2008-06-11

Einstein’s Theory of Frugality in Shopping


If you are or were a steak lover, and had already made the decision to eat out at a nice steakhouse, maybe for a special occasion—which of these would you pick?

EINSTEIN’S HOUSE O’ STEAKS


Chateaubriand (24 oz.) $44.99
Porterhouse (24 oz.) $36.99
Tenderloin (16 oz.) $19.99


Or let’s say you’d already made the decision to buy a new flat-panel television, and had saved up enough to do it (so budget or saving money was no longer your driving motivator)—which of these would you pick?

EINSTEIN’S HOUSE O’ TVs


Philips 50” flat panel $1599.99
Toshiba 42” flat panel $849.99
Panasonic 36” flat panel $690.00

If you’re like most folks, you’d pick the middle choice in each of these examples. (None of these prices are from actual restaurants or televisions, by the way.)

So what?

It turns out most people pick the middle choice for a very particular reason. It looks like the best choice relative to the other choices presented. The television example was based on one used by MIT Professor Dan Ariely in his book, Predictably Irrational. Ariely notes most people do not have such extensive knowledge and have not done such extensive research that they can readily compare a Panasonic to a Philips, at these different sizes (or by extension, distinguish the best value among different steaks (in this example, all being similar cuts)). So they compare among the choices presented, as best as they can.

In the television example, the $1599.99 price may seem a bit steep—so by comparison, the $849.99 price looks more reasonable. In the steak example, the $44.99 price makes the $36.99 price seem more reasonable. On top of that framing, those two steaks are the same size (24 oz.) It’s relatively easy to compare two steaks of the same size and see that there is an apparent value in the less-expensive one. It’s relatively difficult to try to do math and see if that third option (16 oz.) may work out to a better price per ounce. (And in this example, it did.)

Ariely refers to this as relativity—and observes:

[M]ost people don’t know what they want unless they see it in context….We don’t know what kind of speaker system we like—until we hear a set of speakers that sounds better than the previous one… Everything is relative, and that’s the point. Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.


Ariely uses the Ebbinghaus illusion to illustrate how relativity can even play tricks on our senses:

The center circles in each image are the same size—but the relative size of the circles around them make them appear to be different sizes. The same type of thing happens when we look through different models of a product at a store or read through a menu at a restaurant. And the stores and restaurants know this!

Consider what a New York Times article says about how restaurant menu prices are set:

A new breed of menu “engineers” have proved that highly priced entrees increase revenue even if no one orders them. A $43 entree makes a $36 one look like a deal. [¶] “Just putting one high price on the menu will take your average check up,” said Gregg Rapp, one such consultant. “My mom taught me to never order the most expensive thing on the menu, but you’ll order the second.”

Ariely has done experiments to confirm that the addition of a most-expensive option or even a decoy option that makes another particular option look more attractive consistently drives consumers toward a particular choice—the one that the store or restaurant is pushing!

So what are we to do?

My takeaways are:

  1. Do more thorough research (at least where the size of the purchase warrants it) so that you are better able to identify the best value.
  2. Understand and remember that the “most expensive” option may be presented simply to make other prices seem more reasonable.
  3. Understand and remember that there may be a decoy option presented that makes a similar-looking option seem better—but that it may distract from some other option that is really the best option.

In his book, Ariely suggests stepping back to keep the big picture in mind—and boils it down to the simplest suggestion of changing our points of comparison to “break the cycle of relativity.”

By the way, Ariely has a website, Predictably Irrational, in which he discusses and builds on the findings of his book—so check it out!


Related Posts:

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)

Keeping Up With The Joneses Redux — Real or Imagined?

Frugality and Chocolate Sundaes

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