Consider the testimony before Congress of Alan Greenspan, the former chairman of the Federal Reserve, on October 23, 2008. Greenspan was known as “the Maestro” for his seemingly deft management of monetary policy, evidenced by a long tenure during which the United States experienced low inflation, long economic expansions, and short and shallow recessions. He was also one of the main architects of economic policy as the housing bubble inflated toward its climax. A follower of the libertarian, antigovernment thinker Ayn Rand, he was considered the high priest of unfettered markets, prone to righteous expressions of faith in their ability to properly price financial assets and allocate resources efficiently.
But when he was dragged before the House of Representatives’ government oversight committee on October 23, Mr. Greenspan shocked the world by admitting he had been wrong. Henry Waxman, the Democrat from California who chaired the committee, goaded him, “You found that your view of the world, your ideology, was not right, it was not working.” And to most people’s surprise, Greenspan answered, “Absolutely, precisely.” Indeed, even Greenspan learned just how badly prices can fail and send our decisions and our lives astray.
Acknowledgments
I HAVE BEEN writing for a living for two decades. Never before did writing seem to be such a quest. As with any great adventure, the success of this book relied on a large cast of characters.
I couldn’t have started without the help—sometimes inadvertent, involuntary, even posthumous—of economists, psychologists, and even the occasional biologist, demographer, and sociologist.
Some of these scholars were particularly generous. In no particular order, I would like to thank Monica Dasgupta and Vijayendra Rao of the World Bank, Robert Frank from Cornell, Claudia Goldin and David Laibson from Harvard, and Justin Wolfers from the University of Pennsylvania’s Wharton School, who patiently talked me through some of their work and helped me grasp sometimes difficult concepts.
But my gratitude extends to the hundreds of scientists who have offered their lives’ work to understanding some of the bigger questions about humanity: how do we choose between our options? Why do we behave the way we do? I built this project upon their insights and discoveries.
I am grateful to the team at Portfolio. Adrian Zackheim saw promise in this project before I knew where it would lead. He and Courtney Young provided sharp and concise advice along the way and a deft editing touch at the end. Will Weisser and Maureen Cole provided marketing and publicity expertise. And I thank Lance Fitzgerald for pushing this book around the world, so it can be read in many places I have never been. Jason Arthur and Drummond Moir at RH/Heinemann in London were wonderfully supportive.
I will be always grateful to Cressida Leyshon, Steve Fishman, Adam Cohen, Nick Kristof, and Charlie Duhigg, who read portions of the book—providing much needed advice and helping steer me back to coherence when my writing lost its purpose and my ideas went astray. And I thank Tim Sullivan, whose patient ear and sound counsel helped me craft a jumble of thoughts into a coherent idea. Beyond the rather substantial help of my friends, I relied on the able work of some sharp research assistants: Avi Salzman, Miriam Gottfried, April Rabkin, and Alejandra Pérez Grobet. If there are any errors in this book, it is nobody’s fault but my own. There would be more if not for the eagle eye of three great fact checkers—Joshua Friedman, Susan Kirby, and Jane Cavolina.
I would also like to thank all my colleagues at the New York Times, in the newsroom and on the editorial board. It is a privilege to work with them every day. I owe special gratitude to my boss, Andy Rosenthal, whose forbearance allowed this book to happen.
Some superspecial thanks are in order: First of all to my mother, who has always been there, through thick and thin, ready to provide the sort of unconditional love and encouragement that only mothers can. This book happened only because of the persistence of my old friend and agent, Zoë Pagnamenta, who not only believed I had a book in me but helped me figure out what it was about. She has been a doggedly enthusiastic advocate for this book and an indispensable guide, always ready to provide needed directions to navigate the seas of publishing. I also thank Simon Trewin of United Agents in London.
