The word placebo comes from the Latin and means I shall please. The placebo effect is a positive response to the placebo (their condition is improved) despite the fact that the placebo is inert. (Often the placebo is a sugar pill or a saline solution.)
To ascertain if a medical treatment is helpful, researchers run an experiment. In the experiment the subjects are divided into two groups -- the experimental group which receives the treatment and the control group which does not receive the treatment.
When working with humans, the subjects in the control group know they are in the control group if they do not receive any form of treatment. In order to control for this, the control group is administered an inert substance (which is sometimes referred to as a placebo.)
A related effect is the nocebo effect (I shall harm) where the subject has an adverse reaction despite the fact that what is administered is inert.
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