Some more examples of cognitive biases

i) Uber's surge price, ie charging more when there is a high demand for ride-sharing and/or reduced driver supply, highlights our biases when it comes to money, ie

"...Few of us are strong at rationally comparing numerical options. For example, paying nine times the fare for a ride home on New Year's Eve......a fare that would normally be say $70 costing $630 feels completely outrageous, notwithstanding that they are arithmetically the same..."

Catherine Robson, 2016

Linked with this is that the sensitivity to surge pricing does not proceed in a straight line, ie

"...There is a big fall in demand of Uber when there are quite small increases in price, say 1.2 times the standard fare - despite the fact this is often still markedly cheaper than a taxi the same distance. Further, more people are likely to accept a 1.2 times than 2 times fare. This is because at 2 times, customers get the feeling that the fare increase is arbitrary and capricious, whereas 1.2 times feels like there must be science in the price determination..."

Catherine Robson, 2016

From the data collected by Uber, if you have less than 5 percent battery life on your mobile phone, you are much more likely to accept surge pricing at any level. This supports the concept

"...if you feel under pressure or are in trouble, you will reach for any solution..."

Catherine Robson, 2016

ii) fixed fee approach in investment

"...many investors are attracted to a flat-dollar fee model, where an adviser will work for an agreed fee for a level of one-offer ongoing service, rather than charging their fee as a percentage of how much money you have. This fixed- fee approach offers clarity about what advisers can genuinely control and the value they are able to deliver. It also means that some of the hallmarks of poor advice, such as excessive gearing and excessive risk-taking, are avoided..."

Catherine Robson, 2016

There is the 'sticker shock' which is the reverse of the New Year's Eve surge pricing (see above), ie a small percentage is less than a specified amount, eg for a $1 million portfolio, pay 1% or $7500 annually.  Even though the flat fee is less than the percentage, especially if the investment grows, most people will prefer the percentage.

iii) Some lawyers are moving away from time-based billing to fees per matter, with payment upfront

The traditional lawyer approach of charging per hour fee schedule can result in the total fee being much higher than initially expected and thus cause problems with clients. The fixed fee paying upfront is similar to what ride-sharing Uber does, ie you know in advance what it will cost.

 

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