Researchers got some students in Prague to taste an unpleasant mixture of Fanta, salt and vinegar and then to say how much they would need to be paid to drink a larger quantity of the concoction, with those who stated a below-median price being required to actually drink it. This exercise was repeated ten times.
They found that subjects' offers were strongly influenced by the median price elicited in previous auctions. This is not necessarily irrational; someone wanting the money rather than the nasty taste would want to bid a penny less than the median. What is odd, though, is that those subjects who were told about the lowest offers offered lower prices themselves, which was against their own interests. "Preferences are endogenously determined by the market process themselves", they conclude.
This experiment shows that these peer pressures matter even when people's choices are anonymous - that is, in the absence of social pressures to conform. They also matter even in purely private contexts, when people must weigh their idiosyncratic distaste for the drink against their desire for money.
Consumers' choices are shaped by the When Harry met Sally principle: "I'll have what she's having."
One reason for this might be that preferences are, within some range, indeterminant; this might also explain another anomaly from the perspective of conventional theory, that consumer choices are shaped by how they are framed. This point was classically made in a famous (though apocryphal) exchange between George Bernard Shaw and a socialite:
'Would you sleep with me for... for a million pounds?' `Well,' she said, `maybe for a million I would, yes.' `Would you do it for ten shillings?' said Bernard Shaw. `Certainly not!' said the woman `What do you take me for? A prostitute?' `We've established that already,' said Bernard Shaw. `We're just trying to fix your price now!' "
In fact, though, Shaw was being a little harsh: his interlocutor's preferences were merely less well-defined than standard theory assumes.
This might explain a lot. It might contribute to the emergence of Adler superstars (pdf) - musicians and authors who make millions despite a lack of talent: as Andrew Hill says, people want to buy what others are buying. It might also explain the Steve Brookstein effect - the tendency for apparently popular X Factor winners to sink quickly into obscurity; it's because popular preferences might not be as strong as they seem.
You might think this is just yet another attack on orthodox neoclassical economics. I suspect, though, that the problem goes further. Political preferences might also be endogenous; other laboratory experiments show that our attitudes to inequality - to take just one example - are shaped by an anchoring effect or by simple resignation. It might, therefore, be that our political preferences are also endogenous and do not serve our interests. If so, the problem with democracy isn't (just) the politicians, but the voters.