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Each time you watch or listen to a commercial, look at a billboard or set foot in a store, sinister forces are at work to part you from your hard-earned money. Whether it’s the smell of delicious baked goods wafting through the air as you enter the grocery store (designed to make you hungry and buy more) or the slow music playing overhead in retail stores (designed to slow you down so you spend more time in the store and, you guessed it, buy more) business psychologists and marketers work overtime to get us to spend more and more using a variety of retail mind tricks.
One of the most common and devious methods used against us as consumers is something called relativity. No, I’m not talking about E=mc2 or anything related to Einstein. Einstein was smart, but even he may have fallen for these retail mind tricks. This is financial relativity.
Financial relativity (described as simply relativity from here on) is our tendency to compare an item to other items or to other versions of that same item.
For example, take a look at these two pictures.
It’s pretty obvious that the middle circle on the right is larger than the middle circle on the left. Except, it isn’t. They’re both the exact same size.
This optical illusion, first discovered by a really smart guy named Hermann Ebbinghaus, gives us insight into how our brain works. It naturally engages in relativity thinking without us even being aware of it. When you first looked at the circles, the middle one of the right seemed larger. Why? Because your brain compared it to the small circles surrounding it. In comparison to the small circles, it “seemed” larger, just like the middle circle on the left “seemed” smaller when surrounded by larger circles.
This is not something we are typically conscious of. But make no mistake about it, our brains are carrying out this thinking ALL the time, including when it comes to how we determine if we’re getting a good deal or not.
A Natural Instinct
When we’re shopping for something, whether its new shoes, a new car, or a new house, we naturally compare the prices we encounter with the known prices of other items. A $20,000 car at this dealership is compared to a similar car at another that is $25,000.
This is natural, and in and of itself, isn’t a bad thing. In fact, if we don’t actually know the true value of something and when assessing the true value of an item is hard, we compare to other items and create relative values. We have to do this in order to create some sort of frame of reference to determine if we’re getting a good deal, or if we’re getting ripped off.
On the surface, this doesn’t seem like a big problem. If we don’t know how much something is worth, we have to compare it to other items whose values we know (or think we know). It’s a good deal when we find a pair of shoes that are $55 in one store, and $75 in another. Comparing relative values, in this case, helps us to determine if we’re getting a good deal or not.
A Good Deal?
But how do we know if those shoes are actually worth $55? We don’t. How do we know that they are a good deal at $55? We don’t. The only thing we know is that we FEEL like they are a good deal. And why do we feel that way? Because we are using relativity. We know that they are $75 in one store, and so our brains tell us that $55 is a good deal.
The problem is that retailers use this tendency of our brains against us. How?
Dan Ariely, in his awesome behaviour personal finance book Dollars and Sense: How We Misthink Money and How to Spend Smarter, gives the following example.
Which would you rather buy? A shirt priced at $60 or the very same shirt, priced at $100, but “On Sale! 40% off! Only $60!”?
From a strictly numbers point of view, it makes no difference. At the checkout, you are still parting with $60 of your hard-earned money. But since relativity is so ingrained in how our brain functions, we don’t look at these in the same manner. We view the sale priced item much more favourably. We go home with our $100 shirt having “only” paid $60 and feel like we actually are up $40. In fact, if you’re like my wife, when she comes home from shopping you’d think we’d actually MADE money. “Honey, look at how much I saved!!” And yet, alas, the bank statement shows no evidence of savings at all.
Us vs. Them – Retail Mind Tricks
Retailers employ psychologists in order to use our brain tendencies against us.
Think about the last time you walked into a store and looked at the prices. Were there any sales happening in the store? There’s a reason for this, and it wasn’t to “pass on savings to the customer”. Retailers know that consumers take important cues about value, often times the only cue, from what the “regular” price is listed as.
If we walk into a store and see a regularly priced $500 computer that we’re interested in, we may browse around a bit, perhaps ask a few questions and then leave the store. Why? We’re waiting for it to go on sale.
But let’s say another person walks into that exact same store a week later. They see that exact same computer, but this time it’s “on sale”, 50% off the regular price of $1000. Relativity immediately kicks in and they feel like it is a smart, rational, and economical decision to buy the computer on such a good deal. In fact, they may feel like they are losing $500 of value if they don’t buy it (more on loss aversion, a dumb thing our brains do to make us suck with money, in an upcoming post).
