Sumeet & Esha are just back from their weekend visit to Bazaar. Sumeet is complaining, “Esha, you keep buying those things every time. But you hardly ever use them! Add to it, our little Mayank. How this 4 year old has got the brains to figure out the costliest toy out of the shop. Goddd, you guys Make Me Spend so much everytime we go out!”
Familiar conversation?
Yes, we spend money. People make us spend money. Our friends beg us for the party, & our naughty younger siblings make us spend money. But do you know that things & places can make you spend money?
Really? Yes, but you must actually be asking “How”??
They affect our cognitive biases. Biases are human tendencies that make us tend to a particular choice. They override our sensible, thoughtful & rational brain. Every super, smart, successful & intelligent human is prone to biases. Thinking you are not prone, is also a bias!!
Conformity Bias
Take a place such as a supermarket. You enter to buy your daily stuff. What you see at the entrance are rows & rows of empty shopping carts.
You automatically grab the nearest one. Why? It is convenient, cool & it conforms with the people around. Plus, kids just love driving these imaginary super-vehicles all around. Note, conformity is a bias. Solomon Asch, a pioneer in social psychology has very aptly demonstrated how even a single person can influence a group into sensible or non-sensical behaviour. Read more about the study here.
So, back to the supermarket, where you are greeted with rows of biscuits & cookies. Or it could be the bakery section. Observe! It is never the basic groceries like grains & pulses.
Source: dreamstime.com
Why? Biscuits, cookies, and bakery products appeal to your human senses. The sensory impact of all those scents, textures & colours make us feel upbeat & off-course hungry!! They tempt you to buy them. Next, notice the large pack sizes of each item. The biscuits are mostly family packs & boast of 20% – 30% extra size or 20-30% of discounts. The effect is, you add bigger sized, multi-brand & multi-taste cookies to your cart. Here’s your confirmation bias at play.
Confirmation Bias
Source: https://newslit.org/
You come to the supermarket, with the belief that you get an extra discount or more value for your money. The 20% extra on family packs confirms your already existing belief that it’s a value purchase.
Daniel Kahneman in his brilliant book “Thinking Fast & Slow” explains 2 systems of thinking. System 1 is the thinking that is based on our memory & intuition and is mostly automatic. System 2 involves thinking slowly, deliberately and with logic.
Source: www.adcocksolutions.com
Majority of our purchase decisions are governed by System 1 & according to Daniel, we are more attracted to discounts than absolute price cuts. Example a biscuit pack of 500 + 50 g would attract us more than a 550g one, at the same price. Conversely a price cut of Rs. 100 over Rs. 600 item would attract us more than the same item directly priced at Rs. 500. It is our System 1 thinking that considers the extra quantity or the discount as a value deal.
But wait, why family packs? Why not start with a Rs.5. Parle-G? It would cater to all types of consumers right? No! The supermarket wants you to buy more, so that they increase their sales volumes. A supermarket that can turnover larger volumes, gets to negotiate steeper discounts with their suppliers. So, higher volumes mean higher profits for the supermarket.
Source: Ubuy India
Care for another example of confirmation bias?
We all very well know that Decathlon is a sports, fitness & adventure activity brand. The brand always uses youngsters to man their stores. Here’s an interesting fact:
Source:www.madkings.com
Moreover, it’s products are always advertised by people who are out trekking, playing sports, hitting the gym & what not! All these appeal to your already existing beliefs. That is why everytime you wish to buy a pair of sports shoes, you turn towards decathlon over amazon.
Okay, back to our supermarket! In the supermarket you are spoilt for choices. There are multiple brands selling the same product, in different sizes and with different discounts. Think, the section of cosmetics where each brand’s moisturiser advertises different features of their cream. Each packing displays quantity, some in grams some in milli-litres with different pricing & discounts on each. The net effect is that the customer spends the maximum time inside the supermarket, comparing & choosing.
