Why You're Not A Logical Consumer

CNNMoney has an interesting interview with behavioral economist, Dan Ariely. In the interview, Dan talks about how price comparison (which we take for granted as a “good” habit for consumers to engaging in) may not be very helpful after all. Ha!

Question: How else do we act against our best interests?

A. By comparing prices on similar items.

Question: Wait, I thought that was smart to do.

A. It is, but only if you compare everything with everything. If you just compare items near one another, you open yourself up to being influenced. When you open a menu at a restaurant, you may not realize that the prices you see affect what you’re willing to pay.

If the most expensive entrée is $45, you might decide $30 is an acceptable price. Should the restaurant add a $60 dish, you may be willing to pay $45. The same issue comes up when shopping for real estate. Letting a broker show you a house above the top of your range can be costly.

Question: So how do we overcome irrationality?

A. There’s no cure-all. But when I see the word free, I now ask myself, “What’s the seller trying to do here?” Also, it sounds strange, but try not to look at price, not at first. Decide what you want and what you’re willing to pay without being influenced by outside factors.

Shhh! Don’t tell the consumers!

Why you’re a big sucker [CNNMoney]

Comments

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  1. EmperorOfCanada says:

    Makes sense.. kinda

  2. jk09 says:

    This post doesn’t make sense — idiotic.

  3. MercuryPDX says:

    OK… I’ll be back tomorrow when the joke is over.

  4. Rectilinear Propagation says:

    I think this makes a lot of sense. With that explanation I would not be surprised if stores, restaurants, etc. did this on purpose: offering a pricer item not because they thought they would sell it but because it makes the other items’ prices seem reasonable by comparison.

  5. EmperorOfCanada says:

    @jk09

    it may be a stupid post, but it DOES make sense.. It is saying just because you an item is the cheapest out of similar items doesn’t mean it still isnt a ripoff. It might be common sense but it isnt wrong.

  6. mduser says:

    @MercuryPDX: I’m with you.

  7. @MercuryPDX: Me too. This is getting rather tiresome.

  8. chiieddy says:

    It was actually in this month’s Money Magazine. I read it on the can last week.

  9. dreamcatcher2 says:

    This is actually straightforward psychology… this is definitely not a joke.

  10. SpdRacer says:

    Turtle Power!

  11. redkamel says:

    this article is stupid.
    I assume most people, like me, have learned to have a “fixed frame of reference” (its called money) and 45 dollars is an expensive meal no matter the price of anything else. I price compare with reality, not with what I am offered. I follow the menu analogy, but it is meaningless to me. Same with the house out of my range, which the agent has showed me. Usually after we spend 15 minutes there with me not listening since I already looked at the price, I ask him/her “how much does this cost? why are we here then?”

  12. exkon says:

    Can we officially change April Fool’s Day to “Rick Rolled Day”?

  13. Beerad says:

    Yep, totally makes sense, especially in the context of restaurants or anywhere else that you see a list of prices to compare against each other. That $35 salmon plate may seem like a ripoff if everything else costs $28, but it looks like a much better deal if most things cost over $40.

    I don’t know that it applies quite so much to real estate — real estate is one of those weird things where pricing is based so heavily on what someone THINKS it’s worth rather than what it actually IS worth. You can come up with all the details you want about what you’re looking for, but you are never going to get around the external factor of “what the seller thinks it will go for.” Feel free to underbid everything according to what you perceive as the “true” price, but good luck with that.

  14. Smooooth says:

    From the article: “Also, one Halloween I gave a bunch of trick-or-treaters two Hershey’s Kisses, then told them they could have a small Snickers for free or a huge Snickers for the price of one chocolate kiss. The bigger bar was a better deal, an 8-to-1 return on chocolate. But most chose the smaller one; the idea of getting something for nothing was too tempting.”

    New T-Shirt slogan: “My kids went trick-or-treating and all I got was a stupid economics lesson.”

  15. DrGirlfriend says:

    Why does that behavioral economist look like he’s going to be doing unbelievable feats of magic at his local dinner theater?

  16. CRNewsom says:

    @DrGirlfriend: He does have a David Copperfield look about him. Maybe Copperfield crossed with Chris Kattan. Creepy.

