What we’re finding is that in many ways, people don’t act entirely rationally when they are making economic decisions.
About a decade ago, I was in a stereo store, trying to decide between a stereo system that cost $1,000, and another that was $700. The salesman said, “Think about it this way—if you get the cheaper model, you can also get $300 worth of CDs.” Suddenly it became clear to me that I wanted the cheaper stereo. I could have subtracted $700 from $1,000 myself, but that perspective didn’t occur to me until the salesman put it that way.
To a neo-classical economist, this makes no sense, because if you are acting rationally, the decision to buy should include the concept of opportunity costs. But what we’re finding is that in many ways, people don’t act entirely rationally when they are making economic decisions. My research is on identifying factors that matter in decision-making, and trying to understand why they matter.
I teach a class called Consumer Behavior that applies the literature on judgment and decision-making to consumer preferences. I ask the students to do some research themselves and try to discover one of these framing effects, in which emphasizing some aspect of a situation changes people’s preferences. One of the students asked people to decide what they would wear to a party, and it turned out that if the language in the invitation was more casual—using more contractions, for example—they tended to choose more casual clothes.
Interviewed on June 13, 2012.