You and your friends are relaxing at the beach. It’s midday, the sun is beating down, and it is sweltering. One of your friends offers to grab you a drink at the rundown convenience store. How much are you willing to pay?  What if the drink was from a fancy hotel? How much are you willing to pay then?

This scenario is the basis of an experiment that Richard Thaler ran (except he used beer). Economics says that people should be willing to pay the same amount for the drink- all that matters is how hot and thirsty they are, which determines  the “utility” or value of the drink and how much they will pay.

Richard Thaler found that people are willing to pay more for the drink from the fancy hotel than the rundown convenience store. (This is probably how you felt as well.) But, remember, the drink is the same, it just comes from a different seller. So why are people willing to pay different prices?

People are willing to pay higher prices because they are taking into account that the fancy hotel has higher costs to cover. In other words, they are thinking about the “fairness” of the price. In his research, Thaler continued to investigate how “fairness” (and other factors) influence consumer behavior. His work shows us the psychological side to consumer behavior compared to the rational rules of economics.

Richard Thaler was awarded the Nobel Prize in economics this year for his research. He is a Professor of Behavioral Science and Economics at the University of Chicago. His work has inspired many other researchers to dig deeper into “behavioral economics.” Who could imagine how many discoveries could be made from getting hot and thirsty at the beach?