Notice how the design of the supermarket is such that you enter from one end, but you never exit from that same end. The designers of the supermarket ensure you travel almost all sections of the supermarket before you exit. Why? The more time you spend inside, choosing between products, walking, exploring and being exposed to more shelves, the more is the probability of you making some purchase. The more stuff you see, the more you’ll buy. According to brain-scan experiments by Paul Mullins & colleagues of Bangor University, Wales the demands of so much decision-making quickly become too much for us. After about 40 minutes of shopping, most people stop struggling to be rationally selective & instead shop emotionally, which is the point when we buy stuff we never intended to buy! This is how the place is making you spend money!!
Infact, the designers of supermarkets are called Choice Architects & their design like the supermarket is called Choice Architecture. These terms have been coined by Richard Thaler & Cass Sunstein authors of the book, Nudge: Improving Decisions about Health, Wealth and Happiness. The book talks about how the presentation of choices dictate consumer behaviour & how nudges can help people make better or worse decisions.
Here’s another nudge in the form of slogans in the supermarket:
The surprising thing is, in the supermarket, you make a purchase even if you don’t find the product you wanted or if it is beyond your price range. The culprit is not you, but your bias of sunk cost fallacy. You buy something, just to honour the time & energy spent in comparing, deliberating & choosing.
Sunk Cost Fallacy
Source: https://object-matrix.com/
Supermarket’s do employ delaying tactics, to make you spend more time. The items that everyone need, say the groceries, dairy items, powders/detergents are kept in the middle or the last. The steady music in the background & the comfortable temperature mean you shop leisurely even on a hot sweltering day outside.
Another classic example of sunk-cost fallacy is you keep visiting the same supermarket store cause you have bought the membership card. Majority, supermarkets encourage you to buy a membership card. Even if the products you want are no more sold by the store, or they have now become costly, sunk cost of the membership card brings you back to the same store!
Sunk cost fallacy is also why you sit out a boring movie till the end, just because you spent a good cost on the tickets!
Source:https://dev.to/blender/on-making-better-decisions-28l2
Anchoring Bias
The grocery section of the supermarket is designed to exploit this cognitive bias of humans. Most supermarkets have 3 varieties of groceries. A well-known brand, an in-house brand and the same item sold loose. The well-known brand’s price point serves as the anchor for the in-house brand’s price. The same product, say ½ a kg of Daal, is priced slightly cheaper than the well-known brand. Shoppers reach for the well-known brand, but buy the in-house brand because it feels cheaper than the well-known brand.
Another example of anchoring bias is exploited by e-commerce websites. See the image below:
Source: Amazon
The 40% discount is the temptation & the Rs. 1000 is anchor. It makes the price of 599 look like a nice deal! But in reality, Rs. 600 are being quoted for a 4 apples!! Yup only 4 nos…
Coming to the loose items being sold in our supermarket. Notice how the plastic bags are almost always in the following sizes, 1kg, 2kg & 5kg. There is a weighing machine to weigh the exact quantity. But, 3kg sugar in a 5kg bag seems less, but you have no other option for a smaller bag. Same is the case with ½ kg daal in a 1kg bag. So, you fill that bag more. The bag’s size serves as the anchor for the buying quantity.
Still not convinced? Compare this with buying the same sugar from a normal brick & mortar grocery store. You would buy in exact quantities, as per your shopping list. The anchoring effect of the bag size overrides the quantity in your shopping list!!
The same anchoring effect takes place when you fill the cart. The carts are almost always wide & deep. If you buy less, you feel the cart is empty & to fill it, you buy more! Martin Lindstrom, a marketing consultant & author of Brandwashed says that, “An experiment found that when a shopping cart was doubled in size, consumers went on to buy 40% more.”
This is also very similar to the Delbeouf effect of portion sizes. A larger plate makes you eat more, because you serve yourself more quantity, while a smaller plate limits your intake. Conversely, the same quantity of food in a smaller plate looks enough, while in a larger plate feels less! Head over here to read about the Delbeouf effect.
There is another Bias at play here.
