Axiomatic
One of the fundamental axioms of economics is that we know what we like: we have preferences, they're consistent across time and they can be revealed by careful experimentation. This, of course, is utter nonsense. Yet it's not just a guiding principle of economics but is also a rough and ready rule we live our lives by. We make decisions and then we justify them, after the event, because to do otherwise would make a mockery of our choices.
But because we do actually make decisions we must, in a sense, really know what we like, even if we're habitually inconsistent. Unfortunately, outside of our own specialised areas of expertise we don't know how to absolutely value things and all too often we assign a value based on entirely superfluous data intermingled with a bit of relative valuation, reckoning that a Porsche 911 Carrera is worth more than a child's teddy bear. We exhibit coherence but in an arbitrary fashion – a behavior known, rather unoriginally, as coherent arbitrariness.
Teddy Girl
Of course, a Porsche generally is worth more than a child's teddy bear – unless the bear happens to be Teddy Girl, a 1904 Steiff model that fought its way through World War II at the side of Colonel Bob Henderson and sold at auction in 1994 for a cool $170,000. Rules of thumb don't always work even in obvious areas, but in those requiring a bit of expertise they can go horribly wrong.
There are legion examples of people getting confused over what price to pay for something that they don't know much about. Robert Cialdini famously tells the story of the shop assistant who accidentally doubled instead of halving the prices of slow selling jewellery in a tourist spot, only to discover that the stuff sold out almost instantly: because people were using the price as a signal to indicate quality, lacking any other means to make that judgement.
Arbitrary
Another famous experiment carried out by Dan Airely, George Loewenstein and Drazen Prelec – “Coherent Arbitrariness”: Stable Demand Curves Without Stable Preferences – showed how people can be primed to re-base their estimates of an item's worth. They got participants to write down the last two digits of their social security numbers and then got them to bid for various items. It turned out that the participants with the highest two digit numbers bid significantly more than those with the lowest. As Airely puts it:
