How to judge prices while Black Friday shopping
Friday, November 29, 2013 7:00 AM
Happy Black Friday to all! I hope you had a wonderful Thanksgiving. Did you know that the original Black Friday was Sept. 24, 1869, and referred to a stock market crash brought on by speculators who attempted – but failed – to corner the gold market?
Today Black Friday means something altogether different. So I depart from current economic events to encourage you to make your trip to the mall a learning experience. I am indebted in this endeavor to William Poundstone and his delightful 2010 book titled “Priceless: The Myth of Fair Value (and How to Take Advantage of It).”
Poundstone’s book is full of insights, but for our shopping trip, I will focus on three central concepts. First, as the subtitle of the book makes clear, “fair value” is a myth. Stated differently, there is no such thing as the correct price for anything, at least in any absolute sense. How much is this apple worth? Well, it depends on how many other apples are available, what condition they are in, how much money you have, how hungry you are, how many other people want it, what our relationship is, and so on.
Second, when faced with this kind of uncertainty, human beings determine the “value” of an unknown by comparing and contrasting it to the value of a thing they know. That is how we distinguish items in the physical world. A sound is judged loud or soft by comparison to the ambient noise around us. The apparent brightness of one object is affected by the shade of the objects around it. And we use that same approach with respect to price.
Finally, when it comes to the prices we pay, our thinking is not very coherent. In fact, we are influenced by all sorts of extraneous factors. And no one has better learned the lessons of how to manipulate our sense of value than retailers. While you are out today, have some fun looking for:
Charm prices. A charm price is a little below a round number. That usually means a price ending in 9 or 99. They are called charm prices because – although no one is quite sure why – they work! Rationally, we all know that something that sells for $19.99 isn’t necessarily a bargain, but the $19.99 item will typically outsell a $20 item by a wide margin. Poundstone’s best guess: that the 99-cent price feels like a discounted price.
Sale prices. By stating a regular price, the retailer gives us a known price that, presumably, others have been willing to pay. By comparison to the normal retail price, the sale price looks cheap. Such anchors are very powerful, whether valid or not. For example, it has been proved time and again that if you ask 100 people to write down the last four digits of their Social Security number and then to estimate a value they do not know – like how many doctors live in the state of Iowa – those with higher Social Security numbers will give higher estimates than those with lower numbers.
Expensive luxury goods. High-end stores like to prominently display an outrageously expensive item in a high-traffic area. It’s OK if no one ever buys it, because everything else looks affordable by comparison.
Free gifts. If you like to shop from home, be wary of this classic infomercial technique. We get more pleasure from getting three $10,000 bonuses than we do from a single $30,000 bonus. Infomercials exploit this feeling by successively adding one “free bonus gift” after another to whatever they are selling. The advertisers are banking on the idea that your willingness to buy will grow with each added bonus. And they’re right!
Poundstone’s lessons have important implications for how we invest, but we’ll save those for another time. For today, have some fun by looking for ways that retailers are attempting to influence your buying decisions. And if you identify some, let me know!
The views expressed are those of the author as of the date of the article, are for informational purposes only, are not meant as investment advice, and are subject to change. Miles Capital does not guarantee the accuracy or completeness of any statements contained in this material and is not obligated to provide updates.
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