Wednesday, January 02, 2013

You're going shopping. You think you trust yourself...

You shouldn't. Wednesday column

So you’re about to shopping. I imagine you trust yourself. You shouldn't. New research shows you are far more vulnerable to whims than previously thought - even when buying really big things - and your decisions are affected by your mood, although not always in the ways you would expect.

It’s well-known that you should “never shop on an empty stomach”. A few years back economists Daniel Read and Barbara van Leeuwen proved the point by asking British office workers to choose between receiving an apple or a Mars Bar. But they weren’t going to get the gift for a week’s time, so they had to guess what they would want in the future, in the same way as we have to when shopping. Half were asked just after they had eaten, half toward the end of the day when they would be hungry. The hungry half were far more likely to say they would want a Mars Bar in a week’s time. The half that had eaten were more likely to want an apple.

Another researcher found that shoppers who’d been given a muffin to eat before entering a supermarket were more far more likely to stick to their shopping lists.

But big decisions are different, right? Not about cars they are not. Americans buy convertibles. The US National Bureau of Economic Research finds they buy more of them on days that are exceptionally hot. Think about that: a car lasts for a decade, but a decision about the type of car we buy can depend on the weather on the day we go shopping.

The Bureau of Economic Research examined 40 million car sales records spanning eight years. It found people bought more convertibles in spring and summer than in winter and autumn. That’s not surprising - buying in a season when you can use a convertible means it can give you an extra season’s worth of use. But what was surprising was what happened on days when the weather was exceptionally hot. On days that were 9 degrees celsius hotter than normal for the month sales of convertibles jumped 9 per cent, even in winter. Adding weight to the finding those convertibles were bought on a whim the Bureau found the convertibles bought on those days far more likely to be returned.

But that couldn’t happen for homes, could it?.. Surely we make that purchasing decision - the most expensive of all - on the basis of a very strict shopping list. For instance, we would decide ahead of time whether or not we wanted a swimming pool - we certainly wouldn’t decide on a whim based the weather the day we went shopping.

The NBER same study published in July finds that homes with pools sell for $1400 more in summer than they do in winter. The finding makes little sense. By the time a contract for a house has been settled (typically two months) the season will most probably have changed. Yet it is the weather at the time of purchase - not at the time of moving in - that makes buyers more likely to want pools.

The researchers pose an disturbing question: If we are so casual and easily influenced when making our most important purchasing decisions, how casual are we when we make even more important decisions, such as where we will work, who we will marry, whether we will get divorced and whether we will have a children?

Economist George Loewenstein from Carnegie Mellon University coined the term “projection bias”. We make our guesses about what we will want in the future by projecting forward what we have wanted in the past. But he says we bias that projection by overweighting what we happen to want at that particular moment. (And we bias it in other ways. We typically overestimate how much income we will need in retirement because we base our guess on how much we’ve needed in the high expenditure years we have been working.)

And we are biased in other ways as well. We are extraordinarily susceptible to numbers and words written down on unrelated pieces of paper.

A few years back I took part in a mass experiment at the University of NSW ran by Daniel Kahneman, one of the few psychologists to have won the Nobel Prize in economics. He asked each of us to take out our driver's licence and write the last two digits of its number at the top of a page. Then we had to guess the value of a bottle of red wine and write down the dollar figure - anything from 00 dollars to 99 dollars - at the bottom of the page. The bottle might have been a collectors item. Its label said it was created for the 2000 Olympics.

Sure enough, those of us with licences whose last two digits spelled out a low number thought the wine was cheap. Those whose licences produced a high number thought the wine was expensive.

The phenomenon is called “anchoring”. It is deployed against us the minute we set foot inside a store. Harvey Norman puts affordable television sets next to expensive sets whose high prices are prominently displayed. The high price acts as an “anchor” making us think the affordable ones are cheap. Studies show the mere presence of a credit card sign in a shop increases our willingness to spend there, whether or not we are planning to spend with a card.

Until now the effect of our moods has been a mystery. On one hand some of us splurge when we are feeling down - so-called “retail therapy”. On the other hand many of us indulge in luxuries when we are feeling good. She says it depends on whether we think our mood is fixed. If we are depressed and we feel that won’t change we won’t bother to splurge. If we feel good and we feel that can’t change we’ll feel its safe to splurge without worrying about the consequences. Which is probably why the music in shops is so relentlessly positive. It’s important.

In today's Sydney Morning Herald and Age

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