Chapter 2 of Predictability Irrational

In chapter two of Predictability Irrational, Dan Ariely explains pricing and how consumers pay for these prices through an example of pearls. He first brings up this idea of anchoring, anchoring to humans is like imprinting to animals. What anchoring means for pricing is that it is the set amount we are willing to pay, the initial price that we see for an item is what stays in our minds. Another point that he brings up is the idea of behavior and self herding. Behavior herding is when we assume something is good or bad on the based on other peoples experiences with it and self herding is our own previous experience that can determine how we buy an item. The last concept that was brought up were "illogical forces". Illogical forces are what attribute to our emotions and what could skew our buying at overly high prices. Continuing throughout the chapter Ariely provides examples of how not to get influenced by these illogical forces and thus eliminating irrational decision making.

Anchoring is the first price we see on a new item, and we "anchor" that price in our heads so we can compare it to other prices. While arbitrary coherence is when we see a price it is arbitrary and we will use it compare present and future prices. If a college student saved $3000 to buy a used car they would have that price in their head and they would acknowledge don't have the money to spend on extras like electronics and clothes. They would recognize that the money they saved up for a car is worth a lot and was difficult to accumulate, so they wouldn't spend a lot of money on a quick fix like a new electronic or a shopping spree. Retailers and businesses are very aware of anchoring. This is how they get consumers to pay higher prices for products that seem different. One example of this is Starbucks vs. Dunkin' Donuts. Starbucks creates an environment for the consumers to come there over DD because they offer more choices, with special names, and a cool poetic environment. All of these lead to consumers feeling like they are getting extra so they willing to pay for the "extra incentives." Lastly the fallacy that falls behind supply and demand is that they aren't the true driving factors behind market prices. In reality anchoring and arbitrary coherence are what drive market prices up and down.