Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats a Pricey Watch as a Bargain
Transcript
- Lucas: So, Luna, you know that feeling when you see a watch for ten thousand dollars and your brain goes, 'that's not crazy expensive, that's just... a nice watch'? Luna: Oh, absolutely. And the same brain will balk at a forty-dollar meal. It makes no sense. Lucas: Right. And that's not just you being a car enthusiast or a horology nerd. That's a well-documented quirk of how we evaluate prices. Economists call it the Veblen effect, after Thorstein Veblen, who wrote about 'conspicuous consumption' over a hundred years ago. Luna: And it's not just about showing off. There's a real cognitive mechanism at play, right? Something about the price itself changes how we experience the product. Lucas: Exactly. And that's our topic today: why your brain treats a pricey watch as a bargain. We're going to unpack the psychology behind premium pricing, and I want to start with a concrete example. Back in 2021, Patek Philippe released a limited edition Nautilus, the 5711 in olive green, with a retail price of around thirty-four thousand dollars. It sold out in hours. The secondary market price? It spiked to over half a million. Luna: Half a million. For a steel watch that tells time. Lucas: Steel, yes. And that's the thing—it's not about the materials or the craftsmanship, which are fine, but not six-figure fine. It's about what the price signals. And that's where the Veblen effect kicks in. Luna: So, for the listener who's not familiar, can you break down what the Veblen effect actually is? Lucas: Sure. Normally, in classic economics, if you raise the price, demand falls. But for a Veblen good, the opposite happens: as the price goes up, demand goes up, at least within a certain range. Because the high price itself is a feature. It signals exclusivity, status, and taste. People buy it not despite the price, but because of it. Luna: And that's why a thirty-four-thousand-dollar watch can feel like a 'deal' if you know it's going to be worth two hundred grand on the secondary market. It's like a smart investment, your brain tells you. Lucas: Exactly. And that's the perverse logic of luxury goods. The high price anchors your perception of value. It's not just about the object itself; it's about the story the price tells. And that's where behavioral economics gets interesting, because we can actually see this in action in controlled studies. Luna: Like that famous wine study, where people were given the same wine but told it was a different price, and the more expensive one literally lit up more pleasure centers in the brain. Lucas: Precisely. That's a classic. In a 2008 study at Caltech, researchers scanned brains while people tasted wines labeled with different prices. The same wine labeled ninety dollars was rated as tasting better than when it was labeled ten dollars, and the fMRI showed increased activity in the medial orbitofrontal cortex—that's the area associated with pleasure and reward. Luna: So the price literally changes your subjective experience. It's not just a rationalization after the fact. Lucas: No, it's happening in real time. And that's why luxury brands are so careful about pricing. They don't discount. They raise prices. And they do it aggressively. I was reading recently about how the big Swiss watchmakers have been hiking prices year after year, and it's not just about inflation or costs. It's about maintaining that exclusivity and the perception of value. Luna: And it works. I mean, Rolex is a perfect example. You can't just walk into a store and buy a steel Submariner anymore. There's a waitlist. And the grey market price is often double or triple the retail price. That scarcity pushes the perceived value even higher. Lucas: Yeah, and that's a great point. Scarcity and price anchoring work together. When you see a waitlist, it signals that the product is in high demand, which makes you want it more. And when you finally get the call, the price tag feels justified—even if it's thirty percent higher than it was a few years ago. Luna: So, is there a way to step outside of this? I mean, as consumers, how do we resist the pull of the Veblen effect? Lucas: The first step is awareness. Just knowing that your brain is being anchored can help you pause and ask: 'Am I buying this because it's actually a better product, or because the price is making me think it's better?' And that's a skill you can develop. Luna: But it's hard, because the marketing is so sophisticated. They're using all these cues—materials, packaging, the boutique experience—to prime you. Lucas: Absolutely. And that's why I think it's helpful to focus on the specific mechanisms. One is anchoring: when you see a price, it creates a reference point that influences your willingness to pay. Another is social proof: if everyone else is buying it, it must be good. And then there's the endowment effect, which we've talked about before—once you own it, you value it even more. Luna: And all of that combines to make that ten thousand dollar watch feel like a rational purchase. But let's talk about something else: how does this play out in more everyday contexts? Like, why do we pay five