Tuesday, June 30, 2009

Why We Don't Always Order the Gnocci

Take a look at the menu above (click for a larger version). It's a prix fixe meal recently offered at a Tel Aviv restaurant. The prices are quoted in New Israel Shekels (NIS), worth about as much as an American quarter. The three-course meal costs 115 NIS, or around $30. You've got a choice of five entrees. Which would you choose?
The menu is from an experiment by behavioral economists Ori Heffetz and Moses Shayo, of Cornell and Hebrew University, Jerusalem. They got a fancy Tel Aviv restaurant to play along as they manipulated the menu prices, specifically the little prices in parentheses telling how much the entrees would have cost a la carte. They wanted to test whether more people would pick an item just because it was more expensive. (Did you choose the shrimp gnocchi?) Those who pick up many checks on dates might swear it works that way, but Heffetz and Shayo showed it didn't. The a la carte reference prices did not affect diners' choices.
“Maybe, sometimes, old-fashioned economics is just about right,” Shayo told The New York Times' John Tierney. “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.” The Times article picks up on that thought, offering the research as a corrective to the current wave of Homo economicus-bashing.
Well, kind of. Nobody disputes that taste can trump money, especially when money isn't truly at stake. More generally, it's long been known that reference prices affect estimations of prices — but choices are a whole different matter. In the late 1960s, Sarah Lichtenstein and Paul Slovic demonstrated this in some classic experiments. Volunteers were required to assign prices to wagers and, separately, to choose between pairs of wagers. Their choices and prices were often contradictory. That is, the volunteers would insist that wager A was worth more than wager B… but when given a free choice of the two, they would consistently chose wager B. This was especially paradoxical because the volunteers were simply trying to maximize money (not balance a taste for stuffed artichokes against a desire to get the best "deal").
Obviously, both choices and prices are important in the real world. There is now a applied science of menu design, based at least loosely on psychological principles. The practical restaurateur is mainly concerned with nudging diners to select high-profit items. One trick is this: If a restaurant wants to push a $30 steak, it will put it on the menu next to a $80 Kobe steak. The latter, even if no one orders it, makes the $30 steak seem reasonable in comparison. And it causes more diners to choose the $30 steak rather than something else, or so menu consultants believe. The Heffetz-Shayo menu was unusual in that it gave prices that don't apply (you're going to pay the prix fixe no matter what you choose). Conceivably, some diners might have picked the most expensive item, to get maximum value (the hypothesis Heffetz and Shayo were testing), while others might have momentarily forgotten about the prix fixe and picked something inexpensive, to get a bargain (as the menu design trick supposes). It's even possible that the two effects canceled out, contributing to the null result. It might be interesting to see more rigorous testing of the tricks used by menu designers.
News to me: that shrimp, pork, and sausages are popular entrees in Tel Aviv.

Friday, June 19, 2009

Frank Lloyd Wright Money Pit, $15 Million

In the hard-to-price real estate department, a foundation has listed Frank Lloyd Wright's iconic Ennis House, in the Los Feliz district of Los Angeles, for $15 million. Completed 1924, it's the grandest of Wright's "textile block" houses, constructed from molded concrete blocks. Wright had the utopian notion that these concrete blocks would be the lost-cost housing material of the future. It didn't work out that way. Only four textile block houses were built, all for rich people in Southern California. Wright wrote: "The concrete block? The cheapest (and ugliest) thing in the building world.… Why not see what could be done with that gutter-rat?… It might be permanent, noble, beautiful."
Well, two out of three isn't bad. The textile blocks began crumbling at the first drop of rain. Earthquakes didn't help, either. Exasperated owners tried well-meaning conservation treatments, like sealing the concrete, that did more harm than good. The Ennis House, severely damaged by the 1994 Northridge earthquake and some monsoon-like rainy seasons, was red-tagged by city inspectors in 2005.
How much would you pay for a Frank Lloyd Wright masterpiece needing perpetual TLC?
Pluses: The architecture, of course, and unparalleled views of the city and Hollywood Hills. The foundation invested $6.5 million on repairs. The home has been in numerous movies, including Blade Runner. It was in a Ricky Martin video.
Negatives: It's estimated the new owner will need to spend $5 to $7 million in further repairs. Zillow's "Zestimate" for the place is only $2,131,500, presumably reflecting what it would be worth without the Wright name or the upkeep issues. The last price paid for the house, in 1968, was $119,000.

Listed by Hilton & Hyland and Dilbeck Realtors with international marketing by Christie's Great Estates.

Wednesday, June 3, 2009

The Price Machine of Irving Fisher

There's a great piece on the "Phillips machine" in today's New York Times. It's a hydraulic computer that uses water to predicts the ebb and flow of the economy. A New Zealander named Bill Phillips built it in 1949, and copies were sold to Harvard, Cambridge, Ford Motor Company, and the Central Bank of Guatemala(!) The Times site has video of a restored Phillips machine gurgling away.
Not mentioned is a remarkable predecessor, the 1892 price machine of Irving Fisher. (I write about Fisher and his machine in my upcoming book, Priceless.) Fisher was probably the most famous American economist of the Gilded Age. The public first knew him as the author of a best-selling self-help book with the earnest title, How to Live. A successful inventor, Fisher devised an index card system, a precursor of the Rolodex, and made a fortune off of it. From his perch at Yale, Fisher pontificated on the issues of the day. He was for vegetarianism, prohibition, eugenics, and just about every nutty health regimen under the sun.
Like Phillips' machine, Fisher's was based on a simple principle: water seeks its level. The device consisted of a tank of water with a flotilla of half-flooded wooden “cisterns” connected by a system of levers. Adjustments to “stoppers” and levers fed in data on incomes, marginal utilities, and supplies; then prices could be read off scales. The device prefigured, if not parodied, the direction of twentieth-century economics. “Press stopper I and raise III,” read part of Fisher’s instructions for the thing. “I, II, III now represent a wealthy, middle class, and poor man respectively…”
Fisher’s career came screeching to a halt in 1929. Days before Black Monday, Fisher waved aside the volatility that was worrying investors. “Stock prices have reached what looks like a permanently high plateau,” he announced. They hadn’t, and that statement — now perhaps Fisher’s most quoted pronouncement — inevitably turns up in humorous compendiums of Famous Last Words.