A while back, I heard the following definition
for a bargain:
It is something that you don’t need
at a price that you can’t resist.
Although this definition might seem too anecdotic
and a bit “unserious”, it is a wonderful illustration of the psychology behind
bargains and it explains why sometimes we buy not-so-useful things.
The definition above illustrates that there are
two types of utilities involved.
For those of you who don’t know what utility
is, it is a fancy word used by economists to describe benefit or pleasure or
happiness. For example consuming a bottle of water will bring some benefit /
pleasure / happiness to the drinker.
Normative economics takes into account the
utility derived from consumption of the good or service. Behavioural economics,
however, acknowledges that alongside the benefit of consumption, there is some
pleasure (utility) that comes from the purchase itself. This was named by
Richard Thaler (1985) as Transaction
utility.
In other words, Transaction utility is the
pleasure one gets from the deal itself.
Quite interestingly, in the case of a bargain,
the consumption utility is close to zero or even negative (i.e. you have to do
something with that useless thing and most likely it will bring some
head-aches.) while, at the same time, the transaction utility is very high – a price
that you can’t resist.
What I believe happens in the moment of
purchase is that (at least some) people recognize the low consumption utility, yet
can’t resist the great deal. Subsequently, because of confirmation bias, they
try to find arguments that support the purchase. More specifically these
arguments are directed towards tackling the low consumption utility. In other
words, although they realize that the item itself is not particularly useful,
they conjure possible uses for the item.
Thaler, R.H., (1985), "Mental Accounting
and Consumer Choice," Marketing Science, 4 (3), 199-214.
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