(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 219

194 PART 2 • Producers, Consumers, and Competitive Markets
not get a wage that they feel is fair may not put much effort into their work.29
(In Section 17.6, we will see that paying workers higher-than-market wages can
also be explained by the “efficiency wage theory” of labor markets, in which
fairness concerns do not apply.) Fairness also affects the ways in which firms
set prices and can explain why firms can more easily raise prices in response to
higher costs than to increases in demand.30
Fortunately, fairness concerns can be taken into account in the basic model
of consumer behavior. If individuals moving to San Francisco believe that high
apartment rents are unfair, their maximum willingness to pay for rental housing
will be reduced. If a sufficient number of individuals feel this way, the resulting
reduction in demand will lead to lower rental prices. Similarly, if enough workers do not feel that their wages are fair, there will be a reduction in the supply of
labor, and wage rates will increase.

Rules of Thumb and Biases in Decision Making
Many economic (and everyday) decisions can be quite complex, especially if
they involve choices about matters in which we have little experience. In such
cases, people often resort to rule of thumb or other mental shortcuts to help
them make decisions. In the tipping example, you took a mental shortcut when
you decided to offer a 15-percent tip. The use of such rules of thumb, however,
can introduce a bias into our economic decision making—something that our
basic model does not allow.31

• anchoring Tendency to rely
heavily on one prior (suggested)
piece of information when
making a decision.

ANCHORING The mental rules that we use in making decisions frequently
depend on both the context in which the decisions are made and the information
available. For example, imagine that you just received a solicitation from a new

local charity to make a donation. Rather than asking for a gift of any amount, the
charity asks you to choose: $20, $50, $100, $250, or “other.” The purpose of these
suggestions is to induce you to anchor your final donation. Anchoring refers
to the impact that a suggested (perhaps unrelated) piece of information may
have on your final decision. Rather than trying to decide precisely how much
to donate—say $44.52—and not wanting to appear miserly, one might simply
write a check for the next higher category—$50. Another individual wishing to
make only a token donation of $10 might choose the lowest stated amount, $20.
In both cases, anchoring can bias individual choices toward larger donations.
Similarly, it’s no coincidence so many price tags end with the digits 95 or 99.
Marketers understand that consumers tend to overemphasize the first digit of
prices, and also to think in terms of price categories like “under $20” or “over
$20.” Thus to the consumer, who may not be thinking too carefully, $19.95 seems
much cheaper than $20.01.
RULES OF THUMB A common way to economize on the effort involved in
making decisions is to ignore seemingly unimportant pieces of information.
29

For a general discussion of behavioral economics and the theory of wages and employment, see
George Akerlof, “Behavioral Macroeconomics and Macroeconomic Behavior,” American Economic
Review 92 (June 2002): 411–33.

30

See, for example, Julio J. Rotemberg, “Fair Pricing,” NBER Working Paper No. W10915, 2004.

31

For an introduction to this topic see Amos Tversky and Daniel Kahneman, “Judgment under
Uncertainty: Heuristics and Biases,” Science 185 (September 1974): 1124–31.