Bargains That Aren't
ByTim Harford
Published:
July 13, 2008 in Parade magazine
Not
everything that seems like a bargain will really end up saving you
money. Luckily, behavioral economists are finding the gimmicks and
tricks that regularly lure us to spend more. Read this—and don’t get
caught!
ANYTHING YOU BUY ON CREDIT
Putting
a purchase on a credit card with a zero interest rate may seem like a
good deal, but you’re less likely to shop frugally when you’re using
it—or any kind of credit card. MIT researchers Drazen Prelec and Duncan
Simester ran an experiment in which two groups of subjects were allowed
to bid on tickets to sporting events. One group had to pay in cash
within 24 hours, the other with a credit card. The credit-card group
offered much more for the tickets—and more than twice as much for a
sold-out game. Other studies suggest that people who pay with plastic
spend more and tend to forget how much they spent.
MANUFACTURERS' REBATES
Many
electronics are sold with a rebate, and those tempting discounts can
sometimes sway buyers to particular brands. But studies show that less
than half of all rebates are successfully redeemed. That’s no accident,
says Prof. Richard McKenzie of the University of California, Irvine,
author of Why Popcorn Costs So Much at the Movies. Companies
can introduce an obstacle by manipulating the window in which a rebate
can be redeemed (for example, making it 10 days long, starting three
weeks after purchase). Then there’s “slippage”—customers are mailed
checks but never cash them because the checks expire first or people
throw them away without realizing what they are. “Rebate checks can be
mailed in envelopes designed to look like junk mail,” McKenzie says,
adding that “rebates are fading out. People are beginning to learn.”
AN EBAY AUCTION DEAL
Auctions
get people excited, and excited people are likely to overpay. “Almost
half of all auctions contain overbidding,” says Assistant Prof. Ulrike
Malmendier of the University of California, Berkeley. Overpayments are
easy to spot, because eBay sellers often offer identical goods for a
fixed price. Malmendier and colleague Young Han Lee found that some
eBay winners could have gotten higher-quality goods from more reputable
sellers and paid less—by buying at a set amount. To avoid succumbing to
auction-induced exuberance, they suggest submitting a one-time maximum
bid equal to the fixed price available elsewhere on eBay. If you are
outbid, forget the auction and buy it at the set price.
MID-RANGE PRODUCTS
Think
that a mid-range camera—or dishwasher or toaster—is the perfect
compromise between value and luxury? Think again. Prof. Itamar Simonson
of Stanford University revealed the catch in a classic experiment where
subjects were asked to choose between an expensive, high-end camera and
a cheaper model. He found that more subjects went for the high-end
camera when they also were presented with a third choice: an even more
expensive, feature-laden product, which made the “mid-range” option
seem modest by comparison. “A company can exploit customers’ preference
for the middle item,” says Simonson, “by presenting a more expensive
item next to the one it is really trying to sell.”
FREE STUFF
Prof. Dan Ariely of Duke University, the author of Predictably Irrational,
has discovered that free products trigger an emotional reaction that
can cause consumers to lower their guard. “Most transactions have an
upside and a downside,” he explains. “When something is free, we forget
the downside.” Some of Ariely’s examples: free shipping on larger
orders from an Internet retailer that causes you to buy things you
don’t need in order to qualify, or “free” DVDs that come with an
overpriced DVD player. Even free entry to a museum or gallery can cost
you in time due to longer lines and crowds.
YEARLY GYM MEMBERSHIPS
We
all know people who sign up for a 12-month gym membership- in
January—and give up their fitness regimes by March. Why do they enter
into such costly commitments? “People make a choice that suggests
they’re too confident about their future attendance,” says Ulrike
Malmendier of UC Berkeley. Malmendier and colleague Stefano DellaVigna
found that four out of five of the gym-goers they studied could have
saved money by paying per visit instead. So before joining for a year,
be realistic about how much you’ll go.
Tim Harford, a Financial Times columnist, is author of “The Logic of Life: The Rational Economics of an Irrational World.”