Oct 182015


Most people realize that companies are in the business of making money. They like using marketing that targets loopholes in our seemingly rational psychology. Lots of self proclaimed “savvy consumers” think they are smart enough to avoid clever sales tactics. WRONG. Like it or not everyone succumbs to marketing! Education and abstinence are your best tools.

Predictably Irrational by Dan Ariely describes these psychological loopholes that often end up with us buying more stuff. Lets take a look at some:

1 – Relativity – Making decisions based on bogus comparisons

Given the choice between A, the slightly inferior A-, and B, most people will choose A

Given the choice between A, the slightly inferior A-, and B, most people will choose A

Imagine you are buying wine and there are three choices. You don’t know much about wine so you base your decision on price. The prices are $10, $25, and $30. You don’t want to appear cheap to your hot date so you axe the cheap one, and you are conscious of saving money so you axe the $30 one and go with $25.

Little do you know the $25 wine is exactly what the restaurant wanted you to pick. They understand that most people won’t buy the most expensive item, but they will buy the second most expensive. The priciest item is a decoy. Here is an example right from Predictably Irrational:

You want to subscribe to the Economist magazine. The choices are:

  • Economist.com subscription – $59
  • Print subscription – $125
  • Print + web subscription – $125

Wait what? Why is the print + web the same price as print? does that mean the web is actually free? Well if that’s true then it’s a great deal and you buy the print + web for $125.

Those clever marketing boys and girls from the Economist got you! They know that the print subscription won’t sell. It’s only there to make the print + web look better. It’s a decoy. In the Economist experiment when the print option was removed suddenly the sales tipped in favor of the web only subscription. The reason is that humans don’t really know what things are intrinsically worth and we often base our decisions on the value of a thing by what other items cost around it.

One final example: When bread machines were first introduced by Williams-Sonoma no one had any idea what a bread machine should cost. $250? $600? WS put out one model for $250 and sales were poor. But then they put out a “deluxe” model for $475 which served as a price reference. $250 seemed like a good deal compared to $475 and sales skyrocketed!

How to avoid/take advantage: Watch out for items that are clearly decoys and ignore them.

Outside of finance this idea rings true as well. If you are looking to court an attractive member of the opposite (or same) sex bring along your similar looking, but slightly less attractive friend as a decoy to make yourself look better in comparison.



2 – Price Anchoring – Using the first price encountered as the basis for all future comparison


One day I was walking through a market in China and noticed an interesting piece of Jade. The owner approached me and wrote on his pad 650¥ (about 100USD). He immediately crossed it out and wrote 450. Having been to many other markets at this point I counter-offered 30. He laughed and dropped his price to 300. This continued on for some time and eventually I walked away 50¥ (8USD) poorer with my new jade (which has since spend the majority of its life in my dresser drawer).

The shop owner was hoping that I had no idea what jade was worth and thus assume that 650 was the going price. The initial drop from 650 to 450 would then seem like a fantastic deal. Unfortunately for him I was already somewhat aware of the value of that piece of jade. I had already “anchored” to a price that was significantly lower and from my point of view 650 was utterly outrageous.

I notice this all the time, especially for more intangible items like admission to amusement parks. Have you noticed how places like Six Flags and Disneyland always seem to have deals? They don’t expect anyone to actually pay full price. But when you see $20 or $30 off suddenly paying $50 seems like a good deal even though it’s still $50. The full price is the decoy anchor that tricks you into thinking $50 is a fantastic price.

Another example is department stores that nearly always have a “sale”. They want to sell those sweat shop jeans for $30, but if they put the regular price at $50 and it’s $20 off for 10 months out of the year you are more likely to go for them.

How to avoid/take advantage: If you are the SELLER, kick up your initial offer by 20% to set that anchor higher during the negotiations. If you are the buyer, do the opposite. Be aware of point #1 as well. Consider the absolute value of something rather than relative value between a standard/deluxe item. I like to think about things in terms of how many foot-long subs I could by. Hmm, Six Flags, or ten foot-long subs…



3 – Zero Price Effect – Attributing excess value to something that has “free” attached to it


Free room, free food, free swimming pool, free HBO… oooh! Free Willy!

Imagine buying a chocolate bar from a streetstand. They are offering full-sized Oh Henry for $0.50 and Hershey’s Kisses for $0.01. You can only buy one though, not both. The Oh Henry seems to be a pretty good deal since normally it’s around $1 or $1.50, plus it’s tastier than the kiss. You buy the Oh Henry

Now imagine the same situation except the Oh Henry is $0.49 and the kiss is free(up to three free ones). Suddenly the kiss becomes more appealing(depending on your taste). Free chocolate or paying for chocolate? Most people will choose the free option. But wait. All that changed was a price drop of one cent. The Oh Henry is still great value, why is free so seducing?

Getting something for free is like cat nip for consumers. It warps our ideas of value because there is no downside getting a free item. For normal purchases we weight the upsides and downsides but if something’s free we ignore the downsides. Free can make us blind to potentially fantastic deals and ignore what we really want or need. Maybe we walked up to that candy stand with the intention of buying an Oh Henry, but the free chocolate was too tempting to pass up.

In the real world businesses use “free” to separate you from your money all the time. For example: Lets say you want to buy a new car. You narrow it down to a Civic or a Corolla. The Honda dealership makes an offer of $18,000 and Toyota offers $17,000, but Honda throws in free oil changes for the first year. Hey free oil changes! Heck yea let’s do it! You buy the Civic. But wait, in the first year you’ll maybe have three oil changes? Which cost at most $50? You just spent an extra $1000 to gain $150 in freebies. Whoops.

How to avoid/take advantage: Stop and take a step back when you see the word “free”. Lump the cost of the free item into the value of the entire package. Buy one get one free? It’s 50% off each.



4 – Artificial Scarcity – Rare things are more valuable

Businesses create a sense of urgency in consumers when they run a “1 day only” sale or state in their ads that “quantities are limited”. Well quantities are rarely limited and the business would gladly keep the sale price if it meant you’d still buy it.

Humans are loss averse, we would much rather avoid losing something that gain something. Artificial scarcity instills a sense of urgency and potential loss since that special discount will soon be gone. You’d better drop your money now or risk paying full price! Here is a list of examples I’ve come up with, how many have you acted upon?

  • Any kind of temporary sale
  • Airlines – “Only 3 tickets left at this price!”
  • Hotels – “Only 1 room left!”
  • Ebay auction timers – “Bid now only 10 minutes left!”
  • Infomercials – A 5 minute timer and countdown of remaining items
  • Liquidation/Overstock sales – “Only a few left at liquidation prices!”
  • Groupon 24 hour deals
How to avoid/take advantage: Recognize when the business is using artificial scarcity. Don’t impulse buy. Sales nearly always come back! Plan your purchases accordingly and wait for the item to go on sale. If something is worth buying you should be willing to pay full price (just wait for the sale)

We’ve all fallen for these tactics at some point and I’m no exception. Being aware of the strategies can help prevent some of the more obvious tricks from working. Remember most companies are in the business of separating you from your money and it’s up to you to stop them! Don’t end up with a house full of stuff that you don’t need. Be a smart consumer.

If you are interested in Predictably Irrational you can find it here

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  1. […] is only $100. This might just be a ploy to get you to spend more money as I talked about in my last post on relativity. Or it might be that one-way travelers are more rare, and based on supply and demand the cost is […]

  2. […] (myself included) could sell 40% of their belongings and barely notice. The problem is that the human mind is bad at assigning value. The saying “one man’s trash is another man’s treasure” is wrong. It should […]


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