The Giffen good is a strange beast from economic theory. For most goods, demand decreases as price increases. A Giffen good defies this normal market behavior — the demand for it increases even as its price increases.

Giffen goods have a very interesting history. They were postulated originally by Alfred Marshall in his 1895 book The Principles of Economics. The classic example is staple foods such as rice, wheat, and potatoes. As their price goes up, poor people on a tight budget actually consume more of them, because they are forced to cut back on luxuries such as meat, but still need the same number of calories to survive. Until recently, Giffen goods remained a theoretical beast, with no real documented examples — until 2007, when two Harvard economists demonstrated that rice and noodles behave as Giffen goods in certain poor parts of China.

Google’s recent results raise the possibility that search advertising might be a Giffen good. Here’s a simple model. Company X spends marketing dollars on two channels: search advertising and brand advertising (on the web or on TV and magazines). Search advertising drives customers directly to their site, resulting in immediate sales. Brand advertising drives organic traffic, albeit in a more unmeasurable way.

Do you take into account the hidden cost when making decisions? It’s one of those areas where I used to fail miserably. I’ve learned to take it into account over the last couple years, but only recently was able to formulate the concept properly.

The idea goes something like this: Behind most obvious decisions is a non-obvious hidden cost, which can often outweigh the benefit of the “obvious” decision.

…if an engineer had designed the drive-through, you would probably have to pay before they started making your food. Impossible to game, flaw destroyed. The problem is, what’s the cost of the extra time involved in waiting until you receive payment before you start making the food? And what’s the cost per meal wasted times the number of times that the customer is not able to pay? There’s a reason they start making your food right away: It saves a ton of time, and people are able to pay most of the time.

Seems obvious, right? Then why do we still insist on requiring two password fields, one for verification? Or two email fields? Sure, a banking application might require this… but your average web app? You could look at it this way: What’s the chance that someone will mistype both their email AND password, weighed against the drop-off in signups because of the extra form fields. You will drop a significant number of sign-ups with the added fields, but there will be a very small percentage of people who get both their email and password wrong.