Wine Snobs Paid Economists To Pretend They Aren't The Worst

What makes something valuable? For that matter, what even is value? Value is defined as "the importance, worth, or usefulness of something" by the internet, but that really isn't that useful of a definition. In economics, value is "a measure of the benefit provided by a good or service to an economic agent." But that isn't really a super useful definition. The reason every definition of value is basically trash is because value is a subjective thing that just can't be defined. While there are more logical or precise ways to define value compared to others, people just really aren't always that logical, so while something could be perfectly reasonably valuable to one person, someone else could think it's worthless. One man's trash is another man's treasure and all that.

One of many weird images to show up when you Google image "value," 

serving as further evidence that it is really hard to define. 

Because value is so subjective and can't be simply measured in a number like cost, a better measurement for it in economics is utils. Utils are a hypothetical unit measuring satisfaction. The more satisfying something is to a consumer, the more utils an object is said to have. Satisfaction and utility for a consumer are typically determined by factors like taste, convenience, efficiency, aesthetic appeal, and function. For example, a product like roller backpacks have a high value because they allow the consumer to easily and efficiently carry their stuff from class to class while exhibiting style and intelligence, thus attracting potential mates. It's utterly genius multi-tasking, with wheels. 

Trust me, these are making a comeback. A wise investment. 

Some people like to think of value in terms of getting more or better products for less money. Because we like things, but also like having money to spend on other things, it would make sense that when it comes to products of the same quality, consumers prefer the cheaper option, right?

Well sure, it makes perfect sense, but it might not actually be the case because, as mentioned earlier, people very rarely make perfect sense. Studies show that when people are presented with two items of exactly the same quality but with different prices attached, they actually prefer the more expensive one. This is because of perceived value. Perceived value is the worth that a product or service has in the mind of the consumer, which often differs from its intrinsic value. When people are more swayed by an item's perceived value than its intrinsic value, economists call it irrational value assessment.

Stupid economists have to come up with names for all the weird things we do.

Like, sorry I'm irrational, can I live?

So one of the ways perceived value works is through price association. Because typically things that cost more are higher quality, people often associate higher price with higher quality, and that assumption carries over even to items that are not different. To test this theory, members of the Stanford Wine Club were invited to taste different wines and give them scores. Five different bottles were brought to the tasters, but what they didn't know was that two of the bottles actually contained the same wine. The only difference between the bottles was that one was marked with a $45 price and the other with $5. Despite there being no difference in the contents, the $45 bottle was consistently rated as the best of the wines. 

So let's get this straight: two bottle of the exact same cheap, $5 wine are presented, but one has a $45 dollar price tag on it that magically makes it taste better. 

This is my favorite thing we've learned in economics, because 

I am deeply passionate about wine snobs looking like idiots.

While I would love to chalk this up to the unraveling of the grand conspiracy that there are any people who actually know anything about wine, these rich idiots paid off scientists - I mean, scientists proved with a follow-up test that there was more than just pretentiousness at work. You see, the same experiment was performed again, but under a modified MRI scanner, which showed increased levels of dopamine (the happy chemical) while people drank the $45 wine. So it wasn't just that people saw the price tag and felt compelled to say it was better; rathe the higher price actually changed the way people experienced the product. 

This experiment has been recreated for other products as well. People were asked to test either Prozac or a placebo, with the placebo having a slightly higher price. Subjects reported better results from the more expensive placebo. In another, a group of students were asked to solve puzzles after purchasing energy drinks to help improve focus. Those given a discount performed worse than those who paid full price. All these examples show that a higher price affects the way consumers view and even experience a product. If the price is higher, consumers assume that the product is better quality and more affective, causing them to actually be more affected by it. Conversely, if an item is too cheap, consumers assume that it is flawed and enjoy it less. How does that make sense, you might ask? It doesn't. But that doesn't make it any less real. 

What are you even doing anymore

All this goes to show that pricing is a dangerous game. Products cannot be too expensive or they risk being overpriced or unaffordable, but the lowest price possible is also not always the most competitive either. Because of behavioral economics, we know that people don't always make the most logical choices, so irrational value assessment is an important pricing strategy for any business.