How consumers suck at math

Posted to Statistics  |  Tags:  |  Nathan Yau

Derek Thompson for The Atlantic on how retail uses our numeric biases to their advantage:

Now that I’ve just told you that consumers try to avoid additional payments, I should add that there are two additional payments we love: rebates and warranties. The first buys the illusion of wealth (“I’m being paid money to spend money!”). The second buys peace of mind (“Now I can own this thing forever without worrying about it!”). Both are basically tricks. “Instead of buying something and getting a rebate,” Poundstone writes, “why not just pay a lower price in the first place?’

“[Warranties] make no rational sense,” Harvard economist David Cutler told the Washington Post. “The implied probability that [a product] will break has to be substantially greater than the risk that you can’t afford to fix it or replace it. If you’re buying a $400 item, for the overwhelming number of consumers that level of spending is not a risk you need to insure under any circumstances.”

Other tidbits: our obsession with prices ending with a nine and how we justify purchases of things that are more expensive but aren’t necessarily better than the cheaper item.

2 Comments

  • I hate rebates, there’s too much work to actually get the money back so often times people don’t do it. That said the statement “why not just pay a lower price in the first place?” assumes that the same net price is available without the rebate. That’s may not be the case, rebates are typically a manufacturer funded incentive that lower your net price after all the pricing tactics employed by retailers.

    Over 15 years ago Circuit City and I parted ways because I’d tell customers things like if you need to insure this TV you shouldn’t be buying it, in regards to the extended warranty.

  • I hate rebates too but I’ve never seen a situation where you could just pay the lower price instead so I’m often stuck with them.

    As for extended warranties, I generally avoid them but I recently made an exception. My son is starting a graphic design program this fall at a local tech school and we helped him buy a Macbook Pro for his course work. Given his personal history, I figured that his probability of damage was significantly higher than whatever estimate the store uses so I sprung for the warranty.

    I still hope I don’t need it.

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