  17. KIRZEN2007 says:

    This is actually quite logical, and it happens more than you think. To give you an idea, at one point in time our sales department had two nearly identical products on the store shelves under completely seperate brand names. One of them was artifically inflated by 20% deliberately to make the lesser model look less expensive.

    In the long run people actually bought both, I figure that they felt that the 20% was an unspoken mark of quality even if the same manufacturers (and infact, the same parts) were going into both sets.

    But it was a direct effort to make the price of the lesser product look more affordable. You can also pad it in the reverse direction, people tend not to buy the cheapest model, they unconciously the cheapest model to be poorly built and unconciously equate the most expensive model to a luxury.

    Lets say someone’s selling a glass of beer @ $3.50 and you’re planning on pushing a beer for $4.50, but you realize that people won’t really identify the added quality. So you make -two- beers, one that sells for $6.00, and one that sells for $4.50. Suddenly on an unconcious level the $3.50 is a ‘cheap’ beer, and the $6.00 is a luxury, and that $4.50 beer is a comfortable middle ground. You’ve alterred peoples impressions of the quality of the product without doing anything other than introducing something more expensive… Even if the more expensive option doesn’t sell well, its likely to drastically improve sales of its equally good, less expensive twin.

  18. SwatLax says:

    Hey April, how are Leo, Don, and the rest of the gang doing?

    Give Splinter and Casey my best!

  19. Orv says:

    @dreamcatcher2: This is why I hate April Fools Day, anymore. Online it’s so hard to tell what’s a joke and what isn’t — especially with how weird reality has gotten in the last few years!

  20. trujunglist says:

    This post makes absolutely perfect sense.

  21. Ghede says:

    I used to find myself purchasing my morning 20oz bottle of Dr. Pepper and thinking “1.25, What a bargain! That place next door sells it for 1.50!” Completely forgetting the fact that a 2 liter bottle costs 99 cents, and has almost three times as much soda.

    To go off on a tangent… why is it a 20oz bottle of soda goes flat in less than a day after you open it, but a 2 liter bottle can a week or two?

  22. shoegazer says:

    The behavior he talks about is called “anchoring”. Starting with a certain value influences the way you perceive prices around that value.

    Example: I offer you a random piece of crap for $50. Then I offer you a slightly crappier random piece of crap for $30. Your perception of value will be colored by the first price and your mind will be fooled into thinking $30 is a reasonable price to pay. Or, you could think “Man I don’t really like the $50 crap but it’s way less crappy than the other one.”

    Think of how restaurants price bottles of wine. The second cheapest wine typically has the highest markup.

  23. guido64 says:

    This is a closing tactic taught by sales trainers if they are any good.

    Sales slime: So Mr Jones, you want what we have to sell here at Amalgamated Widgets, let me tell you a bit about out customers. Some will spend $70 on a widget, some spend $40 and others spend $50. How much did you want to spend on your widget?

    Mr Jones: Though balloon over head; ($70 is too much, and $40 is too little, I will get a lousy widget for $40, so I will go mid range and spend) saying out loud; The $50 widget please.

    All the sales guy did was set an upper point to shock the customer and then offers an easy way out that lets the customer feel they got a good deal and was not too cheap in the process.

    The sales guy is supposed to sell the widget for $50.00.

    This works if you are selling to a person that does not have all of the facts in front of them. It is all because our mindset is often based more on how much of a payment it will be vs. the actual cost of the item.

  24. spinachdip says:

    People who think this article is stupid are stupid.

  25. Meg Marco says:

    @spinachdip: :)

  26. picardia says:

    @Steaming Pile: The bitching is a WHOLE lot more tiresome than the joke, which is just a different way of wording items that would probably be on Consumerist anyway. Seriously, if this is such a mindwarp for you, fuck off until tomorrow so the rest of us can read.

    Where is that ignore button again?

  27. kilrathi says:

    This one isn’t a joke. Some of the people that leave comments on the Consumerist make me question if it’s even worth reforming the system, as they are clearly too stupid to handle differentiating between a real article and an April Fool’s day one.

