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Paying a price for impulse

Date

Peter Martin

Shoppers beware, impulse buying extends to cars and even houses, not just Mars bars.

'If we are so casual when making purchasing decisions, how casual is our judgement when we make even more important decisions?'

'If we are so casual when making purchasing decisions, how casual is our judgement when we make even more important decisions?' Photo: Louise Kennerley

SO YOU'RE about to go shopping. I imagine you trust yourself. You shouldn't. New research shows you are far more vulnerable to whims than previously thought - even when buying really big things - and your decisions are affected by your mood, although not always in the ways you would expect.

It's well known that you should ''never shop on an empty stomach''. A few years back economists Daniel Read and Barbara van Leeuwen proved the point by asking British office workers to choose between receiving an apple or a Mars bar. But they weren't going to get the gift until a week later, so they had to guess what they would want in the future, in the same way as we have to when shopping. Half were asked just after they had eaten, half towards the end of the day when they would be hungry.

The hungry half were far more likely to say they would want a Mars bar in a week's time. The half that had eaten were more likely to want an apple.

But big decisions are different, right? Not about cars they are not. Americans buy convertibles. The US National Bureau of Economic Research finds they buy more of them on days that are exceptionally hot. Think about that: a car lasts for a decade, but a decision about the type of car we buy can depend on the weather on the day we go shopping.

The Bureau of Economic Research examined 40 million car sales records spanning eight years. It found people bought more convertibles in spring and summer than in winter and autumn. That's not surprising - buying in a season when you can use a convertible means it can give you an extra season's worth of use. But what was surprising was what happened on days when the weather was exceptionally hot.

On days that were 9 degrees hotter than normal for the month, sales of convertibles jumped 9 per cent, even in winter. Adding weight to the finding that those convertibles were bought on a whim, the bureau found the convertibles bought on those days were far more likely to be returned.

But that couldn't happen for homes, could it? Surely we make that purchasing decision - the most expensive of all - on the basis of a very strict shopping list. For instance, we would decide ahead of time whether we wanted a swimming pool - we certainly wouldn't decide on a whim based on the weather the day we went shopping.

The bureau's same study published in July finds that homes with pools sell for $1400 more in summer than they do in winter. The finding makes little sense. By the time a contract for a house has been settled (typically two months), the season will most probably have changed. Yet it is the weather at the time of purchase - not at the time of moving in - that makes buyers more likely to want pools.

The researchers pose a disturbing question: If we are so casual and easily influenced when making our most important purchasing decisions, how casual is our judgment when we make even more important decisions, such as where we will work, who we will marry, whether we will get divorced and whether we will have children?

A few years back, I took part in a mass experiment run by Daniel Kahneman, a psychologist who had just won the Nobel prize in economics. He asked each of us in the lecture hall to take out our driver's licence and write the last two digits of its number at the top of a page. Then we had to guess the value of a bottle of red wine and write down the dollar figure - anything from 00 dollars to 99 dollars - at the bottom of the page. The bottle might have been a collector's item. Its label said it was created for the 2000 Olympics.

Sure enough, those of us with licences whose last two digits spelt out a low number thought the wine was cheap. Those whose licences produced a high number thought the wine was expensive.

That phenomenon is called ''anchoring''. It is deployed against us the minute we set foot inside a store. Harvey Norman puts affordable television sets next to expensive sets whose high prices are prominently displayed. The high price acts as an ''anchor'' making us think the affordable ones are cheap. Studies show the mere presence of a credit card sign in a shop increases our willingness to spend there, whether or not we are planning to spend with a card.

Until now the effect of moods on our whims has been a mystery. On one hand some of us splurge when we feel down - so-called ''retail therapy''. On the other hand many of us splurge when we feel good.

In October, Francine Petersen of the European School of Management and Technology put forward a theory that bridges the gap. She says it depends on whether we think our mood can change. If we are depressed and we feel that won't change, we won't bother to splurge. If we feel good and we feel that can't change, we'll feel it's safe to splurge without worrying about the consequences. Which is probably why the music in shops is so relentlessly positive. It's important.

Peter Martin is economics correspondent.

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