You Bought What?

You think you’re a rational person. You get a job, put your paycheck in the bank, save as much as you can. But everyone’s ordering takeout . . . and that shirt looks so good on you . . . and this great pair of boots you might possibly want to wear someday you have the perfect outfit and it’s nighttime and the stars align right is on sale for half off $500 . . .

Are you saving enough money?  Economists would say that’s a nonsense question.

That’s because economists assume people are rational, and therefore everyone saves exactly the amount of money they want, says Dan Ariely, a professor at MIT’s Sloan School of Management.

But for a behavioral economist like him, it is perfectly sensible to say that people are actually not saving enough, but why?

This problem, among many others, is one that Ariely hopes to solve and create a solution for through his E-Rationality research program.

E-Rationality is a division of MIT’s Media Laboratory. The program’s goal is to identify and understand human day-to-day behaviors and develop aids, or “mental crutches” to help people overcome them, Ariely said.

E-Rationality takes the principles of behavioral economics and applies them to a vast spectrum of human behaviors.

Though E-Rationality runs the gamut when it comes to researching human error, much of its research is in the area of consumer rationality, or rather consumer irrationality.

Boston University School of Management marketing professor Suchi Chandran said while certain shopping habits aren’t outright stupid, they’re definitely not good for the bank.

“I hesitate to use the word irrational, but it’s not optimal according to standard economic theory,” she said.

WHY DID I JUST BUY JUSTIN TIMBERLAKE’S WASHCLOTH FOR $900?

OK, so sometimes you make an irrational purchase for what you think at the time are all the right reasons – it fits, it was on sale, it’s really random and cool and one-of-a-kind – but consumer analysts have mapped out the real reasons you bought that ancient, tattered, vintage wine poster last week.

One reason: People have an innate inability to judge the absolute value of items. A person may be able to judge the value of an item relative to the price of similar items, like a chocolate bar, for instance, says Ariely, but they do not really know what the absolute value of that chocolate bar truly is.  

Boston University sociology professor Xiaoshuo Hou said in situations where buyers are so physically detached from the seller, all they can rely for judgment is seller feedback.

“When several sellers are selling the same product, customers may turn to the seller with the highest rating rather than the cheapest price, because they’d rather pay more to get a higher chance of receiving the right product,” said Hou, who specializes in the study of formal organizations.

Another reason (and this one really applies to online auction sites such as eBay): People love to be the highest bidder, especially on an item they’re already attached to. Ariely said if someone bids on a watch, for instance, they might become attached to that watch even just after placing that bid. They might dream about the watch, imagining it already on their bedside table. The reason, he says, is that being the highest bidder in any ongoing auction helps create the illusion of ownership.

Yet another reason: When people fixate on winning an auction, their interest in playing their cards right sidelines the attention they might normally give to considering whether or not they are paying a good price for an item.

Andrew Fatato, a College of Communication junior and avid eBay shopper said he’s overextended his budget just to win an auction.

“I’ve spent money I don’t have just to win,” he said.

Just last week he signed on eBay to look for guitar straps and bought a $750 guitar instead. He had to sell the guitar he already owned to pay for the new one.

One more reason: the “happy-hour effect.” In a bar, for example, happy hour attracts cheap customers; the influx of patrons then attracts others who come to drink at a bar with lots of people.

This effect applies to items on sites like eBay that start out out priced much below their actual value. A DVD priced at $1 attracts more bidders than one priced at $10, even though the price for $1 item quickly climbs as customers flock to it. Ariely said he’s found that people also like to bid on items that already have many bidders, to heighten the sense of competition and winning.

Fatato said when shopping on eBay, it’s easy justify throwing another $15 or $20 at a time when an item starts out cheap but snowballs into something he can’t quite afford.

THE HEAT IS ON

Ariely initially researched the rationality-irrationality relationship and its relationship to a topic far removed from impulse shopping: sexual arousal.

In his paper, “Heat of the Moment: The Effect of Sexual Arousal on Sexual Decision Making,” Ariely suggests each person is in a sense actually two people, a “cold” person and a “hot” person.

In an experiment, subjects in a cold, levelheaded, unaroused state were asked a series of sex-related questions in a way they believed they would answer if they were aroused.

A day later, they were asked the same questions in a “hot” state of sexual arousal.

Ariely reported that in a cold state, the subjects underestimated what they would be willing to do when sexually aroused.

Though the experiment conducted in the research deals with sexual behavior, the findings are applicable to consumer behavior as well, Ariely said.  ”The cold person really does not know what the hot person wants,” he said.

HOW OFTEN ARE YOU HOT?

This “hot” behavior is something that occurs among regular consumers daily, Ariely said.

A person may have a passion for bike riding, but know they cannot afford to buy a new bike – but if he walks past a bike shop and sees a brand-new one, he may get caught up in the “heat of the moment” and buy the bike, a decision he would never have planned or expected himself to make in a cold, neutral, “unaroused” state.

Ariely has shared his research with businesses such as insurance company The Hartford. Scott Chalfant of The Hartford declined, however, to comment on his involvement with e-Rationality because of company public relations policy.

Ariely doesn’t want to leave his research in a scholarly journal, unread by people who would benefit from it.

He’s releasing his book Predictably Irrational in February and is creating an interactive website for his research

THE SELF-DECEIVED

Chandran, who specializes in online customer behavior, said most people log on to bidding sites like eBay or priceline.com thinking they’re going to get a great deal.

Because bidding often require commitments up front, people often end up spending more on items than they would have otherwise, she said.

“You go in sort of with the smart shopper mentality,” Chandran said. “You think, ‘If I’m smart, I can get something of value.'”

Fatato, however, said he rarely goes on eBay looking for one specific item.

“I think everything I’ve bought on eBay I go into for the thrill of gambling,” he said.

Chandran said she thinks it’s difficult for people to change their over-bidding behavior.

“The whole process draws you in,” she said. “Learning doesn’t happen easily.”

CORPORATE STRATEGY

Chandran said that while it’s probable many companies understand such customer psychology because of the wide variety of research on the topic, it is unlikely they officially use the knowledge in marketing plans.

“I’m not aware of any specific instances of how companies have incorporated this information strategically,” she said. “It just doesn’t sound right.”

While appealing to customers’ bidding impulses isn’t an openly admitted practice, Chandran said companies can use the knowledge when pricing items. For any given item, there’s a range of reasonable prices.

“I think [this knowledge] gives them a certain amount of leeway,” she said. “They don’t have to offer rock-bottom prices.”

Online companies can also look at customer shopping histories to categorize customers and understand what shopper identity fits them.

Customers are not completely bereft of power, though, Hou noted.

Customers can also initiate changes in the organizations,” she said. “They can make organizations to pay attention to certain things, such as environment and employee benefits, [by] boycott[ing] the products of the companies that mistreat their employees.”

Erin Kutz contributed reporting for this story.