Bryan Caplan  

Rod Long's Non Sequitur

The Invention of Enterprise... Libertarian Schisms...
I just noticed this comment by philosopher Rod Long:
As a wise man once said: when the price of irrationality is low, people buy more of it. My suggested corollary is that when the price of irrationality is difficult to determine, people likewise buy more of it.
Kudos for the wise man :-), but the second sentence doesn't follow.  In fact, it's wrong.  With risk-averse agents, price uncertainty reduces demand.  Consider: When a product doesn't have a price tag - and no one will tell you the price - does that make you more likely to buy it?

P.S. I think Knightian uncertainty is incoherent, but I realize that many people behave differently when they face what seems like Knightian uncertainty.   But this won't save Rod.  The literature on "ambiguity aversion" finds that the perception of Knightian uncertainty makes people act more risk-averse, not less.

Comments and Sharing

COMMENTS (6 to date)
Tom Dougherty writes:

"When a product doesn't have a price tag - and no one will tell you the price - does that make you more likely to buy it?"

It makes me more likely to look for a price scanner! But barring that, yes, I am less likely to purchase an item that I don't know the price of in advance.

Adam Ozimek writes:

This just means that they will sell irrationality near casinos or auction it off on a gameshow.

I wonder how many less people will read your paper once it they download it and see it is a word doc. Would it kill you to pdf that thing?

kebko writes:

Wouldn't the risk averse reaction frequently be to be more irrational? Isn't the frequent purpose of acting on or believing something irrational to remove oneself from the realm of logical questioning?

Alan Crowe writes:

Definitely not a corollary, but it is still interesting as an alternative, incompatible theory, about how to fit "irrationality" as a good in an economic framework.

Theory One: Irrationality is a good like any other, when it is cheap persons buy more of it.

Theory Two: Theory one only works when the price is certain. When the price is uncertain, because there might be hidden extra charges, "irrationality" is a special kind of good for which purchasers are especially unwilling to stop and think about whether the sticker price is actually the total cost of ownership.

Now I want to risk a corollary to Theory Two. Sellers always have an incentive to obfuscate the price, hoping that buyers will think it less than it is and buy more. The incentive is especially strong when it comes to selling irrationality, because buyers are especially willing to plunge in without checking out the hidden extra. Corollary: sellers of irrationality make more effort to obfuscate the price than sellers of other goods.

My slogan, as is the way of slogans, was too quick. Here's the more cumbersome version of what I meant:

When people's initial assumption is that the price of irrationality is low, and when the actual price is difficult to determine and so that initial assumption does not easily get corrected, then people buy more of it.

As to buying goods without price tags: which would you be more likely to do -- order a Coke without asking the price, at an ordinary-seeming restaurant that has no price for Coke clearly listed, or order a Coke at a restaurant that has a big sign saying "Coke - $100 per glass"?

Colorado writes:

This must also apply when the price advertised is clearly fraudulent and the ultimate cost is unknown. I'm thinking of the health care bill. Isn't it amazing how quickly health care talk went to zero when the votes changed? It's like they didn't really want to buy it in the first place.

Comments for this entry have been closed
Return to top