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Senin, 24 November 2008

The Law of Supply and Demand Sucks

Adapted from Dan Ariely's Predictably Irrational
Chapter 2: The Fallacy of Supply and Demand: Why the Price of Pearls-and Everything Else-Is Up in the Air


Trade has a very important function in society. It has been practiced since the ancient world. Suppose our world recognizes only two goods, apples and oranges. All of us have our own preferences to apples and oranges. Because of the differences of our preferences, the trade occurs. It is because I like oranges more while you like apples more, I trade my own-grown apples for your oranges. Using this orange and apple world, classic economics believes that free trade can maximize our utility. Free trade can maximize the world's wealth! Unlike the classic school, behavioral economics challenges this belief.

In free trade, the aggregate supply of oranges and apples and the aggregate demand of both are supposed to create an equilibrium. In such condition, using the concept of calculus, any classic economist can readily prove that the total utility (wealth) is maximized. This belief is now fiercely challenged. How come? Dan Ariely proves that demand is no way independent from supply. He conducted social scientific experiments before coming to his 'odd' conclusion. The simple underlying concept he discovered is what he calls anchoring or imprinting. Preferences or demand can easily be manipulated by introducing a sort of anchor.

The anchor can significantly influence our willingness to buy at a certain price level, relatively close to the anchor. If the anchor is high, we are willing to buy at a high price level. If the anchor is low, we are willing to buy the very same product at a low price level. One experiment conducted by Dan to his students was a poetry recitation by himself. For one group, he offered them money for listening to his recitation of short, medium, and long poetries, each having different levels of prices. For another group, he demanded money from them for listening to the same poetries. Different levels of prices too.

The result? Well, the prices offered or demanded by Dan indeed determined the behavior of each group. On the one hand, the group offered the money actually demanded money from the transactions, with different levels of prices according to the length of poetry recited. On the other hand, the group demanded money for listening to the poetry were indeed willing to pay at different levels of prices depending on the poetry length. It was the very same sets of products. The only different was only that one group were offered money and the other were demanded money, both at different levels of prices. The pre condition prior to the transactions functions as the anchor!

Can we change our anchor easily? Dan Ariely conducted another experiment. He invited his executive students to listen to three types of annoying sounds. One group were suggested a ten cents compensation. The second group were suggested a ninety cents compensation. As you may guess, the first group indeed demanded a low level of compensation, in average close to ten cents. The second indeed demanded a high level of compensation, in average close to ninety cents. The story does not end here. The very same people of each group then were invited to repeat the experience, but now with a different anchor, fifty cents. The first anchors, ten cents for the first group and ninety cents for the second group, prevailed regardless the introduction of the new anchor. Even when the first group were introduced the ninety cents anchor and the second group were introduced the ten cents anchor, the first anchors of each group - i.e. ten cents for the first and ninety cents for the second group - prevailed!

Probably you would think that it is irrational. Yes, indeed, we human are irrational. Not randomly, but predictably. We are like baby geese that imprint the first objects they encounter as their mothers. We are like baby geese that stay with the same mothers (the first anchors) although along the way they meet other adult geese (new anchors). How irrational!

Despite the fact that we tend to stay with the same religion because we herd ourselves, a new anchor actually can convert us to another religion if the new anchor really comes with a very different product and perception. The success of Starbucks competing with incumbents, like Dunkin' Donuts, can be attributed with its initial penetration to the market using a very different delivery concept of drinking coffee. It is continental coffee. It is premium, high price. It is served not in small, medium, or large cups, but served in tall, venti, or grande cups. It is not served with donuts but with croissants.

The success of the king of pearl, Asael, in selling black pearls royally out from almost nothing can also be attributed with this anchoring mechanism... Are you ready for this? With an arbitrary anchor! After failing in his marketing effort a year before, Asael came back with a very high price tag for the pearls, penetrating New York's high class market.

Now we know that our preferences can easily manipulated by the introduction of anchors. Now we know that our behavior can be shaped arbitrarily. The anchors can be the manufacturer suggested retail prices (MSRPs) or even arbitrary numbers like the last digits of our own social security numbers. So if your behavior is coherent following some sorts of patterns, do not be proud, since the coherent behavior can be just arbitrarily coherent. This also suggests that we do not really know our preferences and utility. Under this irrational circumstance, in my opinion, it is irrational to believe that free market - the law of supply and demand - merely can maximize our utility, our happiness.

I am not saying that the basic principle of supply and demand is completely wrong. However, an extreme ideology that recognizes governments with no roles whatsoever in the (free) market should reconsider its postulates. As Dan Ariely writes, probably we need to find elsewhere a way to maximize our wealth. Our utility! Our happiness!

Next: Free, Good or Bad?
Prev: Relativity and Rationality

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Kamis, 20 November 2008

Relativity and Irrationality

Adapted from Dan Ariely's Predictably Irrational
Chapter 1: The Truth about Relativity: Why Everything Is Relative-Even When It Shouldn't Be


The more you have, the more you want. It is what Dan Ariely writes in his book, Predictably Irrational. He refers to that phenomenon as the cycle of relativity. Human is wired to relativity. We have difficulty to value anything, such as houses, internet subscriptions, physical attractiveness, in an absolute value. We compare things relatively. If we are shown a particular circle surrounded by small circles and the same size circle surrounded by large circles, we will perceive the first circle larger than the second same size circle.

The more you have, the more you want. It is the negative side of relativity. One prophet said if someone is given a mountain of gold, s/he will demand another mountain of gold. It is rooted from greedy and envy. That's why an executive of a company feel scared when asked by Dan Ariely should the salary of each employees in the company be publicly known. It is a real catastrophe. Everybody will require a raise, and it is always not enough, yet it cannot be stopped. You will easily guess what will happen next.

