Insight: Although initial prices are arbitrary, once price is established through decision making, they will shape future prices (making them coherent).
Insight: Arbitrary Coherence challenges assumptions of standard economics:
(1) Economics frameworks state that demand determines market prices - however consumers willingness to pay can easily be manipulated through arbitrary anchors, and consumers are not rational when it comes to the price they are willing to pay for goods.
(2) Economics assumes that supply and demand are independent - however consumers are easily influenced by suppliers and can be anchored by suggested retail prices, advertised prices, promotions etc. These anchors (from the supply side) influence demand from the consumer.
Insight: An implication of arbitrary coherence is that the decisions we make are not a reflection of the utility or pleasure we get from the goods and services, which undermined the claimed benefits of the free market (that parties benefit from trade).
Insight: Another implication is that if we cannot rely on free markets to maximise utility, then regulated markets may be optimal for essential services such as health care, medicine, water, education etc.
Reference: Dan Ariely: experiments related to arbitrary coherence demonstrate how the power of suggestion (anchoring) combined with our tendency to want to appear consistent leads to decisions that are coherent with the initial anchor. We are irrational.
Insight: Once we make decisions based on a price, it will impact future decisions (anchoring).
Insight: The implication of arbitrary coherence is that it calls into question the benefits of a free market. If we can be manipulated to value things arbitrarily, then it is the manipulating actors that stand to benefit from free trade. Traditional economics assumes humans are rational, but arbitrary coherence suggests that our market behaviour is more irrational than rational.
Insight: Pricing anchors have a long term impact through arbitrary coherence: although an initial pricing anchor may be arbitrary, future prices are anchored to that initial arbitrary amount.
Insight: We have two rules when we consider our demand price for goods. We firstly determine the baseline price arbitrarily, but then later decisions are based on the initial (irrelevant) anchor, which makes those decisions irrational.
Key Insights & Principles
Decision Making
Once we make a decision about the price of something, this will shape future decisions about similar goods.
We are more irrational than rational.
Demand is often manipulated by supply side actors, who stand to benefit from free markets.
The concept and observation of arbitrary coherence means that regulated markets may be optimal for essential services.
When making decisions, consider how anchors impact those decisions, and how decisions in the present may impact future decisions.
