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Should we as consumers be rational always? Why are we paying more for less?

The “less is more” mantra has backfired into “more is less,” especially among individuals who have lost their jobs in the recent past due to Covid-induced downsizing, and the rest who work more hours for less pay. From a consumer’s view, another example of more is less is the case of leading cellular service providers offering 100% money back on smartphones by doubling the monthly charges for a few additional small freebies. When unlimited data plans are available in most 4G networks for less than Rs 1000 per month, the same company is charging almost double for limited data but with bundled discounts of about 1700, effectively talking of giving back the investment in the handset in two years.  

The company will not give you unlimited data downloading and probably expects additional revenue from the users in the next two years. Moreover, they effectively increased the switching cost for the customer without doing much – less value service for more money. 

It is like major banks charging you a service fee if you use any ATM instead of seeking the branch teller assistance. They have that backwards; they should offer you a discount if you use the ATM and save them human capital costs.

Did you ever marvel about those machines in the restrooms that blow-dry your hands? They cost more with less effect. Research has shown that you are better off leaving the restroom with wet hands and letting them air-dry. That way you reduce the amount of bacteria on your hands. 

The list of examples goes on and on and includes: nouveau cuisine, gourmet foods, salt-free food, fat-free sour cream, sugar-free candy, reduced sugar preserves, cholesterol-free eggs, light ice cream, ice milk, “natural” unprocessed virgin oils, organic produce, fortified mineral water, non-alcoholic beer, and reduced tar cigarettes. All of them charge more for less. 

Traditional economists’ equations do not explain seemingly irrational behaviour of consumers who pay more for less. Some researchers discuss the concept of how “framing” things in the best possible light can manipulate us to act accordingly. People treat gains and losses differently. People, in general, hate risk if they are talking about gains, but will take incredible chances to avoid a most certain loss. 

Don’t we all agree that life is a good thing, despite the lockdown and the mask hassles?  So how can you avoid falling into these perverse traps and instead be a rational consumer all the time? Don’t worry, because, in fact, you probably are acting rationally by paying more for less – sometimes. It is best that you at least try to see the other side by becoming aware of the spin that advertisers, governments, adversaries, spouses, and friends put on things. 

Being aware will lead us to take better decisions. Ask yourself these questions: 

  • Is it worth to spend Rs 75000 on a smartphone and take a cellular plan that will effectively give back 100% of it in two to three years? Do you really need the latest phone at this point of time?
  • Is it worth to spend Rs 100 per year to have limited “fast” cash from automated teller machines? 
  • Is it worth to spend upwards of Rs 50000 a year for term life policy when you are really covered for most risks by either employer or by your own investments? 
  • Is it worth to spend an extra Rs 10000 or more per year to carry that black or Signature credit card for the promise that if you lose it in most developed or developing countries on the planet you will have money and a new card back within 24 hours? 

The answers depend on your perception of your own needs. 

Two professors have proposed the theory of “just enough” to explain human behaviour, both as a descriptive and as a normative or prescriptive theory. As an example, to be efficient, how many votes should any bill in Lok Sabha need? The answer is just enough to pass. The reason is that the final vote subsumes all the compromises and horse-trading that goes into the passing of each bill. How many vote trade-offs or promises of other funding for a variety of projects (or personal pockets of law-makers) goes into any bill that passes? Probably too many – but if legislation is passed, surely just enough. 

Does that mean that individuals or groups should always act rationally? No. After all, irrationality and neurosis help to make us all interesting. It’s doubtful that we would want to live in a completely rational world anyway. Perhaps we should be, at least in these times of the second wave of the pandemic, shouldn’t we?



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Disclaimer

Views expressed above are the author’s own.



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