Most of all, I owe an enormous debt of gratitude to my family, who had to bear with me as I reorganized my life and theirs around my exciting new adventure. Gisele, my wonderful wife, not only agreed to be a sounding board, providing thoughtful advice and reassurance through the uncertain early stages of the book, she gamely shouldered new burdens so I could focus on writing, filling as best she could the hole left in our family by my absence. Mateo, our son, might remember this stage of his life as the time when his father wasn’t allowed to have any fun. He doesn’t know yet how much fun I had. He should know too the crucial role he played in this project. His raw love and indiscriminate joy gave me an endless supply of light and heat. And he is a great partner to kick the ball around with in the yard. I couldn’t have done this without him.
Notes
General note: Unless otherwise noted, prices in U.S. dollars are converted to 2009 dollars using the Consumer Price Index.
1-4 Prices Are Everywhere: The data on how people value garbage is drawn from: Annegrete Bruvoll and Karine Nyborg, “On the Value of Households’ Recycling Efforts,” Statistics Norway Research Department Discussion Paper, March 2002 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=310320, accessed 08/01/2010); Roland K. Roberts, Peggy V. Douglas, and William M. Park, “Estimating External Costs of Municipal Landfill Siting Through Contingent Valuation Analysis: A Case Study,” Southern Journal of Agricultural Economics, Vol. 23, Issue 2, December 1991; Derek Eaton and Thea Hilhorst, “Opportunities for Managing Solid Waste Flows in the Peri-Urban Interface of Bamako and Ouagadougou,” Environment and Urbanization, Vol. 15, No. 1, April 2003; and Papiya Sarkar, “Solid Waste Management in Delhi—A Social Vulnerability Study,” in Martin J. Bunch, V. Madha Suresh, and T. Vasantha Kumaran, eds., Proceedings of the Third International Conference on Environment and Health, Chennai, India, December 15-17, 2003 (Chennai, India: Department of Geography, University of Madras and Faculty of Environmental Studies, York University), pp. 451-464. Evidence of the different Swiss and Chinese attitudes toward the environment is drawn from the 2005-2008 wave of the World Values Survey (http://www.worldvaluessurvey.org/, accessed 08/01/2010). The relation between sulfur-dioxide emissions and income is found in Gene Grossman and Alan Krueger, “Economic Growth and the Environment,” Quarterly Journal of Economics, Vol. 110, No. 2, 1995 (converted to 2009 dollars using GDP deflator). SO2 emissions in the United States are drawn from the Environmental Protection Agency (http://www.epa.gov/air/sulfurdioxide/, accessed 08/01/2010). The tale of the Larry Summers memo is drawn from Noam Scheiber, “Free Larry Summers: Why the White House Needs to Unleash Him,” New Republic, April 1, 2009; “Let Them Eat Pollution,” Economist, February 8, 1992; and James A. Swaney, “What’s Wrong with Dumping on Africa?,” Journal of Economic Issues, Vol. 28, No. 2, June 1994, pp. 367-377.
5-8 The Price of Crossing Borders: Comparative gender gaps are drawn from: Bijayalaxmi Nanda, “The Ladli Scheme in India: Leading to a Lehenga or a Law Degree?” Presentation, Department of Political Science, Miranda House, Delhi University (http://www.undp-povertycentre.org/pressroom/files/ipc126.pdf, accessed 08/13/2010). The analysis of illegal immigration into the United States draws from: Raúl Hinojosa-Ojeda, “Raising the Floor for American Workers: The Economic Benefits of Comprehensive Immigration Reform,” Center for American Progress, January 2010 (http://www.immigrationpolicy.org/special-reports/raising-floor-american-workers. , accessed 08/01/2010); the Mexican Migration Project database (http://mmp.opr.princeton.edu/results/001costs-en.aspx, accessed on 06/30/2010); Maria Jimenez, “Humanitarian Crisis: Migrant Deaths at the U.S.-Mexico Border,” American Civil Liberties Union, Washington, 2009 (http://www.aclu.org/immigrants-rights/humanitarian-crisis-migrant-deaths-us-mexico-border, accessed 08/08/2010); Patricia Cortes, “The Effect of Low-Skilled Immigration on U.S.
