Why you're a big sucker

Behavioral economist Dan Ariely says he isn't a logical consumer - and neither are you.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Paul J. Lim, Money Magazine senior editor

dan_ariely.03.jpg
Behavioral economist Dan Ariely says there's no cure-all for overcoming consumer irrationality.
CLICK HERE

(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.  To top of page

Send feedback to Money Magazine
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
These 10 food trends could dominate 2015 So long, kale. Here's what's expected to shake up the food industry next year. More
Beyond Russia: Geopolitical hot spots in 2015 Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More
These 20 antique guns could fetch big bucks Morphy Auctions in Pennsylvania is putting nearly 1,000 old guns on the block. Here are just a few. More


Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.