Choice-supportive bias or post-purchase rationalization
Source: https://theartofservice.com/
You have already bought the items as per your need & the size of the cart has made you buy stuff that you didn’t need. But your rational mind is questioning your decision. Why 4 packets when you need only 2. Why a new set of napkins when you already have enough at home?
That is when you justify your decisions. You either think, “Yes, if not today, I will need this 2 months later!” “It’s okay to buy it now, what if I am unable to come here again and have to buy at the local store? Surely, they won’t give me this much discount.”
This is post-purchase rationalization where you find reasons to justify your purchase and shut up the tiny voice of protest!! You find positives about your decision & overcome any chance of buyer’s remorse. “This flavor is not found in the local store, so I have bought extra!” This bias helps you to overcome your financial, mental & consumption boundaries.
The choice architect’s know this well & hence they fuel this bias with catchy slogans like:
We already told you, the supermarket benefits from making you buy more. But that would mean, you would visit the supermarket less frequently.
In majority cases, No! The effect is you end up changing your consumption pattern, albeit gradually. Example is the bag of 100 pieces of toffees. A single toffee costs Re 1/-. The bag of 100 pieces costs Rs. 90/- Voila! A discount!!!
Now, taking a toffee out of the refrigerator is no big deal. Suppose your family averages 3 toffees per day, you would finish the bag in
about 3 months. But, what if you have to buy, 3 toffees per day from the local shop, will you? I am sure you won’t!! The value deal of the toffee bag ends up changing your consumption pattern.
Framing
Well, the name sounds more like a Ponzi scheme that traps you, than a bias! But Framing is used to nudge you into choosing the right product. Refer to the adjacent image displaying subscription plans for a newspaper daily. The Rs. 1499 plan is a no-brainer, a straight value buy. It’s way cheaper than the monthly plan & saving Rs. 300 on the annual plan. The annual plan of 1799 is the anchor & nudges you to buy the 1499 Rs. plan. But, the catch is auto-renewal. An Rs. 300 discount means the plan renews automatically next year. Chances are, even if you wish to discontinue the plan you would forget or be too lazy to actually discontinue. Notice, how an Rs. 300 discount, tricked you into continuing the subscription the next year.
Nobel Prize winner author Richard Thaler calls these as nudges. The smart annual plan is the nudge for the reader to be a long term subscriber. In his book, Nudge: Improving Decisions About Health, Wealth, and Happiness Thaler says:
“The bottom line, from our point of view, is that people are, shall we say, nudge-able. Their choices, even in life’s most important decisions, are influenced in ways that would not be anticipated in a standard economic framework.”
Now just imagine, if you are an irregular reader of the daily & only the smart annual option displayed. Chances are high that you would have simply ignored the subscription. The way the information is presented, frames you into thinking this is a value deal.
Loss aversion
Humans have a tendency to avoid losses. Letting go is always difficult. This is the chief reason why many supermarkets like Easyday, Big Bazaar, Reliance Mart encourage people to buy a member’s card. The discounted price for the members is displayed on every product. You think, you lose this discount & also the privilege of priority check-out. That compels you to buy the member’s card, off-course at a cost. Notice, how the card also ensures you visit the same supermarket again.
Same is the case with limited time coupons. A purchase of above Rs. 3000 gives you a discount coupon of Flat Rs. 500 off on your next purchase. You buy extra to avail the coupon & you visit the next weekend to avoid losing the discount! A classic case of loss aversion! Well, this bias is also called the endowment effect.
There’s a fun fact about this bias. A study was carried out, wherein some college students were given Cadbury while some others were given a coffee mug. When asked to swap the Cadbury for the mug & vice versa, both sets of students were reluctant to. So, irrespective of the value of the item, we care more about losing, than about gaining.
Scarcity Bias
Source: Linkedin.com
Supermarkets & food chains always advertise limited-period offers. The sabse saste 7 din, or the happy hours, end of season sale tend to address the scarcity, Bias. They advertise widely inducing urgency & panic, making you feel that you may never get these cheap prices again. So, you rush to the supermarket, to avail the offers.
