Far too often, our economic choices are predictably irrational
Published Sunday, March 16, 2008
Last weekend I decided to buy a pair of shoes online. I knew what I wanted, so in less than five minutes I was ready to check out.
Then a banner at the top of my screen notified me that if I spent $75 I would receive free shipping. My shoes were $65. If I spent $10 more, I could save $7.95 on shipping. I rationalized that a $10 item would really only cost me $2.05, so I started searching for something else to buy. I wasted quite a bit of time looking at numerous things I didn’t need: socks, radios, hats, vest, sunglasses, flashlights. I finally settled on a $16 T-shirt that I may never wear. But hey, with free shipping, it only cost me $8.05. How could I pass up such a great deal?
As I write this, I am able to sit back, shake my head and ask myself, “What was I thinking?” I admit that I have asked myself this question more than once, because such marketing gimmicks have a way of luring me in. I manage to justify buying things I don’t need by telling myself that the deal is too good to pass up, which is why I have a jumbo-size container of chicken bouillon cubes in my cupboard that will still be there long after I have passed on.
It brings me some comfort to know I am not alone in my irrational behavior. Dan Ariely, a professor at M.I.T., has been studying behavioral economics for almost 25 years and found that many people are irrational in their economic choices. In his book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions,” Ariely explains that although we believe we are always thinking rationally about how to best use our money and time, quite often, we are not. He states, “Our irrational behaviors are neither random nor senseless-they are systematic.” What’s more, we “make the same types of mistakes over and over.”
If we always thought rationally, we would never fall for two-for-one specials when we only need one of the items. We wouldn’t order dessert when we’re on a diet. We wouldn’t try to keep all our options open when one option is clearly better than the others. We wouldn’t still have a headache after taking a five-cent aspirin, while the same headache vanishes when we take the same aspirin costing 50 cents. We wouldn’t spend almost all of our disposable income when we know how important it is to save. We wouldn’t fall so easily for marketing gimmicks that offer something for free, when we know such things always end up costing us something.
Ariely conducted an experiment in which people were asked if they would prefer a 15 cent Lindt truffle or a 1 cent Hershey’s Kiss. Seventy-three percent chose the truffle and 27 percent chose the Kiss. When they dropped the price of the chocolates by a penny, making the Lindt truffle 14 cents and the Hershey’s Kiss free, only 31 percent chose the Lindt chocolate and the Hershey’s Kiss suddenly became the favorite. Ariely concluded that when things costs money, people tend to rationally compare price and quality before making their decision. But the allure of getting something for free tempts people to ignore other reasonable options.
In another experiment, management students at M.I.T. were asked to write the last two digits of their Social Security number on a piece of paper. Then they were asked whether they would be willing to pay that many dollars for various items presented to them: books, bottles of wine, candy, etc. Next, they were asked to write down the highest amount they would pay for each item. The students rejected the suggestion that the last two digits of their Social Security number influenced their bids. But the results showed that when Social Security numbers ended with figures lower than 20, they made low bids for the items; about $70 dollars total. As the last two digits in the students’ Social Security numbers went up, so did their bids. The group with Social Security numbers ending in the 80 to 99 range bid the same items up to an average of a $198. Though their Social Security numbers were irrelevant to the value of the items, this “anchoring” effect influenced how high students would bid.
In his book, Ariely describes many different scenarios in which our minds play tricks on us. He says that understanding why we make “predictably irrational” decisions is the first step in overcoming them. As for me, the next time I see a free shipping offer, I’m hopeful I won’t cave so easily.
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