The more you have, the more you want. This cycle of relativity can happen to you and me and everybody. When you are about to buy a pen of $27, you will change your mind after knowing that in another store, let's say fifteen minutes away walking, the exact same pen costs only $20. You will chase that seven dollar save. However, if you are about to buy an expensive suit of $427 and someone tells you that in fifteen minutes away walking the same suit costs you only $420, you will ignore the same seven dollar save. It's not only you. Typical people will behave exactly the same, because we all are wired to a relativity judgement.

The more you have, the more you want. This relativity cycle represents the fact that we are not always rational. Indeed, we often make irrational decisions. Not randomly, but systematically. The irrational judgements and decisions we all make are predictable! You may need to read the whole chapters of Dan Ariely's book to convince yourself. Dan rediscovers this common knowledge (for some) through scientific social experiments. Here's one example. Dan selected the photos of MIT's George Clooney and Brad Pitt among his students'. He made a slightly distorted picture of each the Clooney and Pitt. He distributed 600 questionnaires to his female students. If they had the option, who would they choose? George Clooney, the distorted Clooney (minus Clooney, a decoy), or Brad Pitt? To ensure a fair contest, about half of questionnaires had a different menu. Brad Pitt, the distorted Pitt (minus Pitt, a decoy), or George Clooney?

The result? Seventy five percents of the time, the respondents chose the perfect Clooney (or Pitt) over the minus Clooney (or minus Pitt) and the perfect Pitt (the perfect Clooney). The presence of the decoy of Pitt made the perfect Pitt better than not only the decoy but also the perfect Clooney. On the same token, the presence of the decoy of Clooney made the perfect Clooney better overall. Beware, if someone asks you to join her or him a company. Probably, s/he needs you as a decoy (minus her or him) so that s/he will look better.

Another Dan's experiment originated from an ad at The Economists' website. The ad was something like the following.

Internet subscription only: $59
Print subscription only: $125
Internet and print subscription: $125

As you may think, the second option is really a decoy to lure readers choosing the third option, the combo. Dan Ariely tested this ad to his MIT students. When present, the decoy (the second option) made respondents choosing the combo option significantly more than when the decoy was not included in the menu. Needless to say, the decoy itself, the print subscription only, won no vote at all.

Now we know we are not as rational as we think we are. Therefore, now we know how to improve our judgements and decisions, especially related to relativity cycle and traps. When considering to buy an expensive stuff, we can think more broadly and consider alternatives that probably matter much more. We can defer our urge by discussing more with our spouses. Secondly, one of my teachers (ustadz - Y Pan) once said to me something like this. "If you are able to buy a BMW, buy a Camry. If you are able to buy a Camry, buy an Altis. If you are able to buy an Altis, buy a Kijang Innova. If you are able to buy an Innova, buy an Avanza." With this self restrain, we can break the relativity cycle. We can break the cycle of "the more we have, the more we want."

Next: The Law of Supply and Demand Sucks

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Rabu, 05 November 2008

Kebijakan Memang Berbalik


Hasil pemilu Amerika yang sudah diketahui mengkonfirmasi neo liberalisme yang diusung Partai Republik sudah mencapai titiknya yang terjauh (lihat artikel saya sebelumnya Kebijakan Berbalik Arah - Y Pan). Karena Amerika selalu memimpin dalam penjelajahan teritori baru, fenomena mentok di Amerika yang kini berbelok dan berbalik dapat diharapkan membuat anchor baru. Paling tidak membuat trend baru.

Pengendalian atau intervensi terhadap pasar, seperti yang dilakukan Administrasi FTR semasa perang, akan mengalami reinstitusionalisasi. Nah bingung kan? Setidaknya reformasi bidang kesehatan, pendidikan, dan jaring pengaman sosial yang mengarah ke privatisasi semasa GOP berkuasa di Gedung Putih akan terhenti (Baca buku The Conscience of a Liberal karya Paul Krugman deh - Y Pan). Terlebih, Obama telah berjanji akan menaikkan pajak orang-orang kaya, yang secara tradisional mendukung GOP (Great Old Party / Partai Republik). Anehnya milyarder seperti Bill Gates dan Warren Buffet malah secara terbuka mendukung Obama. Kocek Pemerintah AS tentu akan terisi lagi buat biaya program-program sosial. "It's the society stupid!" kata Peter Drucker dalam Managing in the Next Society, sembari mengenyek para pendukung paham ekonomi liberal sebagai panglima.

OK deh, cukup dengan hujatan terhadap ideologi anti pemerintah dari kubu neo liberal klasik dan pendukung-pendukungnya yang terutama murid-murid Milton Friedman. Berikut ini beberapa website yang sempat saya ambil snapshot-nya, terkait hasil pemilu Amerika.








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Selasa, 04 November 2008

Iklan di KRL

Pelan-pelan mulai terpasang iklan di KRL-KRL AC. Setahun lalu, tempat iklan di KRL berisi iklan dari PT KA sendiri, tawaran agar beriklan di situ. Bunyinya: train the best place to advertise your adds (harusnya your ads, iklan anda, bukan your adds, tambahan anda - Y Pan). Nah, lucu juga. Nggak tahu terkait dengan kekeliruan bahasa itu atau masalah lain, lama sekali baru mulai ada yang mau beriklan di situ. Berikut ini foto-fotonya.




Selamat kepada PT KA. Pemasukan dari iklan mudah-mudahan dapat nambahin kocek demi memuaskan kita-kita ini, yang sering sebel karena KRL terlambat atau sebel karena tidak diberikan informasi yang berguna.

Ayo... Siapa lagi mau nyusul beriklan di KRL? Menyongsong pemilu, caleg dan capres mungkin? Kalau pilpres Amerika masih jauh, Obama dan McCain mungkin?

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