Symposium: I am not Delusional

Josh, it seems to me that your argument comes down to this paragraph:

“Unless John is completely risk-averse, he should be attending shows if the expected value (based on reviews and reputation) meets a certain threshold, say the ‘really good’ threshold. What about price? Well, his price cap should be based on his initial willingness to pay. If he were originally willing to pay $15 for a ‘really good’ comedy show, then—if that expected value is met—he should still be willing to pay $15.”

There are two problematic concepts here: a) the “really good” threshold and b) my willingness to pay.

Let’s start with a. You seem to think that reviews and recommendations, etc. can reasonably make up for the informational asymmetry when it comes to deciding if something meets the “really good” threshold. And that is often the case. I generally know based on reviews and promos if a movie is one I want to see, and I can tell that if Larry David or Demetri Martin is doing stand-up, then I’ll probably enjoy that. Conversely, I know I probably won’t like a movie in which Dane Cook falls in love with Jessica Alba.

But other than flops and sure-things, you don’t really know if an event will be worth it. And most sketch comedy events are in that tricky gray area.

This brings me to b) my willingness to pay. You say that I should set a price ($15) that I’ll pay for “really good” comedy shows. But that only works if the choice is a binary between “really good” and not. The fact is that opinions of comedy shows (and movies) are more nuanced than that. Some are “great,” some are “really good,” some are “good at parts but just ok overall,” etc. The point is that you don’t really know these things until you see them.

The willingness to pay, then, cannot really be based on expected value, since that is going to be imprecise on these close-call examples. I maintain that willingness to pay is set by anchoring.

Now, obviously my willingness to pay for comedy shows isn’t really 0. But it should be “anchored” by other analogous shows I’ve seen. Now, comedy show price aren’t as uniform as movie tickets, but there is still an expected range. Suppose that range is free-$30. If I set my willingness to pay (for shows whose quality I can’t be sure of) at, say, $18, then I think I have rationally anchored. I think it’s a safe bet that the value I get from the shows I do see and enjoy will outweigh the value I miss on good shows that I don’t see and the value I lose on bad shows I do see.

$18 isn’t necessarily my willingness to pay, but it basically serves to illustrate that my willingness to pay is going to be determined by existing prices that I’ve been exposed to. Now, there are always going to be problems. As I said in the first post, you cannot really know if something is worth $18 until you’ve seen it. But for things like comedy shows and movies and other things of subjective value, you accept that there are going to be mistakes and anchor at the point where you think it’s reasonable that the mistakes will be outweighed by the shows/movies/concerts that are worth more than you paid.

2 responses to this post.

  1. Posted by Josh on June 4, 2009 at 3:03 PM

    A couple of responses:

    John claims: “This brings me to b) my willingness to pay. You say that I should set a price ($15) that I’ll pay for “really good” comedy shows. But that only works if the choice is a binary between “really good” and not. The fact is that opinions of comedy shows (and movies) are more nuanced than that. Some are “great,” some are “really good,” some are “good at parts but just ok overall,” etc. The point is that you don’t really know these things until you see them.”

    -First, I set the 15 dollars for a “really good” show for the purposes of simplicity. Of course, this could be a sliding scale. A “great” show could be 20 dollars and a “good” show could be 10 dollars, etc. The whole purpose of expected value is to help you cope with uncertainty. If you think there is X probability that a show is going to be awesome and Y probability that a show is going to be poor, you multiply those probabilities with the relevant values (e.g. put this goodness scale on 1-10) to determine the expected value of the show. Of course, as I said before, you may be SO risk-averse that expected value doesn’t really matter to you unless it’s very close to certain that you will enjoy the show.

    -Second, while a good part of my argument was rejecting the entire concept of anchoring, part of my argument was a critique of how John anchored. So, when he goes back and uses 18 dollars as his example of his anchor, that’s a little unfair. He set ZERO as an anchor and would only see a 12 dollar show, if it were 12 dollars better. He set this not based on some complex rational calculation of “the value” he gets from shows, but rather just on the fact that a really good show he initially saw was zero.

    Reply

  2. […] at NPI all have an interest in comedy (see John S. and Josh’s Anchoring Symposium for how this interest has led us to intense if obscure economic debates) so we naturally found a […]

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: