Why you're a big sucker
Behavioral economist Dan Ariely says he isn't a logical consumer - and neither are you.
(Money Magazine) -- Bet you think you spend money pretty sensibly. Well, Dan Ariely would bet you don't. A noted behavioral economist with current posts at MIT and Duke, Ariely has been proving for years that consumers often spend more when they plan to spend less.
Now he's put his findings into layman's terms in a new book, "Predictably Irrational: The Hidden Forces That Shape Our Decisions." In it, he explains how marketers exploit our blind spots of logic and how we can see them coming. Today's shaky economy, he argues, is no place to waste money being irrational.
Question: What's one of our biggest, most illogical weaknesses as consumers?
A. "Free" offers. When the price of something is said to be zero, it blinds us. We get so excited, we fail to realize that we'll end up paying in some way.
Question: For instance?
A. When I bought a car a few years ago, I debated between two choices. One was less practical but had a special deal going for it: free oil changes for three years. This sealed the decision for me. Later I realized that since I don't drive much, it was only $150 to $200 in savings. And in the end I was left with a less practical car.
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.
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.Send feedback to Money Magazine