Prices: Evidence from CPI Data,” Journal of Political Economy, Vol. 116, No. 3, June 2008; and Department of Homeland Security, Office of Immigration Statistics, “Estimates of the Unauthorized Immigrant Population Residing in the United States: January 2009” (http://www.dhs.gov/xlibrary/assets/statistics/publications/ois_ill_pe_2009.pdf, accessed 07/27/2010).
8-10 Prices Rule: The data on cigarette prices comes from the Campaign for Tobacco Free Kids (http://tobaccofreekids.org/reports/prices/, accessed 8/13/2010); and the Centers for Disease Control and Prevention (http://www.cdc.gov/tobacco/data_statistics/tables/economics/trends/index.htm, accessed 8/13/2010). Illegal drug prices and consumption drawn from Arthur Fries, Robert W. Anthony, Andrew Cseko, Jr., Carl C. Gaither, and Eric Schulman, “The Price and Purity of Illicit Drugs: 1981-2007,” Institute for Defense Analysis for the Office of National Drug Control Policy (http://www.whitehousedrugpolicy.gov/publications/price_purity/price_purity07.pdf. , accessed 08/08/2010). The analysis relating gas prices and housing draws from Edward L. Glaeser and Matthew E. Kahn, “Sprawl and Urban Growth,” NBER Working Paper, May 2003; and Census Bureau, American Housing Survey of the United States, 2007 and 1997 editions (found at http://www.census.gov/hhes/www/housing/ahs/nationaldata.html, accessed 08/13/2010). The comparison of urban patterns in Moscow with those of other cities draws from Alain Bertaud and Renaud Bertrand, “Cities Without Land Markets, Location and Land Use in the Socialist City,” the World Bank, Policy Research Working Paper 477, June 1995, in Journal of Urban Economics, Vol. 41, No. 1, January 1997, pp. 137-151.
11-12 When Prices Misfire: The anecdote about incentives and births in Australia comes from Joshua Gans and Andrew Leigh, “Born on the First of July: An (Un)natural Experiment in Birth Timing,” Journal of Public Economics, Vol. 93, 2009. Data on the window tax come from the Wolverhampton Archives (http://www.wolverhamptonarchives.dial.pipex.com/windowtax.htm, accessed 08/13/2010). The analysis of the effects of the 55-mph speed limit draws from Paul Grimes, “Practical Traveler: The 55-m.p.h. Speed Limit,” New York Times, December 26, 1982; and M. C. Jensen and W. H. Meckling, “The Nature of Man,” Journal of Applied Corporate Finance, Vol. 7, No. 2, Summer 1994, pp. 4-19. The data on wages and gas prices was drawn from the Bureau of Labor Statistics and the Energy Information Administration. Data on gas mileage was drawn from the Environmental Protection Agency’s 1974 Gas Mileage Guide for Car Buyers.
