This article documents a widespread bias: a tendency to overestimate how much others will pay for goods. The effect may influence pricing and negotiations, which depend on accurate assessments of others' valuations. It is also shown to underlie or interact with several widely researched behavioral phenomena, including egocentric empathy gaps, the endowment effect, and the false-consensus effect.A fter purchasing a box of Teuscher chocolate truffles for $104, I invited Armin (the shop's proprietor) to guess how much the typical student in my class would be willing to pay for it. After asking what I taught, where I taught, and the average age of my students, he paused and conjectured, "Around $65." In fact, my students were willing to pay just under $11. When those students were asked the same question, they made a similar error-overestimating how much their classmates would pay.In this article, I investigate the overestimation of willingness to pay and the widespread belief that others will pay more than oneself. This effect occurs not just for chocolate truffles but also for books, teddy bears, smoked salmon, sporting equipment, iPhones, artwork, gift certificates, gambles, a trip to the moon, and a magic pill that confers the ability to speak French. Indeed, the effect appears to hold for every good when judgments are averaged across people (and for most people when judgments are averaged across goods).Study 1 illustrates the basic effect. Study 2 reveals that the effect persists for hypothetical goods that have no associated market price on which to anchor judgments of others' values. Study 3 suggests that self-other differences in the enjoyment of goods do not explain the effect and suggests instead that it could be driven by an empathic failure to appreciate how others react to monetary payments. Studies 4 and 5 support this account-they show that the effect is eliminated when valuations are measured by selling prices rather than buying prices. The remainder of the article examines evidence for and against other accounts of this effect, possible implications for pricing and negotiations, and its relevance for interpreting other widely researched behavioral phenomena, including the endowment effect, egocentric empathy gaps, and the so-called false consensus effect.
STUDY 1: OVERESTIMATING OTHERS' WILLINGNESS TO PAY
Participants and ProcedureIn an introductory marketing class at the Massachusetts Institute of Technology (MIT), 35 undergraduates participated in a second-price auction (Vickrey 1961) for 10 goods displayed on a table at the front of the class. They privately specified their own bids and guessed the median bid. Afterward, the highest bidders for each good paid the secondhighest bid and received their respective goods. Before guessing the median bid for each good, participants were told, truthfully, that the most accurate guesser for each good would earn up to $5 (up to $50 in total).
Results and DiscussionRespondents overestimated the median bid by an average of 43% (see table 1). Here, distributio...