Think twice be­fore go­ing over bud­get by splurg­ing on that ‘bar­gain’ buy

The National - News - - BUSINESS | MONEY - NIMA ABU WARDEH Nima Abu Wardeh is a broad­cast jour­nal­ist, colum­nist, blog­ger and founder of SHE Strat­egy. Share her jour­ney on find­ing-nima.com

My son and I were on the hunt for a bike. He has sud­denly out­grown his wheels and now wants to lean in to the ad­ven­ture of off-road moun­tain bik­ing, which calls for a very dif­fer­ent ma­chine to the one he has.

I’m all for the great out­doors and started the quest to get the “best” (for our phase of life) with a stan­dard on­line search. You know the drill: you check out what’s rec­om­mended, why, what the price jumps give you in the way of kit and func­tion. I’m sure many a par­ent be­comes an ac­ci­den­tal doc­tor­ate holder in what­ever thing their child is into at a given time. We set out to a place that would have the bikes he could try out for size, feel and fit. It started so well and then it went ter­ri­bly wrong.

Why? Be­cause we’re hu­man. Chat­ting to the ex­pert on the shop floor meant we were ex­posed to even more in­for­ma­tion and then the clincher: try­ing out the goods led us to “bet­ter”, more ex­pen­sive bikes.

Here’s the thing: they didn’t have the right-sized frame in the two mod­els we wanted to com­pare, which meant try­ing other bikes that were the cor­rect size that were also at a much higher price.

Un­der­stand­ably, the most ex­pen­sive bike felt “amaz­ing” and be­came the new ref­er­ence point. This meant that all other bikes were then com­pared to this piece of magic in terms of price and per­for­mance.

It wasn’t just my son who was do­ing the com­par­isons, I was too. “Oh, it’s ‘only’ Dh2,000 more than this much less bril­liant bike.” The kind of think­ing that gets us all in trou­ble.

This is the an­chor­ing ef­fect. It works as fol­lows: you are ex­posed to a piece of in­for­ma­tion. Then you’re given other pieces of in­for­ma­tion. You might think you are pro­cess­ing each bit of in­for­ma­tion in­de­pen­dently – but your cog­ni­tive bias refers back to what you were ex­posed to first, and com­pares against it. I could not be­lieve we had fallen into the trap of us­ing the first price tag as a ref­er­ence – a novice mis­take.

There’s a well-known ex­per­i­ment by psy­chol­ogy pro­fes­sor Dan Ariely that brings this to life. In his 2008 book Pre­dictably Ir­ra­tional: The Hid­den Forces that Shape our De­ci­sions, Ariely de­scribes an ex­per­i­ment by Mas­sachusetts In­sti­tute of Tech­nol­ogy and Carnegie Mel­lon where he asked stu­dents to write down the last two dig­its of their so­cial se­cu­rity num­bers.

The stu­dents were then asked to write down the high­est bids they’d make on var­i­ous items, such as a box of choco­lates and a cord­less key­board. When the bid­ding was over, Mr Ariely asked the stu­dents if they thought they’d been in­flu­enced by their so­cial se­cu­rity num­bers. “No” they replied.

Here’s what hap­pened: stu­dents with so­cial se­cu­rity num­bers end­ing with the high­est dig­its (80 to 99) bid 216 to 346 per cent more for each item than stu­dents with the low­est end­ing nu­mer­als (00 to 19).

Now think back to the last time you were shop­ping for a par­tic­u­lar item, only to see a whop­ping price tag. You walk away, but your brain refers back to that big price tag when you see some­thing else – and be­fore you know it, you’re buy­ing that some­thing else be­cause you think it’s a good deal.

Here’s how you can be hooked and reeled in: you’re in the mar­ket for a car – or a bike. The sales­per­son walks you past the fully loaded ver­sion of what you’ve en­quired about. You might feel obliged to sit in (or on) the ve­hi­cle. You love the feel, the perks. But not the price. You walk away. You then go to the next level down, and even though it’s still higher than the bud­get you’d set, you start jus­ti­fy­ing the cost. Your mind is ref­er­enc­ing the an­chor: the first price tag. This next one is a steal in com­par­i­son. Next thing, it’s yours.

I will be watch­ing Black Fri­day like a hawk. My mis­sion is to see if the high­est-priced bike tried out is avail­able at the price my son and I orig­i­nally dis­cussed. Stick to your bud­get. That’s when the first price tag has no power over you.

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