dollars for a coffee at Starbucks when the same coffee at home costs fifty cents? Lucas: That's a great question, and it's actually the same principle. Starbucks is a Veblen good in its own way. The price is part of the experience—the cup, the logo, the ambiance. You're not just paying for caffeine; you're paying for the status of carrying that green cup. And the price anchors your perception of quality. If it were one dollar, you'd probably think it was swill. Luna: So we're all a little bit snobbish, whether we admit it or not. Lucas: A little bit. And that's not necessarily a bad thing. It's just human nature. But being aware of it can help you make more deliberate choices. For example, when you're buying a gift for someone, or when you're treating yourself, ask yourself: 'What am I really getting out of this? Is it the quality, or is it the feeling of buying something expensive?' Luna: And sometimes, that feeling is worth the money. If it genuinely brings you joy, why not? But the problem is when you're doing it without realizing it, and you're overspending on things you don't actually care about. Lucas: Exactly. It's about intentionality. And that's where behavioral economics can really help. It gives you a framework to understand your own decisions, so you can make choices that align with your actual values, not just your impulses. Luna: And that brings me to something I've been thinking about. We talk a lot about these biases in the show, and it's easy to feel like you're being manipulated all the time. But I think the flip side is that understanding these biases can also be empowering. You can use them to your advantage. Lucas: Sure. For example, if you're a small business owner, you can use price anchoring to your benefit. Instead of offering a low-priced product and hoping to sell a lot, you can offer a premium version that makes the standard one look like a bargain. That's a classic positioning tactic. Luna: Right. And on a personal level, you can use it to negotiate better. If you know the anchor is going to be set by whoever speaks first, you can try to set it yourself. Or you can consciously de-anchor yourself by researching prices before you enter a negotiation. Lucas: That's a really good point. And that's actually what we're trying to do on this show—give you the tools to think more clearly about money. And if you've found that useful, I want to mention something. Luna: Yeah, go ahead. Lucas: This podcast is completely ad-free, and that's only possible because of a small group of listeners who chip in a couple of dollars a month. It genuinely makes a difference. If you've gotten something out of these episodes, you can support us at buy me a coffee dot com slash fexingo. Luna: That's right. It's a small way to keep the lights on, and we really appreciate it. Lucas: Okay, back to the psychology. So we've talked about the Veblen effect and anchoring. But there's another phenomenon that plays into this, and it's the 'price placebo' effect. We touched on the wine study, but it happens in other products too. I've seen studies on energy drinks, painkillers, even skincare. Luna: Oh, the skincare thing is fascinating. There's a well-known study where people used a moisturizer that they were told cost a certain amount, and the more expensive one was rated as more effective, even though it was the same formula. Lucas: Exactly. And that's because we're not just evaluating the product objectively; we're evaluating it through the lens of price. The price becomes a cue for quality, and our brains fill in the rest. That's why generic brands often struggle to compete, even when the ingredients are identical. Luna: But there's a counter-movement, right? I mean, with the rise of 'no-label' packaging in Europe and the 'frugal' trend, some people are rebelling against that. They're saying, 'I'm not paying for a logo, I'm paying for the product.' Lucas: Yes, and that's an interesting challenge to the Veblen effect. But I think for most people, the pull of the status signal is still very strong. We're social animals, and we care about what others think. Even if we intellectually know that a generic product is just as good, we still want the brand. Luna: So, what's the takeaway for our listeners? How do you apply this in your own life? Lucas: I'd say, next time you're about to make a big purchase, ask yourself two questions. First: 'What is this purchase really signaling to me?' And second: 'Is that signal worth the extra money?' If the answer is yes, great. Buy it with intention. If the answer is no, you've just saved yourself a pile of cash. Luna: And maybe check in with yourself after the purchase, too. Are you still happy with it a month later, or was it just the thrill of the buy? Lucas: Good point. The endowment effect will kick in and make you value it more, but that doesn't mean you made a rational choice. It just means your brain is protecting your ego. Luna: So, what's coming up next week? Are we going to tackle another bias? Lucas: We are. Next time, we're going to look at the 'sunk cost fallacy' and how it keeps us in bad investments, both financial and personal. That should be fun. Luna: Until then, keep questioning your price tags.