The largest anchor ever
How do we know what is a reasonable amount of money to pay?
How much would a rational person be prepared to pay for, say, a cauliflower? They’d go down the ranking of all possible purchases, and for each one compare the utility it provides with that offered by the vegetable, until the utilities are equal. Whatever price they’d pay for these equivalent goods, they’d hand over for the cauliflower.
But we ordinary humans don’t possess the power to determine the price independently. Our willingness to pay — whether for a cauliflower, a used car, a sofa, a haircut or a holiday in the Mediterranean — is strongly influenced by what others are happy to pay. And that information comes to us via the market.
In the supermarket, it is advertised on the shelves. Conventional purchases in shops, certainly in the West, involve little negotiation. In practice, it is generally a binary decision: are we willing to pay the asking price or not? Either something is too expensive (but by how much?) or it is cheap enough (but how much more could it cost before we bail out?). So we’re generally not really aware of the maximum price we’d be willing to pay. Perhaps surprisingly, that means we don’t know how much we truly value the things we buy.
