Saturday, January 30

Placebo effect of wine

Fellow economics blogger Tim Harford over at Dear Economist has taken on the placebo effect of prices. This is particularly exciting to me because I did my undergraduate honours thesis on this topic.

The placebo effect of prices basically says that as a product's price goes up, it becomes more effective because of some psychological process. Some of the key studies on this topic so far have been in the medical and marketing literatures. The placebo-effect-of-prices topic has yet to gain much attention from economists, so it's nice to see Harford (an economics writer with the Financial Times) is aware of it. It's also fun to see the practical applications of academic research being presented.

I believe the placebo effect of prices is something that deserves a little more attention, because if higher prices do make products work better, this needs to be taken into account when governments and central bankers are considering policies that change prices. Inflation may have a positive effect that we are currently ignoring, for instance, if it makes everything we purchase better. However, the placebo effect of prices is a fairly new area of study, so we are only beginning to understand how it works.