation meaning that Mars and the grocery store are pocking extra cash by taking advantage of people’s trust. I am not a fan of this!

So what gives?

There are some glowing reviews for Audrey Niffenegger’s first novel, The Time Traveler’s Wife, and I believe they are well warranted. Rarely do I find myself genuinely upset when finishing a book due to the knowledge that soon I will fail to have the joy of it sitting on my lap. Rarely do I feel so connected to the characters in a novel that I forgo sleep in order to get just one more chapter in. Well as rarely as this happens, it happened with this book.

The story is about a man who, due to a genetic disorder, spontaneously time travels, often to points in his life, present and past. The nonlinearity of the story draws you in and constantly has you wondering when an event happened and how it relates to the bigger story. Aside from this fascinating take on reality, the love story that Niffenegger tells is simultaneously heart warming and wrenching. The connection between the two lovers, Henry, the time-traveling protagonist, and Claire, his wife, spans all normal understanding of what love is and how it progresses through time.

The book also raises some interesting questions about causality and free will. Can one change the course of events when traveling back in time? Is the future occurring at the same time as the present and the past? Questions like this will make you wish that The Time Traveler’s Wife were twice as long as it was.

Take my advice: buy the book, read it, and thank me later.

I don’t remember the last time I clicked on a banner ad…and then I log into Facebook to find this one staring me in the face.

I’ve done some advertising on Facebook before, and this is, by far, the smartest use of the their keyword targeting feature that I’ve seen. In my music preferences I list Mika (who are fantastic, by the way) and clearly this artist thinks that he sounds something like them. So what does he do? He advertises to Mika fans directly. Brilliant.

The best part is that there are only about 55,000 users on Facebook who list Mika in their favorites, which means that the targeting is quite narrow. Exactly what you want in the online marina.

Well done Nathan Leigh Jones. Oh, and his music is okay…not my favorite, but not terrible.

The reason that I haven’t posted in the last couple of days is because an industries reader managed to figure out my identity. I’m not sure how he did it, but now that the information is out there, there’s no point in me keeping it a secret from the rest of you.

The truth is that I am not an academic, but rather a highly intelligent 5 year old. My parents are both genetic engineers and discovered a way to speed up learning by several orders of magnitude. I was their first experiment.

I still hope that all of you enjoy this blog and continue reading, but I realize that my deceit may cost me my readership. Please forgive me and understand that I was only trying to find a home for myself in this maze of a world.