Bargains that aren’t

20th July, 2008

First published: Parade Magazine, 13 July 2008

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!

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.

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.”

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.

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.”

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.

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.”

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