If it is expensive it must be good.

MaxPower October 19th, 2007

So I found this blog post about this guy who spent 4 pounds ($8 bucks) for a cheese sandwhich in London. That in and of itself isn’t surprising, but what was more interesting is that this guy is a ‘pop-economist’ and linked to a new book/study out by another economist that says that the placebo effect goes beyond the concept of “take a sugar pill and feel better” to if you’re told that the medicine is expensive you’re more likely to find it effective than if you think it is cheap. So rather than this guy thinking “man I’ve been ripped off with this sandwhich” his brain rationalized the purchase by telling him how very good it was.

So there is some truth to the thought then, if it is expensive it must be good. Or at least your brain thinks so, and isn’t that what really matters?

FT Blog post on the $8 sandwhich here

Actually – that reminds me of a story I read in a neuro-economic book. Everyone has “buckets” in their brains where you allocate spending and it is unusually hard to transfer cash between those internal buckets. For example, you decide to go to a movie. You know it is going to cost $10 to get in. On the way to the theatre you lose the $10 out of your pocket. You’d likely still buy the ticket when you get there right? Now consider if you went to the movie theatre, bought your ticket and then went for a coffee. You then lost the ticket. Would you re-purchase the ticket or would you go home? In some cases you’d repurchase (if you’re with a group of friends or whatever) but you’d be much more likely to go home because your movie expenditure “bucket” is now empty. Because your brain rationalized the $10 cash loss as “eh, shit happens” it wouldn’t impact your decision to go to the movie. I’ll try to find the book to provide a link in the comments below.