Bandwagon effect

The bandwagon effect, also known as the "cromo effect" and closely related to
opportunism, is a phenomenon—observed primarily within the fields of microeconomics,
political science, and behaviorism—that people often do and believe things merely because
many other people do and believe the same things. The effect is often called herd instinct,
though strictly speaking, this effect is not a result of herd instinct. The bandwagon effect is
the reason for the bandwagon fallacy's success.

The bandwagon effect is well-documented in behavioral science and has many applications.
The general rule is that conduct or beliefs spread among people, as fads and trends clearly do,
with "the probability of any individual adopting it increasing with the proportion who have
already done so".[1] As more people come to believe in something, others also "hop on the
bandwagon" regardless of the underlying evidence. The tendency to follow the actions or
beliefs of others can occur because individuals directly prefer to conform, or because
individuals derive information from others. Both explanations have been used for evidence of
conformity in psychological experiments. For example, social pressure has been used to
explain Asch's conformity experiments,[2] and information has been used to explain Sherif's
autokinetic experiment.[3]

When individuals make rational choices based on the information they receive from others,
economists have proposed that information cascades can quickly form in which people decide
to ignore their personal information signals and follow the behavior of others.[4] Cascades
explain why behavior is fragile—people understand that they are based on very limited
information. As a result, fads form easily but are also easily dislodged. Such informational
effects have been used to explain political bandwagons.[5]

Origin of the phrase

Literally, a bandwagon is a wagon which carries the band in a parade, circus or other
entertainment.[6] The phrase "jump on the bandwagon" first appeared in American politics in
1848 when Dan Rice, a famous and popular circus clown of the time, used his bandwagon
and its music to gain attention for his political campaign appearances. As his campaign
became more successful, other politicians strove for a seat on the bandwagon, hoping to be
associated with his success. Later, during the time of William Jennings Bryan's 1900
presidential campaign, bandwagons had become standard in campaigns,[7] and "jump on the
bandwagon" was used as a derogatory term, implying that people were associating
themselves with the success without considering what they associated themselves with.

Use in microeconomics
In microeconomics, bandwagon effect describes interactions of demand and preference.[11]
The bandwagon effect arises when people's preference for a commodity increases as the
number of people buying it increases. This interaction potentially disturbs the normal results
of the theory of supply and demand, which assumes that consumers make buying decisions
solely based on price and their own personal preference. Gary Becker has even argued that
the bandwagon effect could be so strong as to make the demand curve slope upward. This
belies the fact that there is no empirical evidence for a bandwagon demand relationship with
a positive coefficient. Others argue further that a positive coefficient is inconsistent with
demand parameterizations and generates comparative static implications that are untenable.[12]
See network effect and Veblen good.

Snob Effect

• The snob effect refers to the desire to own unusual, expensive or unique goods. These
goods usually have a high economic value, but low practical value. The less of an
item available, the higher its snob value.
• Examples of such items with general snob value are rare works of art, designer
clothing, and sports cars.
• In all these cases, one can debate whether they meet the snob value criterion, which in
itself may vary from person to person. A person may reasonably claim to purchase a
designer garment because of a certain threading technique, longevity, and fabric.
While this is true in some cases, the desired effect can often be achieved by
purchasing a less-expensive version from a reputable brand. Often these high-end
items end up as closeout items in discount stores or online retailers where they may be
offered at deep discounts from original price, bringing into question the true value of
the product. Ultimately, wealthy consumers can be lured by superficial factors such as
rarity, celebrity representation and brand prestige.
• Collectors within a specific field can suffer from snob effect, searching for the rarest
and often most expensive collectibles. Such examples are classic automobiles, stamps
and coins.

Veblen good
Luxury cars, particularly at the higher end, like the Rolls Royce Phantom pictured here, are
often said to be desirable due to their price. As a result it is argued that luxury cars are Veblen
goods.

In economics, Veblen goods are a group of commodities for which people's preference for
buying them increases as a direct function of their price, as greater price confers greater
status, instead of decreasing according to the law of demand. A Veblen good is often also a
positional good.

Explanation
Some types of high-status goods, such as high-end wines, designer handbags and luxury cars,
are Veblen goods, in that decreasing their prices decreases people's preference for buying
them because they are no longer perceived as exclusive or high status products. [2] Similarly, a
price increase may increase that high status and perception of exclusivity, thereby making the
good even more preferable. The Veblen effect is named after the economist Thorstein
Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.[3]
However, this 'anomaly' is mitigated when one understands that the demand curve does not
necessarily have only one peak. The goods generally thought to be Veblen goods are still
subject to the curve since demand does not increase with price infinitely. Demand may go up
with price within a certain price range, but at the top of that range the demand will cease to
increase before it begins to fall again with further price increases. At the other end of the
spectrum, were luxury items priced equal to non-luxury items of lower quality, all else being
equal more people would buy the luxury items, even though a few Veblen-seekers would not.
Thus, even a Veblen good is subject to the dictum that demand moves conversely to price,
although the response of demand to price is not consistent at all points on the demand curve.

Veblen goods and consumer psychology is a major theme of late 20th century novels such as
Viktor Pelevin's Generation P and Frédéric Beigbeder's 99 Francs.

The Veblen effect is one of a family of theoretically possible anomalies in the general theory
of demand in microeconomics. Other related effects include:

• the snob effect: preference for goods because they are different from those commonly
preferred; in other words, for consumers who want to use exclusive products, price is
quality;[4]
• the bandwagon effect: preference for a good increases as the number of people buying
them increases;

These effects are discussed in a classic article by Leibenstein (1950).[5] The concept of the
counter-Veblen effect is less well known, although it logically completes the family.[6]

None of these effects in itself predicts what will happen to actual quantity of goods demanded
(the number of units purchased) as prices change—they refer only to preferences or
propensities to purchase. The actual effect on quantity demanded will depend on the range of
other goods available, their prices, and their substitutabilities for the goods concerned. The
effects are anomalies within demand theory because the theory normally assumes that
preferences are independent of price or the number of units being sold. They are therefore
collectively referred to as interaction effects.

The interaction effects are a different kind of anomaly from that posed by Giffen goods. The
Giffen goods theory is one for which observed demand rises as price rises, but the effect
arises without any interaction between price and preference—it results from the interplay of
the income effect and the substitution effect of a change in price.

Recent research has begun to examine the empirical evidence for the existence of goods
which show these interaction effects.[7] The Yale Law Journal has published a broad
overview.[8] Studies have also found evidence suggesting people receive more pleasure from
more expensive goods.[9]

forecasting

Definition
Planning tool which helps management in its attempts to cope with the uncertainty
of the future. It starts with certain assumptions based on the management's
experience, knowledge, and judgment. These estimates are projected into the
coming months or years using one or more techniques such as Box-Jenkins models,
Delphi method, exponential smoothing, moving averages, regression analysis, and
trend projection. Since any error in the assumptions will result in a similar or
magnified error in forecasting, the technique of sensitivity analysis is used which
assigns a range of values to the uncertain factors (variables). A forecast (which
indicates what 'might' happen) should not be confused with a budget (which shows
what 'ought' to happen). See also backcasting.