  28. mac-phisto says:

    joke or no joke, i would generally agree with this statement. even comparing what appears to be the same item at two different stores can skew the reality of what you are getting. just b/c home depot is selling a dewalt impact driver for $200 that appears to have the same model number as the one at ace for $450 doesn’t make it the same. sometimes the difference between model #194573A & #194573G is a lot more than $250 & a few letters.

    when you’re comparing 2 different products, price can definitely screw with you. last time i was at the grocery store, i got a little fed up paying the $8 or so for 30 garbage bags so i bought the $2 100 bag roll of bags so cheap you can see thru them. did i save money? no, b/c now i need to triple bag my garbage so it doesn’t explode in my car on the way to the dump (it still explodes). & when i consider the afternoon i spent deep-cleaning my trunk to get the garlic smell out, i wished i wasn’t such a cheapass.

    then there’s the issue of WAS/IS pricing. stopped at an outlet store last week & was appalled at the “deals” being offered. fleece jacket WAS $69.95/IS $39.95. sounds like a great deal (until you remember that $40 is pretty steep for a fleece jacket).

    it’s good to compare prices, but it shouldn’t be the only factor – or even the primary one – in deciding to make a purchase. definitely shop around, but educate yourself on more than the price tag.

  29. mac-phisto says:

    @Meg Marco: you walking around in a yellow jump suit today?

  30. Poisonthescene says:

    @redkamel: Just because you don’t fall for this doesn’t mean it’s a meaningless article. You’re smarter than the average consumer, congratulations. That doesn’t mean other people don’t need to hear it.

    @spinachdip: I’m with you.

  31. Claystil says:

    Fucking $60 entrées are my budget’s cancer. They get me every time.

  32. Meg Marco says:

    @mac-phisto: Yes. It’s dead sexy.

  33. ooby says:

    @shoegazer: I thought it was called the Straw Man.

  34. mac-phisto says:

    @Meg Marco: well, glad to hear it’s not ben or chris *shudder*. ;)

  35. plinkofrog says:

    Dan is the author of Predictably Irrational. It’s a good read about what he calls “behavioral economics”. One of the interesting tests he did was in regard to comparing a group of things in which two were alike. It’s easier for people to compare the two that are similar and not pay less attention to the rest of the group. I also enjoyed his experiments with the “FREE” chocolates. If you’re at all interesting in this post, check out Predictably Irrational (www.predictablyirrational.com)

  36. Jean-Baptiste Emanuel Zorg says:

    @redkamel:

    this article is stupid.
    I assume most people, like me, have learned to have a “fixed frame of reference” (its called money) and 45 dollars is an expensive meal no matter the price of anything else. I price compare with reality, not with what I am offered.

    I suspect you’re not nearly as fixed in your frame of reference as you would like to think. I could be wrong, of course, and good for you if I am, but the fact is that most people are illogical when it comes to price comparisons.

    I highly recommend the works of Dan Gilbert, a psychologist who has spent years studying just this kind of thing. His book, Stumbling On Happiness, is a bit padded (it could be cut down to half its current size and be just as good), but is truly fascinating.

    A related story that discusses his ideas briefly

  37. Trai_Dep says:

    It’s called framing, people. That’s why you see three models of everything, like little Goldilocks bowls. If you haven’t heard of it, or if you snicker at the rubes that fall for this – look in the mirror. The rube is you.
    Not to say it’s a bad thing, all the time. But something that you need to be aware of, since it can be used for evil (hi, Wal-Mart!).
    Considering how many posts have said this article is dumb, I’d hazard to guess this article is actually pretty on the mark.

  38. Rectilinear Propagation says:

    This is actually quite logical, and it happens more than you think. To give you an idea, at one point in time our sales department had two nearly identical products on the store shelves under completely seperate brand names. One of them was artifically inflated by 20% deliberately to make the lesser model look less expensive.

    @KIRZEN2007: I KNEW IT!

  39. Amy Alkon000 says:

    Ariely’s book, “Predictably Irrational,” which I’m reading now, is fantastic. Great ideas and clear, interesting writing. And no, don’t know the guy, just wanted to spread the work about his book.

  40. squablow says:

    Show them the Cadillac and sell them the Chevy. That’s why car companies have “halo cars”. A Viper sitting in the showroom isn’t making the dealership any money, but it sure helps sell the cheaper stuff on the lot.