Tuesday, November 22, 2011

Richard Thaler: Outrage over non-euvoluntary exchange

The good Thaler doesn't put it that way, exactly. But he is clearly talking about non-euvoluntary exchange and unexpected outrage from consumers. Unexpected by business, that is.

For hints about how to avoid the consumer backlash, the bank’s executives might have consulted a paper I wrote in 1986 with the psychologist Daniel Kahneman and the economist Jack Knetsch. The central question was this: What actions by companies do people consider “unfair”?

Our method was to ask randomly selected people some simple questions by telephone. Here is an example:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as: completely fair, acceptable, unfair, very unfair.” Some 82 percent of the participants called it either unfair or very unfair.

To be sure, we weren’t trying to figure out what is fair. That task is best left to philosophers. We were trying only to determine what actions customers perceive as unfair. As the responses illustrate, most people don’t view a spike in demand as an acceptable excuse to raise prices.

The answer on THIS blog, of course, is that consumers will object when they think the exchange is not euvoluntary. Thaler is right, tho: very cool paper.

Nod to Neanderbill

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Do you have suggestions on where we could find more examples of this phenomenon?