15-22 The Price of Things: The experiment on placebo effects is found in Dan Ariely, Baba Shiv, Ziv Carmon, and Rebecca Waber, “Commercial Features of Placebo and Therapeutic Efficacy,” Journal of the American Medical Association , Letters, Vol. 299, No. 9, 2008, pp. 1016-1017. The relation between lap-dancer tips and menstrual cycles is drawn from Geoffrey Miller, Joshua Tybur, and Brent Jordan, “Ovulatory Cycle Effects on Tip Earnings by Lap Dancers: Economic Evidence for Human Estrus?,” Evolution and Human Behavior, Vol. 28, 2007, pp. 375-381. The impact of Sesame Street characters on children’s preferences is found in The Sesame Workshop, “If Elmo Eats Broccoli, Will Kids Eat It Too?,” Press Release, September 20, 2005. Evidence on people’s willingness to travel across town to save twenty dollars comes from “Conversation Between Economists Glenn Lowry and Sendhil Mullainathan,” Bloggingheads TV, March 22, 2010 (http://bloggingheads.tv/diavlogs/26877, accessed 08/13/2010). Wine preferences are drawn from Eileen Brooks, “Products and Prejudice: Measuring Country-of-Origin Bias in U.S. Wine Imports,” University of California Santa Cruz Center for International Economics Working Paper, 2003; Hilke Plassmann, John O’Doherty, Baba Shiv, and Antonio Rangel, “Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness,” Proceedings of the National Academy of Sciences, Vol. 105, No. 3, January 2008, pp. 1050-1054; and Robin Goldstein, Johan Almenberg, Anna Dreber, John W. Emerson, Alexis Herschkowitsch, and Jacob Katz, “Do More Expensive Wines Taste Better? Evidence from a Large Sample of Blind Tastings,” Stockholm School of Economics Working Paper, April 2008. The story about pricey license plates in Dubai comes from Margaret Corker, “Read My License Plate: It Cost Me a Fortune—Oil Rich Persian Gulf Drivers Take Vanity Tags to a Whole New Level,” Wall Street Journal, July 1, 2008. The history of diamond marketing draws from Edward Epstein, “Have You Ever Tried to Sell a Diamond?,” Atlantic, February 1982; IDEX Online Research, “Bridal Jewelry Business High-Growth & Less Seasonal,” April 19, 2007; and IDEX Magazine, “The Key Facts About Diamond Engagement Rings,” No. 240, April 29, 2010 (http://www.idexonline.com/portal_FullMazalUbracha.asp?id=33915, accessed 08/05/2010).
22-24 A Histor y of Prices: The discussion of the concept of process from Aristotle to Marx draws from Eric Roll, A History of Economic Thought (London: Faber and Faber, 1992). Marx’s statement about value relations is drawn from Karl Marx, Capital: A Critique of Political Economy, Vol. 1 (Chicago: Charles H. Kerr and Company, 1915), p. 83.
25-30 Taming Prices: The analysis on the value of sports-club subscriptions draws from: Stefano Della Vigna and Ulrike Malmendier, “Overestimating Self-control: Evidence from the Health Club Industry,” NBER Working Paper, September 2004. The data on the costs of printing are found in www.hp.com; www.riteaid.com; Jeff Bertolucci, “How Much Ink Is Left in That Dead Cartridge?” PC World, November 2, 2008 (http://www.pcworld.com/article/152953/how_much_ink_is_left_in_that_dead_cartridge/html, accessed 08/13/2010); and Stephen Shankland, “HP Sues Firms That Refill Ink Cartridges,” CNET, March 28, 2005 (http://news.cnet.com/HP%20sues%20firms%20that%20refill%20ink%20cartridges/2100-1041_3-5643687.html?tag=techdirt, accessed 08/13/2010). Families’ reaction to high gas prices drawn from Dora Gicheva, Justine Hastings, and Sofia Villas-Boas, “Revisiting the Income Effect: Gasoline Prices and Grocery Purchases,” NBER Working Paper, November 2007. The analysis of companies’ reaction to changes in food prices draws from Anne Kadet, “Who Shrunk the Cereal?,” Smart Money, November 6, 2008; Stuart Elliot, “Food Brands Compete to Stretch a Dollar,” New York Times, May 10, 2009; and Adweek, “French’s Puts ‘Fun,’ ‘Value’ on Menu,” May 11, 2009. Data on phone prices drawn from Federal Communications Commission, The Industry Analysis Division’s Reference Book of Rates, Price Indices and Expenditures for Telephone Service, July 1998 (http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/ref98.pdf, accessed 08/13/2010); www.att.com; and http://www.productsandservices.bt.com/consumerProducts/displayTopic.do?topicId=25500. Sandra Kurtzig’s tale is drawn from http://venturehacks.com/articles/pricing, accessed 08/13/2010. Airlines’ reaction to Southwest Airways is found in Austan Goolsbee and Chad Svyerson, “How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines,” Quarterly Journal of Economics, Vol. 123, No. 4, November 2008, pp. 1611- 1633. Discussion of the effect of Walmart on competitors and prices draws from Jerry Hausman and Ephraim Leibtag, “Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart,” NBER Working Paper, December 2005; Vishal P. Singh, Karsten T. Hansen, and Robert C. Blattberg, “Market Entry and Consumer Behavior: An Investigation of a Wal-Mart Supercenter,” Marketing Science, September 1, 2006; Emek Basker, “Selling a Cheaper Mousetrap: Wal-Mart’s Effect on Retail Prices,” Journal of Urban Economics, Vol. 58, No. 2, September 2005, pp. 203-229; Emek Basker, “The Causes and Consequences of Wal-Mart’s Growth,” Journal of Economic Perspectives , Vol. 21, No. 3, Summer 2007, pp. 177-198; and Jerry Hausman and Ephraim Leibtag, “CPI Bias from Supercenters: Does the BLS Know That WalMart Exists?,” NBER Working Paper, August 2004.
