It's the Same Five Dollars!

There's a heuristic at work here which isn't completely unreasonable.

I buy $15 items on a daily basis. If I form a habit of ignoring a $5 savings on such purchases, I'll be wasting a significant fraction of my income. I buy $125 items rarely enough that I can give myself permission to splurge and avoid the drive across town.

The percentage does matter -- it's a proxy for the rate at which the savings add up.

It's also a proxy for the importance of the savings relative to other considerations, which are often proportional to the value of what you're buying. If you were about to sign the papers on a $20000 car purchase, would you walk away at the last minute if you found out that an identical car was available from another dealer for $19995? Would you try to explicitly weigh the $5 against intangibles such as your level of trust in the first dealer compared to the second, or would you be right to regard the $5 as a distraction and ignore it?

I've had to consciously adjust my reactions on this sort of thing a few times, by reminding myself that the amount I should care about saving 1 euro on a product should not depend on the total price - but only and specifically on how frequently I will buy the product.

Put another way: it helps to have the right formula to replace the wrong one.

One reason that I would do the 20 minute trip across town for a $5 saving is to reward the store with the good deal and punish the store with the high price.

Since a 20-minute trip is almost never worth $5 to me, it will really depend on how cranky I am.

In this scenario, given that they are different branches of the same store, the whole thing might make me so cranky that I go to another store completely or figure out a way to go a while longer without a calculator.

This is pretty much why I do not have colour ink in my printer right now. I was at a Staples recently and they had ink for a price I was willing to pay but I knew they were selling it online cheaper.

I know I'm not acting rationally about whether I have ink and how much I'm spending on it. I also know that I shouldn't assign moral values to Staples' pricing policies, but I don't think I'll be printing in colour until either I find someone with a pricing policy that doesn't feel all wrong to me or my girlfriend buys some ink because she doesn't want to wait for me to do it any longer.

The seeming irrationality of the customers choice may disappear after the cost of decision-making is taken into account.

In our daily life we are constantly required to estimate trade-offs between things that are very difficult to quantify (e.g. pleasure of wearing a new jacket - money that has to be paid – extra hours of work to earn this money - …). Hence using simple subconscious heuristics (such as “improving the trade-off by 50% is worthy of your time, 5% is not”) is very helpful. A constant search for an optimal solution would make a nightmare out of our every decision, which is hardly worth an occasional 5$ saving.

In this specific example, I believe that increasing the price differentials would have justified an additional mental effort, leading more people to the “optimal choice”.

When advertisements talk about percentage off, they're providing two prices. The higher price is meant to anchor your judgment of the item's value and your estimates of what other stores will charge, while the lower price is meant to seem cheap by comparison. However, the higher price is not required to be reasonable, and in fact, it usually isn't; stores often mark items up to ridiculous prices just so they can bring them back down again with sales.

Converting between time and money sounds like a good solution to this problem.

If you're interested in the broader psychological mechanism behind this bias, I highly recommend Jonah Lehrer' s blog post on irrational purchasing decisions: http://scienceblogs.com/cortex/2009/02/shopping.php

" Money is supposed to be fungible, but these observations really highlight how difficult it is to really behave as if you believed that. So, aspiring rationalists, how might we combat this in ourselves?"

I think there are some hidden assumptions in that question.

Money is supposed to be fungible, yes. But if we act otherwise, is it because money is truly fungible and we're failing to respond appropriately to reality? Or is money itself not fungible and our actions consistent with an understanding that denies our asserted beliefs?

If the unspoken understanding that guides our actions is correct, it's our explicit beliefs that need to be combated. If it's our explicit beliefs that are right, it's our intuition that must be fought. We can't determine the right course of action until we know where the error is.

Sometimes you buy more than one thing at a time. The heuristic might be something along the lines of, if that store is 33% cheaper on that calculator it might be 33% cheaper on other things, and you might end up saving a lot more than $5. If the calculator is only 4% cheaper, your savings will only work out to near $5, which might not be worth your 20 minutes.

I've come across this problem before - what the problem really is is the inappropriate use of proportional savings ($5 is a higher proportion of $15 than of $125) when the attention should be on the absolute savings ($5 in either case) because of the way the problem was framed. The way the problem was presented in this post actually obscures this point.

3600 seconds in an hour, so if you value your time at $18/hour you should imagine a cent ticking away every two seconds, if $36/hour a cent every second, etc.

To the extent that one buys $15 stuff way more often than $125 stuff, such a decision could make sense for reasons like these, but...

The same pattern was observed for both frequently and infrequently purchased items.

Oh. My.

(I myself used to have the same failure mode. What the hell, young army1987? If anything, after spending $120 I have $110 less than after spending $10, so the marginal utility of $5 should be larger in the former case. What the hell?)

3600 seconds in an hour, so if you value your time at $36/hour you should imagine one cent ticking away each second, if it's $18/hour then it's a cent every two seconds, and so on.

So, aspiring rationalists, how might we combat this in ourselves? Maybe it would help to consciously convert between money and time: if you value your time at 25 $/hr, then the cost of a twenty-minute drive is 25 $/hr * ⅓ hr = $8.33 > $5, so you buy the calculator in front of you in either case. So this heuristic at least takes care of the calculator problem, although I would guess it fails miserably in other contexts, I currently know not which.

So after I have the calculator I'll be set.

I've tried to combat this one by imagining the item at a variety of different price points, with the same saving. I don't know how you'd measure how much success you were having, though, because obviously no-one who understood this bias would exhibit it in a formal test setting, only in more informal settings where it's harder to compare. You need some way of mixing it up so you can't just do the sum, but the bias emerges from the noise all the same.

if you value your time at 25 $/hr, then the cost of a twenty-minute drive is 25 $/hr * (1/3) hr = $8.33

Am I the only person who is bothered by the US-centrism of assuming that the cost of fuel is negligible in calculations like those?