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Completely Irrational: Why Companies Can Fool Us Into Paying More

decision making and consumers
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Are you rational? 

Probably not.  When it comes to decision making, it turns out most people (myself included) don’t think rationally.  Sure, we think we are making the best decision at the time, but when looked at objectively?  That’s when things get interesting.

A Study in Human Psychology

As consumers, Dan Ariely’s book Predictably Irrational provides a ton of insight into our financial psyche.  While most economics like to believe that all consumers behave rationally, the truth is that’s rarely the case.

How often have you found yourself paying more just for a brand name?  Or holding on to an investment for too long, just to watch it go down in value?

By understanding the traps we easily fall into, we can work to avoid them in the future.

One of the common pitfalls in our decision making is equating price to quality

Price Doesn’t Equal Quality

Price is a major factor in any financial decision.  Think about the last time you went shopping.  Did you compare the prices of multiple brands before making a decision?

Chances are you picked the item that wasn’t the most expensive but wasn’t the cheapest either.  I mean, you’re trying to save money, but you still want a good product, right?

It turns out, we often incorrectly view price as a marker for quality.

In one of the more fascinating studies Ariely cites, researchers tested a new “painkiller” on 100 people.  The initial experiment was testing the placebo effect, but then they took it a step farther.

They repeated the experiment, but for one group they told them the painkiller cost $2.50 and to another group, the price was only 10 cents.  Which group do you think had the most pain relief?

It turns out twice as many people said they experienced pain relief when the pill cost $2.50.

Just think about that for a minute.  What is it about human behavior that causes us to replace quality with price?

$1,000 iPhone

This blind spot in our decision making is one of the reasons we are so willing to pay to for expensive electronics.

I think it’s the reason why the iPhone X sells out in minutes even though it costs hundreds of dollars more than other iPhones, let alone other smartphones.

I’m guilty of this logic myself (although I’m not spending $1,000 for a phone).  But I do fall into the trap of automatically thinking Apple makes better quality phones than other manufacturers.

Before reading Predictably Irrational  I thought the phone actually was better.  That the newer models had better features and were worth the higher price.  Now, I’m not so sure.

I think I let price replace quality in my decision making process.  Is a slightly faster phone really worth $100-200 more?  No!

Avoiding the Trap

When else can you fall into the price = quality trap?

How about when you’re buying furniture.  Is the $1,000 chair’s quality really double the $500 one?

Or maybe when you’re buying clothes.  Just because one store charges more doesn’t necessarily mean their clothes are better.

Avoiding the price trap can be difficult because it is so engrained in our behavior.  But once you know it’s there, you can work to overcome it.

Next time you’re looking to make a purchase, don’t immediately dismiss the low-price option.  Just because it’s cheaper or not a brand name, doesn’t mean it’s not as good.  Many times, those off brand products are actually made by the brand name companies. If you’re buying food, check the labels – if the ingredients are the same, it’s the same product.

So instead of automatically going for the higher priced option, stop and think what is the difference between the products.  Does the higher priced item have features that are far and above the lower priced one?  Is the more expensive option really a superior product?

Adding these few reflection points in your decision making process will help you avoid the price trap.  Instead of letting your mind make an automatic decision, you will make it a deliberate decision.  This conscious decision will allow you to avoid paying more for a product that really isn’t any better than the lower priced option.

Your Experience

When have you purchased something based on price?  Do you regret that decision?

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2 Comments on "Completely Irrational: Why Companies Can Fool Us Into Paying More"

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Thought-provoking piece! There are a few categories where brand name definitely sways my decision, and makes me more willing to pay for an expensive product. Some things, I’m willing to buy from IKEA (kid’s steel bunk bed frames), and other things I’ll save up for and pay the hefty price tag (adult bed frames, for example). Good to keep in mind that more expensive doesn’t always mean quality.