Sunday, January 20, 2013

On how we estimate value

A friend of mine once had a crush on a girl. The girl wasn't really interested, but valued him as a friend and was too polite to tell him he does not stand a chance (or maybe she just enjoyed the extra attention - who knows!). So the chase went on reaching pretty pathetic levels. At the same time another girl was basically throwing herself at him. Yet he wasn't paying attention to her and preferred to chase an illusion.

It's not a single case. Even if you have not experienced it yourself (on which I congratulate you - I'll try to touch on individual differences later on), you must've heard similar stories from your friends. Actually if you look for most popular dating advice you will learn that the trick is to let go and maintain the magical balance of not caring and being interested (or as John Green would say in his witty way: "dumpees should fight the clingy urge"). Speaking more general my friend was assessing a potential relationship mostly basing on the fact how hard it would be to get. Other more objective criteria (such as for example disturbing lack of sense of humour of the aforementioned femme fatale) did not matter that much.

But this does not happen just in the field of romance. We tend to apply a similar rule to jobs and positions. A highly competitive position will attract even more people. After all if so many people want it it must be good! Some people reapply for some jobs multiple times until they get it often discarding posts which would be a better fit. You could observe this in Google recruitment for engineering positions. Thousands of applicants competing for a few positions, at least seven stages of interviews, high rejections rates, and admitting openly they reject many good candidates - yet many peoples try up to five times (and probably a couple of years) to get a position. At the same time many of them would be equally happy at a startup company somewhere in California.

The same rule applies to physical possessions and services. A at the beginning of the month I accidentally took the wrong train and ended up spending the night at various train stations trying to get to my final destination. I started talking to a guy who also was in a similar situation. He run a barber shop in a small town. He told me what was the "secret" to the success of his business. There were many barber shops in this town. Most of them provided services on a similar or indistinguishable level. His shop, however, charged more than others providing an illusion of a premium service. Despite the higher price and similar quality they were always fully booked. And as in the examples above the clients used the price (more expensive == harder to get) to estimate the quality (value). Of course this trick is nothing new and is known in economics as premium pricing.

What I'm really interested in is what science has to say about this phenomenon. The Nobel prize winner Daniel Kahneman had several theories on how probabilities and absolute values of events translate to their utilities. His Prospect Theory gives a mathematical model explaining how we overweight extreme events (those that are highly unlikely) disregarding their true value (of course if I understand it correctly). The problem is that we don't know the true value (neither the probability) and we have to estimate it. Search for scientific work on this topic has proven to be hard mostly due to the fact that it must exist across fields under different names. There is at least one study showing that the "playing hard to get" tactic in romance is popular (surprise, surprise...). If you have any hints where should I look please let me know!

Last but not least I am not claiming that this heuristic is always bad. After all we don't have access to objective value (if something like this even exists). Estimating it based on the fact how much effort we need to put into trying to get it might be in many situations the best heuristic. Maybe a more expensive hairdresser is in fact better, maybe a position that is harder to get would be indeed more fulfilling, and the girl that my friend was chasing so relentlessly would be more likely o be a keeper.