Sunday, April 08, 2007

Sunday dollars+sense: Paying not to go to the gym

Here’s how to empty your wallet. Join a gym. I’m not joking. Bridget Jones (the author of the fictional diary) knows all about it. Her diary reads: "Monday 28 April. Number of gym visits so far this year – one. Cost of gym membership per year - $370; cost of single gym visit…"

Bridget has stumbled onto the same secret as Stefano DellaVigna and Ulrike Malmendier, two economists from Berkeley and Stanford Universities. They outline it in a paper evocatively entitled: Paying Not to Go to the Gym.

They examined the gym records of about 8,000 gym customers in Boston over 3 years.

They found that the customers consistently chose contracts that cost them almost twice as much as they needed to spend.

Most customers chose a contract costing $US70 per month... But on average each went to gym just 5 times a month, at an average cost of $17 per visit. They could have bought a 10-visit pass and paid only $10 each visit.

The amount wasted per contract added up to $700. Each customer paid $1,500 instead of $800.

Throughout the United States about $23 billion is probably wasted paying not to go to the gym. In Australian it is probably $1.5 billion.

DellaVigna and Ulrike Malmendier have theories about why. It could be because we get “psychological benefits” from joining gyms, even if we hardly use them. They make us feel virtuous. It could be because we enroll at those times of the year when we are enthusiastic (usually the start of spring or new year’s day) and overestimate how much we will want to work out after that.

Or it could be because we are fighting a war with ourselves: The part of our brain that wants to us to keep fit deliberately buys bad value contracts at the gym in an attempt to force the lazy part of our brain to actually attend and get some value for the money - a bit like a student vowing to burn a $50 note or send it to the Klu Klux Klan unless he or she gets an assignment in on time.

Either way gym owners clean up. They get our money without needing to provide the space or the machines to service us. I thought I’d noticed them smiling each time I walked in fresh faced and asked to join.

Vigna, Stefano Della; Malmendier, Ulrike, Paying Not to Go to the Gym American Economic Review, Volume 96, Number 3, June 2006, pp. 694-719