Game Theory of The Price is Right: Part 2

In my last post, I discussed some game theory behind the Cliffhangers game on The Price is Right. And while watching the stupidity of Cliffhangers players got me angry, what really got me thinking was the bidding itself.

To get up on stage (which comes with a chance to win bigger prizes), four contestants take turns guessing the value of an item (usually several hundred dollars). The one with the closest guess to the item's actual value, without going over, wins the item and gets to go up on stage.

Frequently, people make really dumb guesses. Someone will bid, say, $420 for an item, and another contestant will subsequently bid $415, giving themselves a $5 window in which to win the item. But more interesting is whether or not contestants decide to bid $1 above someone else. Frequently, someone will bid, say, $475 after another contestant has bid $420. They could have bid $421 (and indeed this does happen, as in the video below), but in the unwritten etiquette of The Price is Right, it's viewed as a low blow.

An ingenious nudge

I discovered a very bright "nudge" while meeting up with some friends at the local Royal Oak last night (for non-Ottawan readers, it's probably the biggest pub chain in the nation's capital).

The Royal Oak does a good job of providing a decent atmosphere, decent food and a decent pint. They are also do a surprisingly good job of using anchors to their advantage. Anchors are quite simple and can be very effective — by triggering a customer's mind to a specific price or rate, you can affect how much they value a product.

The problem with Movember

At the risk of sounding like a jerk, I haven't donated to anyone's Movember campaign this year, and I'm not sure that I will. I'm blaming it on the paradox of choice.

Movember, for anyone out of the loop, is a charitable campaign where men grow a moustache in November to raise money to fight prostate cancer. It's a worthy cause, though I fear that Movember might fall victim to its own success.

Behavioural economics in industry

I was delighted to find a hidden gem at the back of the Living section of Saturday's Toronto Star, a story about a behavioural economics book co-written by Hewlett-Packard behavioural economist Kay-Yut Chen (the article does not appear to be available online).

The article itself was not earth-shattering, but I was surprised to see that Hewlett-Packard employs a behavioural economist to conduct experiments that could help improve their business. The workplace is a logical place to run economics experiments, but because it's a fairly new field one doesn't hear about companies running their own experiments very often. Charities are one area that has seen the benefit of experimental economics, with several running experiments in recent years in an attempt to learn how to fundraise more efficiently. But for the most part, economics experiments still take place in academic labs (CIRANO in Quebec is probably Canada's most prominent) rather than in the workplace.

Industry seems like it's slowly starting to see the benefits it can reap from economic research. Google poached respected economist Hal Varian from Berkley in 2007 to help them take better advantage of all the data that Google searchers generate, but he's the only example of a prominent economist in a private-sector research position that I can think of. So I was pleased to see that Hewlett-Packard also has an economist. I'll have to pick up a copy of his book.

The Ikea cafeteria (part 2)

I eat at fast food restaurants a lot. Usually, when I'm finished, I'll throw the remnants of my meal in the garbage and stack my tray neatly on top of the garbage can to be collected.

Why do I do this? It would be easier to me to leave my tray on the table for an employee to clean up — it is someone's job, after all. I think I do it for two reasons. First, it's a social norm. Other people do it, so I feel like I should do it. Second, I feel bad for the fast-food employees because they do a tough job for a tiny wage, and I feel a little better about myself if I help them out (although by this logic, I'd start tipping the guy who gives me fries, so maybe my motivation is more due to social norms than outright altruism).

Kahneman pokes holes in happiness research

Behavioural economics pioneer Daniel Kahneman is featured in a recent TED talk, in which he discusses problems with measuring happiness.

Irrationality and hockey tickets

Vancouver newspaper The Province reported over the weekend that despite astronomically high market prices for tickets to the Olympic men's hockey final, many people were planning to hang on to their tickets.

This is somewhat mind-boggling. Olympic tickets were originally sold in a lottery, which means that the people who originally bought the tickets from the lottery paid far less than the market value the morning of the big game (in the neighbourhood of $3,000 per ticket). Personally, if I had a pair of tickets that someone was willing to pay $6,000 for, I'd sell. I love hockey (and it was a great game). But I could do a lot more with $6,000 than with a pair of Olympic final tickets.

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.