Sale pricing helps customers feel like they are making a smart decision. Even just looking at the sale price next to the regular price gives the consumer a warm and fuzzy feeling knowing that they have made a smart financial decision. Except, they haven’t.
They’ve made a very foolish decision. But retailers have dressed it up and put a bow on it to make consumers feel smart. Why? So they keep coming back to buy these “sale priced” items.
It’s On Sale…All Year
In fact, you may have noticed but many stores have sales 365 days of the year. They dress them up differently, in order to make you feel like it’s a special, once a year deal, but they happen all the time. Don’t believe me?
January: New Year’s Sale/After Christmas, Boxing Week Held over
February: Valentine’s Day Sales
March: Spring Break Sales
April: Easter Sales
May: Mother’s Day, Memorial Day (U.S./May Long Weekend Canada)
June: Father’s Day
July: Independence Day (U.S.), Canada Day
August: Back To School, Labour Day
September: Back to School
October: Thanksgiving (Canada)
November: Thanksgiving (U.S.), Black Friday, Cyber Monday
December: Christmas, Year End sales
This doesn’t even include the sales that don’t coincide with any holidays but that stores run on a regular basis.
The odds are definitely stacked against us as consumers. When we walk into a store, our brains are hardwired to compare. Retailers know this and they use it against us.
So What Can You Do To Avoid Being A Relative Dummy?
The first step is to be aware of what is happening. It’s retail psychological warfare, and it happens in every store. Make sure you shop with your eyes, and your mind, wide open. Retailers are looking to part you and your money, and you are your only protector.
Train yourself to think about what the price ACTUALLY IS, not what it used to be. And for the love, don’t think about “how much you saved” when making a purchase and give yourself a pat on the back for being so savvy. This is EXACTLY what retailers are trying to get you to do.
Instead, focus on the cash that you are ACTUALLY spending. As Ariely points out, “Buying a $60 shirt marked down from $100 is not saving $40. It is spending $60.” You don’t walk out with $40 in your pocket. You leave $60 lighter.
How To Fight Back Against Retailers
So far I’ve vilified psychology in this article, but consumers can actually use relativity to find HUGE savings.
For example, when looking to get a deal on something, it’s much easier to negotiate big savings on large items if you ask for small percentage discounts.
Why is this? Because retailers can’t help but compare their sales promotions relative to other companies.
What does this actually look like?
For example, what would you rather…saving 50% or saving 10%. Everyone would obviously say they’d rather save 50%. We’d feel like we’d gotten a killer if we could get half off the regular price.
But what if I told you that the 50% off was on a new pair of shoes that were $100 and the 10% discount was on new patio furniture costing i$1000? A little bit of quick math confirms that the smaller PERCENTAGE discount actually puts MORE money in your pocket.
As consumers, we can use psychological warfare against retailers.
For example, asking for 50% off a pair of shoes probably isn’t going to happen. But could you ask for 10% off a new computer that’s $1000? What about asking for 5% off a $20,000 item, like a car? How about negotiating a 1% reduction in commission when you sell your house? ($500,000 home is $5000 saved).
Retailers, salespeople, Real Estate agents, they’re all human. And like us, their brains naturally move towards valuing things in relative terms. They too assume that smaller percentages are no big deal, even though in REAL value (cash actually saved), it can make a huge difference. Consumers then should focus on asking for smaller percentage discounts, the larger the purchase being made. These discounts are the ones that are more likely to be given by retailers. And they are the ones that yield the biggest ACTUAL savings.
A Final Word From Einstein
“A fool and their money are soon parted.” I don’t love this saying in this instance because we’re not dealing with foolishness here, per say. What we’re dealing with is our brain’s natural tendency towards making irrational decisions, and the sinister psychological tactics employed by retailers. Perhaps a better saying would be, “A clueless consumer and their money are soon parted.”
Albert Einstein was a smart guy. His name is synonymous with genius. Definitely no fool. If Einstein had been an economist, I wonder if this is the advice he would have given.
“Education is not the learning of facts, but the training of the mind to think.”
In fact, that’s just the advice he gave.
What do you do to train your mind to think differently to save money? How have you seen retail mind tricks being used against consumers? Leave me a comment and let me know!