Standard economic theory assumes that we are rational, but we are not. Most of the time, we’re deeply irrational. Irrationality can be amusing or perplexing. It can also be unimaginably painful. Traditional economics posits a world where people act rationally and make economic decisions based on their own best interests but we generally do not observe this happening in the real world.

Are you more likely to admire a $5 bottle of wine, if I lied to you and told you that it costs $45? Research says you are! Members of the Stanford Wine Club were invited to taste 5 bottles of wine and rate them based on their liking. Actually, there were only 3 different wines in those bottles– two wines had two bottles each. Each bottle was marked only with the price tag and nothing else. Some of the same wines were marked at significantly different prices. For example, the $5 wine and the $45 wine were actually the same, the true cost being $5. There was a clear correlation between the rating of the wine and the price tag — more expensive wines got systematically higher ratings. So the $45 bottle of wine got a significantly higher rating than the $5 bottle, although they were the exact same wine!

In another experiment, the same group was asked to rate the same wines again. Only this time even the price tags were absent. The cheapest wine was ranked the highest in this case.

Consider another experiment, where students were given a caffeine rich drink that was supposed to improve their alertness and focus in the short term. Their task was to solve as many puzzles as they can. Half of the group was asked to pay the full price of the drink, and the other half was given a significant discount on the price. The group that got the discounted drink, solved 30% fewer puzzles! This result has been consistent in multiple such studies over time.

So what is going on here? Well, turns out that we inherently expect cheaper stuff to be inferior. This feeling runs so deep, and its effect so profound on our brain, that the cheaper stuff truly ends up having inferior performance. It becomes a self-fulfilling prophecy. So the folks from Stanford Wine Club were not being snobs when they rated the ostensibly more expensive wines as tasting better. They truly did enjoy the wines with higher price tags more.

There is a generic belief that humans are completely rational. It is easily understandable why a belief like this is popular. People want to think of themselves as rational because anything else would get them out of our comfort zones. It would be frustrating to know that our choices do not derive from a logical assumption of our personal decision-making process but as an outcome of uncontrolled, unconscious processes. We want to think that we are rational because this is the rational thing to believe.

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