Subnote

Orthodox economics says that we're supremely rational beings -- self-interested agents in a perfectly efficient market. We buy and sell because it's in our interest to buy and sell. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their self-interest," wrote Adam Smith in "The Wealth of Nations" in 1776.

rate of return 1980-1990

modern art 24.1 %
impressionist art 23.7 %
contemporary art 21.6 %
stocks 17.3 %
bonds 12.6 %
coins 7.3 %
diamonds 6.4 %
housing 4.7 %
gold - 4.3 %

Loewenstein and associates conducted an experiment in which they offered first-year business-school students at Sloan the opportunity to buy a range of luxury goods, including an "average" and a "rare" bottle of French wine, without referring to the actual price of the goods.

The catch was that subjects had to first state whether they would buy the bottles of wine at a price determined arbitrarily by the last two digits of their Social Security numbers (that is, 34 becomes $34). The students were then asked the maximum price they would pay for the bottles.

The Social Security number game is a trick called "anchoring manipulation" that's borrowed from experimental psychology, and for some reason it makes otherwise rational people do irrational things.

For no logical reason, students with Social Security digits higher than 50 said they would pay nearly twice as much as those with digits less than 50, even when reminded that this pricing system was completely arbitrary.

http://www.salon.com/mwt/style/2002/03/11/silly_spending/print.html

Buyers of auto insurance in New Jersey and Pennsylvania were given a choice of whether to pay lower insurance rates in exchange for a reduced right to sue for pain and suffering.

In Pennsylvania, the default was the full right to sue, with a rebate for accepting reduced rights. In New Jersey, the default was a limited right to sue with a surcharge to get the full rights.

In both states, about 75-80 percent of drivers took the default option. While consumers had a choice in both states, the popularity of the default suggests that most were deciding not to decide.”

mugs and chocolate bar: 89% preferred a mug when initially given one, 10% preferred a mug when given a chocolate bar.

endowment effect
	Willing to pay:	Compensation demand:
fishing pier:	$ 43	$ 120
goose hunting permit:	$ 21	$ 101
elk hunting permit:	$ 54	$ 143
deer hunting permit:	$ 40	$ 833
lottery tickets	original price	four times as much

SHUBIK'S 1 DOLLAR AUCTION

a normal auction in which a $ 1 bill (subnote?) is sold, only with one extra condition, the second highest bidder has to pay his last bid as well.

imagine how it goes, before the $ 1 dollar mark has passed, people feel it is worth bidding. But once started it is difficult to stop, it is always more worthwhile to bid extra, otherwise you end up paying but with nothing.

arms races & wars - the other party raises the stake, so we have to as well
old cars - just put in that extra buck to make it worth more
movies - one seldom thurns off a bad movie but want to see it end