You’re Out of Your Mind

Time for a New TV

After getting sick of sharing TV time with the kids we recently decided it was time to replace the broken second TV.  Now electrical items fall under my jurisdiction in our house, be that a good thing or not, and it was my job to buy the new TV.

In a prior work life I worked for one of the state/territory consumer affairs/fairy trading bodies and since that time I’ve been a supporter of consumer advocacy group Choice with an in force subscription and regularly use their product tests to narrow the field of items.  The point being that when I entered the electrical store to make a purchase I already had a pretty good idea of what I wanted, how much I was prepared to pay and also the tricks and traps to avoid.

So how did I go?  Well, the first store I went to didn’t have stock of the TV I’d already identified.  No luck there, so off to the next store.  This is where things got interesting.

For starters they also didn’t have the TV I was looking for, but that was just the start of the lesson for this article.  This store had a very good salesperson, he engaged me in conversation to find out the specifics of what I was looking for and also had a good understanding of the products he was selling.  He quickly came up with a good replacement and positioned it as a better offering for a lower price.  Good sales skills.  Job well done, but what came next was the icing on his cake.

Would You Like Fries With That?

If you’ve bought any electrical item recently through basically any of the retailers, particularly the majors, you will have been offered an extended warranty.  It’s the Harvey Norman version of the Maccas “Would you like fries with that?”  Now if you have ever read any of the research on these offerings you would know they are good business for the retailer and not such a good deal for the consumer.

Take a moment to think, when was the last time you bought a major electrical item or appliance that broke down outside of the manufacturer warranty, but within 5-6 years of purchase.  It doesn’t happen often does it?  Now despite the fact I knew extended warranties aren’t a good deal I took up the 4 year warranty extension anyway.  How did this happen?

Damn Emotions and Biases

The salesperson gently reminded me of something most of us have a craving for, peace of mind.  The extra 4 years of protection provided additional peace of mind and who doesn’t want more peace of mind.

He also reminded me the all up cost was very similar to the cost of the TV I was initially looking for, linking my spending to the other TV’s cost and my initial spending decision.  All of a sudden it seemed the sensible decision to take up the extended warranty (more peace of mind and roughly the same outlay) and that’s what I did.

Problem is it wasn’t logical or sensible at all.  I knew that statistically we were better off to keep the money in our pocket every time the extended warranty is offered, as the amount we would save is expected to be less than the cost of replacing any item that does break down during the extended warranty period.  I’ve even declined the extended warranty on numerous prior occasions.

The second matter is that the amount I was prepared to pay for the TV I initially went looking for is irrelevant as soon as the decision is made to go with another TV.  They both came with a 12 month factory warranty and I didn’t plan on taking an extended warranty for the initial TV, so why should this TV be any different.  They both came from high quality manufacturers.

The first thing he did was to successfully bring emotion into the buying decision by introducing the question of peace of mind.  The thought process started to get cloudy at this point.

By reminding me of the initial TV price relative to the combined TV and extended warranty cost he successfully moved the pricing anchor[1] from the lower cost TV I did purchase to the higher cost TV I was looking for initially.  All of a sudden, the extended warranty wasn’t an additional cost item, it was a free bonus item.  Well, at least that’s what I was telling myself for a brief period.  Long enough to say yes and pay for it.

Slow Down and Take a Breath

My point is that sometimes we know what is logical and what we should do and why we should do it, but emotion, heuristics[2] and cognitive biases can override sensible decision making.  What can we do about it?  I suggest you slow the process down, as feeling you need to make on the spot decisions is often part of the problem.  Slow down and take a breath.

In my case I’d already put the trip to the store off a couple of times and was unsuccessful at the first store, then the second store didn’t have the TV I was looking for either.  I just wanted the matter sorted and it is in such circumstances that we take short cuts and let emotions and biases play a greater role in decision making.  Logical thinking takes more time and we can get lazy and just accept the first decision we arrive at.  In the financial world it is often the wrong one.

We’re Not Perfect, But With Help We Can Make the Right Decisions

Now you may think that this wasn’t a big ticket item so it doesn’t really matter and if it is a one-off that’s true.  But what if you make financial decisions this way all the time?  What about when the decisions have much larger consequences?  Well then it does matter and you may have a real problem.

Financial services companies and retailers spend millions of dollars every year devising ways to exploit our emotions, heuristics and biases.  You have to constantly be on your guard when it comes to financial decision making and develop strategies to combat the shortcomings in our imperfect human thought processes.

One of the single biggest value adds a good financial planner can bring to a client’s position is better financial decision making.  How?  As an objective, unemotional third party to the decision, a good financial planner is able to identify when emotion, heuristics and/or biases are overriding logic and leading you to a poor financial decision.  A good financial planner should also be well aware of the tricks employed by financial product and service providers and able to help you avoid them.

PS – If you found my decision making failure in this instance interesting I think you’d love a book released a couple of years ago by Nobel Prize winner Daniel Kahneman titled “Thinking, Fast and Slow”.  As Molly Meldrum would say, “Do yourself a favour”.

[1] Anchoring is a term used in psychology to describe the common human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions.

[2] A heuristic is a rule or method that helps you solve problems faster than you would if you did all the computing. E.g. a “rule of thumb.”

Disclaimer

This advice is of a general nature only and may not be relevant to your particular circumstances.  The circumstances of each person are different and you should seek advice from a financial planner who can consider if any strategies or products mentioned are right for you.