Tuesday, November 8, 2011

3 Simple Steps to Save Your Money and Become a Rational Shopper

           Shopping is one of the major parts that consist of our lives. Especially for housewives, grocery shopping is one of their daily chores. Moms need to go to a grocery shop--Trader Joe's, Safeway, Walmart, etc...-- almost everyday, and even to big retailers--Target, Home Depot, Bestbuy-- occasionally to buy household neccessities. However, these frequent shopping trips don't always leads to satisfactory shopping. Recall how many times you regretted after impulsive or unnecessary purchases.

Is there a way to avoid those regrets? Yes, by becoming a rational shopper! Then how do we become one? As a Northwestern student majoring in psychology, I've taken several courses on cognitive psychology and decision making, and below I listed three main cognitive biases that I learned to be keeping us from making rational choices. Understanding these three biases is the first step to become a rational shopper.
1. Sunk cost bias
2. Anchoring effect
3. Barnum effect
            Sunk cost is the cost that has already been paid and is not refundable, and thus should not be considered when making decisions. However, we tend to “honor” the sunk cost and therefore it usually plays a huge role in making decisions. “I’ve already spent money on stocking up five razor blades for Gillette, so I will stick with it in order not to waste those five razor blades that I already bought, although I found a much cheaper razor that I like better.” is a common rationale of shoppers who fell into the trap of suck cost bias.

            Anchoring effect is a human tendency to focus too heavily on limited piece of information. We are often “anchored” by initially given information, even if it is only small portion of entire information. Big retailers such as Costco or Sam’s Club utilize this concept to design their product shelving. They place their value products, which are produced from their own factories and therefore cheaper than brand products, right next to brand products, which are placed closer to the entrance so shoppers get to see the price of brand products first. Therefore shoppers who first see the price of brand products are likely to be anchored by that high price and perceive the next price of value item to be much cheaper.
Barnum effect is a human tendency to regard very general characterizations or arguments to be accurate and tailored specifically for him/herself, although those characterizations are vague enough to be applicable to everyone. Informercial or home shopping programs that sell vitamins are typical example of Barnum effect. If you take a close look at their description of vitamin products, you will notice that all the benefits of the vitamin are very vague—alleviating fatigue, boosting up concentration, etc—that they are applicable to everyone. However, still we tend to think that this vitamin just fits our needs and buy it.

            Are there any solutions for these biases? For many of human cognitive biases, simple but strong prescription is to take at least few seconds to think “why” you want to make certain decision, before blindly putting stuffs into your cart. So next time when you go for a shopping and saw a deal or product that you think is really good, why don’t you take a few seconds to contemplate over why you think it is a good deal, and reason your logics step by step? 

Jake Kim, Undergraduate Northwestern IMC, @JakeKim4

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