Saving Money

Livingdeb noted that it's sometimes hard to gauge how much you "save" by making a particular purchase.

I always appreciated my dad's (tongue-in-cheek) approach to "savings" when my mom would take my sister and me shopping for new school clothes each year. We would frequently shop at an outlet store with tags listing the original price and when we got home, Dad would ask "So how much did you save me this time?" and I would add up the difference between original prices and the prices we paid and come up with some crazy figure like $413. Fortunately, this was in the context of a solid money management environment, so I did not take any stupid lessons from this.

Once when I was a young teenager, I went to dinner with my dad and his friend RK; RK fulminated against the idiocy of people actually characterizing getting stuff at less than full price as though they are saving money, when obviously they are spending money. But people do rationalize purchases in this way and are sensitive to discounts. I can even sort of see the logic behind the heuristic - if you interpret the full price as the market clearing price, the price that people in aggregate place on the item (the price at which market supply = demand), you do get a sense of its (public) value, which is often enough correlated to quality to validate the general rule. This is something every budget furniture exploits on a regular basis with their famous "Half Price" sales.

I think trying to compute a real "savings" figure would be difficult, but I sometimes think of the consumer surplus I get from something I've bought by considering how much money I would have been willing to spend on the item (or on another item that yielded similar utility/served a similar function). This isn't always easy either and can be complicated by price awareness - I mean, how much would I be willing to spend on a box of instant oatmeal? I get a sense of that from what the usual price is - but it is often very easy to see that I am getting a really good deal on something that is worth more to me than I spent.

My current reading-at-the-library book is Influence by Robert Cialdini, a psychology professor at Arizona State who did indeed "write the book" on the subject of persuasion, and a story he tells in the book came to mind when Livingdeb mentioned the fact that the 80-cent present didn't seem like quite enough somehow.

I am probably mangling this story, but the gist of it goes like this:

A man wanted to buy a nice gift for his girlfriend so he went to a jewelry shop owned by someone he knew. The jeweler decided to do the guy a favor and give him a 50% discount (which still leaves a healthy profit margin for any jeweler), so he showed him an item for $250. The man was like, Well, a $250 gift feels kind of cheap. I don't know. The man left the store and said he'd be back later. This time, the jeweler wised up. When the man returned, he showed him a similar item at the full retail price of $5oo. The man accepted it. Then the jeweler said, As a favor, I will give it to you for $250, and the man was thrilled at getting a $500 piece for half price.

Another story he tells kind of blew me away with how obvious this technique is in retrospect, but that I never realized it before. In January, he found himself at the toy store to pick up a toy for his son that he had promised him for xmas but had been unable to secure at the time, and he ran into an acquaintance of his doing the same thing; he hadn't seen this other man since the previous January, when they had met at the toy store buying the same toy then too. When he mentioned this encounter to a friend who used to work in the toy industry, the friend said, No coincidence. Cialdini said, Huh? The friend said, toy manufacturers will advertise the year's hot toys before xmas to get kids to make their parents promise to get them one, but will then purposely undersupply the market so that the toys are not available when parents go shopping. At this point, parents have to purchase alternative toys for xmas (which the toy manufacturers have made sure are in good supply). Then after xmas, they start advertising the toys again, to remind kids how much they wanted one and so they will go screaming to their parents "You promised!" And parents, wanting to behave consistently, will frequently go out and buy the originally desired toy now that it is available. Now the toy manufacturer has sold both the original toy and the alternative toy. Nice. I had no clue that the usual lack of hot toys around xmas time was a strategic undersupply. In this case, the rule of thumb that one should not attribute to malice what can be explained by stupidity led me astray. Those dudes are insidious sons of bitches.