Overpricing Horses is Predictably Irrational

You head to Ikea and buy a desk for $100. It comes in boxes, so you have to put it together. Seven (or in my case about 70) hours later, voila, the desk is put together and it is sitting in the home office, looking dang good - a job well done. Now, a friend comes over and says "will you sell it?" and offers you $200. Chances are you say no. The desk is not a desk, it is your desk and it has value to you. You might not take $300 or $400 now for it.

So goes "the Ikea effect" detailed in a chapter of Predictably Irrational, a fascinating book on behavioural economics by Dan Ariely. In it he studies why we do what we do, why we buy, how we form relationships, how we act, and it is a good marriage between psychology and economics.

In exploring how we price items that we own (in fact, his latest blog piece speaks of this), it all depends on the story. To illustrate this in the book he used an anecdote about college kids camping out for days for Duke basketball tickets. He and his cohorts ran an experiment:

After the tickets were awarded (some who camped out got them, and others who did the same thing did not win them) he asked the people who won what price they would sell their tickets for, and conversely asked those who lost what they would pay to go to the game. The ones who won would immediately tell an emotional story about the game, how it would be a part of their college memory and that they are invaluable. When pressed for a price, they reluctantly said they would take (an average) of $2400. For the ones who lost, they immediately thought of money - e.g. if they did not go to the game, how much it would cost to have a good time out watching it, with some good food, good drink and with a little scratch left over. After mulling it over rationally, with cold hard cash decision making, the average they would pay was $170.

This chasm explains a lot to me about how we price horses. If you or I want to buy a horse we will call a trainer, expecting the price will be $60,000. We weigh what we can do with that $60,000 if he says no. We can buy two 20 claimers, take a trip with the family, pay a couple of bills, maybe or invest in a stock; after all 60k is 60k. We rationally equate what price we offer to other things. But often times the owner whom we are trying to purchase the horse from does not think that way. He does not see that the 60k can pay his feed man, give him 3 replacement 20 claimers, and so on. He only sees his horse and the story with the horse; how he bought him as a yearling, fed him carrots, worked with him (in a trainer's case), travelled to a track to watch him race; the memories. He or she equates its value with a story, not with economic reality.

I think this can explain a little bit about "rna's" at breeding sales, as well. "I picked this cross with tons of research, I raised the horse with the finest grains, and he will be a champion. You are only bidding $22,000? I am buying him back."

There is currently a push in Ontario to rejuvenate the claiming game. Some believe that changing the claiming jail time rule might help out. That is a worthwhile debate, but one thing we can not make trainer-owners or owners who have had a horse for a long time do, is price them. People who race their horses in protected classes are often called "bad businessmen" but in fact, as Dan Ariely's research shows, it is not that at all. They have an attachment to their horse, and to pry it from them takes cash; sometimes irrational amounts of cash.

The next time I ask someone to sell a horse, I will look at it from a whole different perspective. Although they are being irrational, at least now I know that it is an irrationality of a predictable variety.