2008-05-26

Generous Return Policies and “Risk Free” Trials Can Fool Your Frugality

Do you sometimes justify buying something because the return policy liberally allows you to return it? If so, when was the last time you actually returned it?

If you’re like me, this happens a bit too often. I might find something I’ve been looking for in a store at a reasonably good price—or more often, a slightly-higher-than-I-wanted-to-pay price that still feels like it’s within the realm of “reasonable,” especially since it’s a slightly nicer model or has a few additional features than the one I originally had in mind.

Are those additional features worth the addition in price? The sign says I can return it within 30 days, no questions asked. What’s the harm? I can buy it, take it home, and have some time to answer the question whether the addition in price makes sense. If the answer is no, I can just return it.

The problem of course is that I never do return it. It almost always seems worth the addition in price, when assessed in the comfort of my own home. And on those occasions when the twinges of guilt hit harder, I do resolve to return it. Several times. And returning the item sits on my “to do” list, just after “clean out the garage” and “get a root canal.”

My behavior has a name.

Laziness?

Foolishness?

The “endowment effect”?

Ah, thankfully, psychologists explain that my behavior is relatively normal (at least with respect to never getting around returning something). Here’s an excerpt from the Wikipedia entry on “endowment effect“:

[A] hypothesis that people value a good or service more once their property right to it has been established. In other words, people place a higher value on objects they own than objects that they do not. In one experiment, people demanded a higher price for a coffee mug that had been given to them but put a lower price on one they did not yet own.

Money columnist and author Jason Zweig discusses the “endowment effect” in the context of the coffee-mug experiment in his book, Your Money and Your Brain:

What makes you reluctant to sell something you may not have wanted to buy in the first place? … [O]nce you own the mug and are asked to sell it, you focus more on being asked to surrender something that has become yours (and what you like about having it)….What’s more, buying the mug you do not own is like an act of commission; deciding not to sell one you do own feels like an act of omission. Your instincts tell you that you will feel more regret over mistake of action and a mistake of inaction.

The item you buy at the store is like the coffee mug—and deciding to keep it is an act of omission. For most of us, we’d rather find we’d made a mistake in holding on to that precious coffee mug—than find we’d made a mistake in letting it go.

MIT Economics Professor Dan Ariely explains this plays out similarly when you are offered a “risk-free” trial (or the like) in his book Predictably Irrational. He starts with the idea of a subscriber to the “basic” cable-television package being offered the “digital gold” package at a special trial rate:

[We think w]e can always go back to basic cable… [¶] But once we try the gold package, of course, we claim ownership of it. Will we really have the strength to downgrade back to basic…? Doubtful… [O]nce we are comfortable with the digital picture, we begin to incorporate our ownership of it into our view of the world and ourselves, and quickly rationalize away the additional price. More than that, our aversion to loss—the loss of that nice crisp “gold package” picture and the extra channels—is too much for us to bear. In other words, before we make the switch we may not be certain that the cost of the digital gold package is worth the full price; but once we have it, the emotions of ownership come welling up, to tell us that the loss of “digital gold” is more painful than spending a few more dollars a month. We may think we can turn back, but that is actually much harder than we expected.

Zweig and Ariely both refer to psychology experiments that seem to confirm the “endowment effect” (with Ariely describing ones that he conducted himself).

Generous return policies and “risk-free” trials still seem like good things to me—but retailers and other businesses know what they’re doing. Hopefully, understanding the “endowment effect” will help us realize what’s going on—and say no to a few more purchases or trials. Or at least to get around to making returns and ending trials.

Right after root canals.


Related Posts:

Frugality and Chocolate Sundaes

How The Word “Free” Makes Us Lose Our Minds

How Much Is That Coffee In The Window (How Coffee Shops And Others Sneak Past Our Frugality)

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