Chronic Murmuring

The Effect of Disgust and Sadness on Price Reservations

An intriguing looking new study in behavioral economics is reported in the paper. The researcher, a psychologist, studied the effect that sadness and disgust, as well as happiness and emotional neutrality, had on individuals' reservation prices. (What are reservation prices, you ask? These are the maximum or minimum value you place on the purchase or the sell of a good. For instance, assume you are selling back your textbook next semester to the bookstore. What is the absolute lowest amount you'll accept? $100? $80? $50? $10? Whatever it is, this is your reservation price, and if the price goes below the reservation price, you will not sell the book. If the price is above it, you will sell the book. Preferably, as a seller, you want to sell above reservation prices in order to make profits. If you are a buyer, you want to buy at prices lower to get good deals.).

What this researcher did, apparently, was simply have a group of people watch scenes from various films (The Champ, Trainspotting and scenes of the coral reef). They then wrote down how they all felt. They then were given a set of highlighters and allowed to sell them. Those who felt disgusted from what they had watched sold the pens at lower prices, apparently, than those who felt neutral. The point of the study was to determine what effect, if any, events from a different situation might affect the current economic situation at hand.

It sounds plausible, on some level. When we were looking for a house, Paige kept hoping to find someone who was going through a divorce, because she reasoned that person would be trying to unload their house in a hurry and possibly at a price below what it was worth. She also was looking for someone who had just gotten a job on the other side of the country who was also in a hurry. She was thinking of how their need to get out of town might affect their reservation price, but this study suggests more might be going on if the person is severely depressed.

But, I will note this - the complaint about behavioral economics that continues to appear in the literature is that they depend almost entirely on experiments for their data. Kahneman and Tversky, when constructing their altnerative theory of risk, essentially asked the volunteers how they would behave under some hypothetical situation in which some high large sum of money was at stake. They deviated from the relevant economic theory, which gave Kahneman and Tversky's theories some credibility. But from what I have been able to gather, in subsequent tests in which excessively high sums are at stake, and individuals in the studies really do stand to lose their earnings, they did not behave as Kahneman and Tversky predicted, but rather, behaved rationally as the economic theory predicted, seeking to maximize expected revenues. In the same way, I'm intrigued by this study, and hope to read it when it's published, but I'm a bit skeptical. How I behave after watching Trainspotting and then handed a box of highlighters - I mean seriously, just how reliable is this when we're talking about the sale of a car, or a house, in actual markets? I'm not saying that it's not possible that there is in fact an effect, but something better than simple experiments is needed to determine it. Thankfully, they did at least use actual monies, although the objects sold were not their own, nor were they particularly valuable. Do the experiment over and get them to sell their cars - see whether they will sell below Blue Book value. If that happens, then you've got an interesting paper.