Source: convertize.com
That is how the e-commerce giants Amazon & Flipkart generate so much revenues during their festive, big billion day or Black Friday sales! Here’s some stat:
Source: www.businesstoday.in
Reciprocity Bias:
Source: 25cognitivebiases.com
Supermarket staff often give a free cookie to your kid. Now, which kid doesn’t love cookies? So, even if your kid doesn’t demand for the entire pack of the cookie, you are obliged to buy it. Why? You see the free cookie as a favor, and you tend to return it. The free cookie is the bait to evoke your reciprocity bias.
In the book Influence: The Psychology of Persuasion author Robert Cialdini describes how the Hare Krishna Society subtly solicited people to donate. They would offer a copy of Baghvad Gita or a flower to passers-by on crowded streets, bus terminals etc. Even if the receiver denies, the Society member terms it as a gift. A subsequent pitch for donation is mostly successful as the passer-by is compelled to donate at least a few coins to return the favour!
Here’s another example:
Source: www.garyasanchez.com
The Lollapalooza Effect
A term coined by legendary investor Charlie Munger. When multiple psychological tendencies combine together to influence your behaviour towards some extreme action, then we call it the Lollapalooza effect. In our real life, we encounter many such situations & places where this effect compels us into taking some action which we normally wouldn’t have taken. A supermarket is one such place, where the biases discussed above come together & make us spend money. A well designed outlet, mall or store can employ measures to appeal to your biases & these biases combine to unleash the Lollapalooza effect on you.
But, there are other biases which if not in a supermarket, do affect you every time you are out there to buy. Let’s also have a look at a few of them.
Bandwagon effect
Source: https://perspect.ai
In my childhood, door-to-door salesmen used to approach our house to sell some kind of detergent powder or some funky kitchen appliance. They always used to tell us how Mr. X & Y from the other lane, have already bought it. The thought that people whom we know, have nudged us to buy. This is exactly what is the bandwagon effect. This bias underlines our inclination toward social proof.
Social proof is the reason why you buy the product that has more positive reviews, knowing very well that many reviews are paid or fake. It’s prudent to remember a quote by Richard Thaler here:
“Recall that people like to do what most people think it is right to do; recall too that people like to do what most people actually do.”
What else does this bias remind you of? FOMO – Fear of missing out seen in the stock market. Investors buy the stock whose share price has risen in the past few weeks. This irrationality of investors is what leads to bull market extremes. More about biases & it’s impact on investing in some future blog.
Recency Bias
Source: https://www.visualcapitalist.com/five-cognitive-biases-hurt-investors
Imagine you are out to shop for a home appliance, say a fridge or a washing machine. The first brand that comes to your mind is the one whose ad you have seen recently. The recent information plays into your mind. You hence ignore the brand whose appliance your neighbors had bought & were raving about last month. The recent information carries more value!
Authority Bias
Source: facebook.com
Authority bias works because it is the shortcut of the brain to make decisions quickly. Relying on an expert’s opinion makes it easy to decide rather than self-think, deliberate & act. This is how an insurance agent who we consider as an expert influences us to buy a particular policy. This bias is also the reason why, when you visit the bank to open a savings account but return back with a Savings + Demat + Trading account. Reason, The bank manager said, “A simple savings bank account cannot be opened!”
Conclusion
We have seen multiple biases that impact us all. Does that mean, you should never visit the supermarket? Well, goodluck to you if you are successful in this. Although, there are a few simple mantras like:
- Always have a shopping list
- Never shop when hungry
- Visit when there is less crowd
However, being aware about these biases & engaging System 2 thinking everytime you make a purchase are perhaps the best ways. Let us know in the comments, if you could save some bucks the next time you shop!
We at Smart Sync Services & Zen Nivesh aspire to help you take well-informed decisions about your money & finances. Drop us an email to know more!!