Why do people overpay?

The Red Sox won the World Series a few days ago in Boston. During the post game celebration one car was flipped over and destroyed. The owner of that car was Chad Duncan, one of my ex-student’s from a few years ago.

Chad got a lot of press (News video here and Written story here) and he stated that he lost $2,500 because his car was destroyed. A stranger started a fund to reimburse Chad and when I went to donate about 30 hours after the fund was created the fund had $3,500 in pledges.

The interesting economics question is why do people overpay even when they know they are overpaying? Chad is very clear. His cost is $2,500.  It makes sense to donate until the fund reaches $2,500.  However, donating/paying beyond $2,500 doesn’t seem to make a lot of sense. (Which is why I didn’t chip in.   Sorry Chad!)

It is possible people want to over-compensate Chad for the bother of getting a new car, but if they are doing this then they are valuing Chad’s time at a huge hourly rate.  What do you think is the reason?


4 thoughts on “Why do people overpay?

  1. We are assuming the subjective answer, that the other people value it combined at $3,500, begs the questions. That is true, but does not explain much.

    Do all the marginal people know where the total pledge is at before they pledge?

    • The webpage for donating has the amount raised to date and the amount needed in large numbers so people are informed. This is what made me curious. No one is misinformed.

  2. People are not rational. They see a good in providing $1+ to a stranger. The same reason we tip at Starbucks or other non-tip based wage establishments.

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