So which would you choose?
- Option A: Buy two Brand X candy bars for $10.
- Option B: Buy one Brand X candy bar for $11 and get a second candy bar free.
Put like this, the choice is obvious. You can have two candy bars for $10 or for $11. The problem is that it’s rarely put like this, and there is always a calculation we are forced to make to get to the two relevant numbers of $10 and $11.
Dan Ariely is a behavioral economist with posts at MIT and Duke who was just interviewed in Money. In the interview, he talks about how consumers get blinded by the allure of getting something for “free.” He mentions his own experience in deciding to purchase one car over the other because of the offer of free oil changes—though he later figured out the value of those oil changes was negligible relative to the purchase (maybe $150-200). He even conducted an experiment giving candy away at 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.
Ariely goes on to explain how consumers are often overly influenced by relative prices. Essentially, when you go shopping for a particular item, you’ll likely see lots of the choices together at the store. If the most expensive version of that item is $100, it may seem fine or even a deal to get the one that costs $60. But if the most expensive version of that item is $160, it may seem fine to get the one that costs $100. Even if you really don’t need the more expensive one, you’re likely to be influenced by the relative price and buy more than what you need. In the consummate example, Ariely warns, “Letting a broker show you a house above the top of your range can be costly.”
The tips I take from this are:
- If you see the word “free,” realize that the offer is being packaged to influence you. Try to stop and do the math on how good a deal it is (or isn’t).
- When a salesperson tries to show you a higher-end product than what you requested, realize again that you are being “sold”—and cut off that effort early.
- Ariely also chips in a specific suggestion: “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.”
For the full interview, see the April 2008 issue of Money. (As of the time of this post, I did not see this up on the website yet.)
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