It turns out consumers can be tricked into buying, they make poor choices because they're bad at math, and many people shop with their heart rather than their head. Those issues and more account for poor money decisions people make every day.
IN THIS PACKAGE
- In a volatile market, examine college savings options
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- Gift of books could offer choice guidance
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Taking stock
- Some experts see discounts in stock market's volatility
- The week ahead
Jan. 13 Audio and video cables may be a place to save
Jan. 6 Price protection can put money in your pocket
- Medical Research
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Here is a sampling of recently published findings:
-- Shopping momentum.
During a shopping trip, making a first purchase, even a minor one, can open the floodgates of buying, said Uzma Khan of Stanford University, Ravi Dhar of Yale University and Joel Huber of Duke University in "The Shopping Momentum Effect" in the Journal of Marketing Research.
Shopping has two phases: deliberation and buying. Once they buy, consumers tend to continue buying without returning to the deliberation stage for future purchases. In an experiment, researchers found shopping momentum was broken when consumers paid from different envelopes, apparently forcing them to return to the deliberation phase and think more about whether the purchase was a good idea.
That suggests a reason for the success of the longtime tip to budget with an envelope system--that is, spending cash from envelopes designated for such purchases as food, clothing and entertainment.
Researchers also found that buying a guilt-inducing luxury item first during shopping curbed buying momentum. So maybe a fancy coffee indulgence before holiday shopping might be a good idea.
-- Confused consumers.
A new sales technique called "disrupt-then-reframe" can trick consumers into buying, according to a recent article in the Journal of Consumer Research, "The Role of the Need for Cognitive Closure in the Effectiveness of the Disrupt-then-Reframe Influence Technique," by Frank Kardes of the University of Cincinnati; Bob Fennis of the University of Twente, the Netherlands; Zakary Tormala of Stanford University; and Edward Hirt and Brian Bullington of Indiana University.
Researchers found that by presenting a confusing sales pitch to consumers and then restating the pitch in a more familiar way, they were able to increase sales. The reason is a consumer's desire to understand or "need for cognitive closure." Fulfilling this need by restating the sales pitch more simply breaks down consumers' resistance, making them more easily persuaded.
-- Cheapskates and spenders.
How free you are with spending depends on the pain you feel in paying for a purchase, said Scott Rick of the University of Pennsylvania and Cynthia Cryder and George Loewenstein of Carnegie Mellon University in "Tightwads and Spendthrifts," which was published in the Journal of Consumer Research.
One way tightwads feel more pain is by intensely viewing "opportunity costs," or what they're giving up later because they are spending now. They might feel more regret or guilt from spending.
Spendthrifts feel they are giving up little or nothing in the future because of spending now. One result is that spendthrifts are three times more likely to carry debt than tightwads, and they have more of it, the academics found. Spendthrifts also save less.
Retailers continually try to make buying less painful by accepting credit cards, some you can just wave at a machine rather than sliding through a reader. Hassle-free online shopping is another example. Perhaps that's why some people can force themselves to spend less by paying with cash. Handing over the greenbacks involves more emotional pain than paying with credit.
-- Double discounts.
Americans in general aren't known for their math skills, which is why a sale offering to take "20 percent off the original price plus an additional 25 percent off the already-reduced sale price" is effective, according to an article in the Journal of Consumer Research, "When Two and Two is Not Equal to Four: Errors in Processing Multiple Percentage Changes," by Haipeng Chen of the University of Miami and Akshay Rao of the University of Minnesota.
Many people would say the above example amounts to a 45 percent discount, derived by adding the two discount percentages. The discount is actually 40 percent, because the second discount comes on a lower dollar figure. On a $100 purchase, 20 percent off is a $20 savings. Then, 25 percent off the remaining $80 is another $20. The total savings amounts to a 40 percent discount.
-- Optimism in moderation.
Being an optimistic person is a financial benefit, up to a point, said Manju Puri and David Robinson of Duke University in the paper "Optimism and Economic Choice," published by the Journal of Financial Economics. Moderate optimists work more, save more and pay bills on time, among other attributes. But extreme optimists tend to think the future will take care of itself and don't bother with some fundamentals of prudent money management.
"Optimism is a bit like red wine: Too much is clearly bad, but a little each day can be good for one's health," the authors wrote.
"Likewise, while too much optimism may be detrimental to one's economic well-being, a moderate amount of optimism is associated with better decision-making."
Gregory Karp is a personal finance writer for The Morning Call, a Tribune Co. newspaper in Allentown, Pa. E-mail him at firstname.lastname@example.org.