One of the things that have often bothered me is the idea of added value. I’ll admit to not having read enough market theory, but it’s been pretty easy to understand how refining an ore leads to a product with higher value due to its increased utility. For bulk chemicals and products, the market is very efficient and bulk product prices tend to be marginally above production cost. Where things become weird is with services and branded products. Many of us have thought about the irrationality of paying twice as much for the same shirt simply because it bears a particular logo.
Then you start thinking about counterfeiting, especially about the concept of originality. Let’s say you’re willing to pay R100000 for an original Pierneef. If a person approaches you with a perfect copy of this painting, why would you not pay the same amount for the copy? The answer is that you are attaching some value to originality. I suppose it should be said that market theorists would probably explain this by saying perfect copies deminish the value of the painting by increasing the supply.
While driving to fetch some pizza from the best pizza place in Pretoria, it occurred to me that cognitive biases could help to explain much of the strategies associated with good business beyond the bulk manufacturing sense engineers tend to think of. I’m still working on the details, but briefly, people do not generally have access to perfect rationality. The biases listed in that wikipedia page all show how our perceptions and estimation of the odds are actually a bit off. When you can craft a strategy that bends as many of these biases in your favour as possible, you will end up with a product that will appear to be worth more than its utility to most people, and you will be able to get a lot more money for it. I’ll be thinking about this more and posting, but leave a comment if you think I’m on to something (or even better, if you can point me to alternative explanations).
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