30-32 Keeping Competition at Bay: The discussion of automakers’ employee discount plans comes from Meghan R. Busse, Duncan Simester, and Florian Zetelmeyer, “The Best Price You’ll Ever Get: The 2005 Employee Discount Pricing Promotions in the U.S. Automobile Industry,” NBER Working Paper, May 2007. The data on price dispersion at Israeli stores comes from Saul Lach, “Existence and Persistence of Price Dispersion: An Empirical Analysis,” NBER Working Paper, January 2002. Price obfuscation online drawn from Glenn Ellison and Sara Fisher Ellison, “Search, Ob
fuscation, and Price Elasticities on the Internet,” NBER Working Paper, June 2004.
33-37 Searching for Fools: The quote on fools by Daniel Kahneman is found in Lee Young Han and Ulrike Malmendier, “The Bidder’s Curse,” NBER Working Paper, December 2007. The attitude of private-equity firms toward auctions comes from “Auction Process Roundtable,” Mergers and Acquisitions, December 2006, pp. 31-32. Prices paid by Denver shoppers are found in Mark Aguiar and Erik Hurst, “Lifecycle Prices and Production,” Federal Reserve Bank of Boston Discussion Paper, July 2005. The price of appetizers in romantic restaurants is discussed in I. P. L. Png and Wang Hao, “Buyer Uncertainty and Two-Part Pricing of Felicitous vis-à-vis Distress Goods: Theory with Evidence from New York Restaurants,” Working Paper, April 2008. Airline ticket pricing is discussed in Severin Borenstein and Nancy L. Rose, “How Airline Markets Work . . . Or Do They? Regulatory Reform in the Airline Industry,” NBER Working Paper, September 2007; and Steven Puller, Anirban Sengupta, and Steven Wiggins, “Testing Theories of Scarcity Pricing in the Airline Industry,” NBER Working Paper, December 2009. Evidence of price discrimination in the concert industry is in Pascal Courty and Mario Pagliero, “The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry,” CEPR Discussion Paper, January 2009; and Pascal Courty and Mario Pagliero, “Price Discrimination in the Concert Industry,” CEPR Discussion Paper, January 2009. Price discrimination by Coke from Constance Hays, “Variable-Price Coke Machine Being Tested,” New York Times, October 28, 1999. Price discrimination by Amazon from Joseph Turow, Lauren Feldman, and Kimberly Meltzer, “Open to Exploitation: American Shoppers Online and Offline,” University of Pennsylvania Annenberg Public Policy Center, June 2005 (http://www.annenbergpublicpolicycenter.org/Downloads/Information_And_Society/Turow_APPC_Report_WEB_FINAL. pdf. , accessed 08/01/2010). Data on airlines’ falling fares and financial problems is found in Air Transport Association, Annual Passenger Yield (http://www.airlines.org/Economics/DataAnalysis/Pages/AnnualPassengerYieldUSAirlines.aspx, accessed 08/13/2010); and Bureau of Transportation Statistics (http://www.TranStats.bts.gov/Data_Elements.aspx?Data=6, accessed 08/13/2010).
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