Imagine There’s a $5 Discount. It’s Easy If You Try. . . .

June 21, 2016
Posted by Jay Livingston

Reading Robert H. Frank’s new book Luck and Success, I came across this allusion to the famous Kahneman and Tversky finding about “framing.”

It is common . . . for someone to be willing to drive across town to save $10 on a $20 clock radio, but unwilling to do so to save $10 on a $1,000 television set.

Is it common? Do we really have data on crosstown driving to save $10? The research that I assume Frank is alluding to is a 1981 study by Daniel Kahneman and Amos Tversky. (pdf here ) Here are the two scenarios that Kahneman and Tversky presented to their subjects.

A.  Imagine that you are about to purchase a jacket for $125 and a calculator for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $10 at the other branch of the store, located 20 minutes drive away. Would you make the trip to the other store?

B. Imagine that you are about to purchase a calculator for $125 and a jacket for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $120 at the other branch of the store, located 20 minutes drive away. Would you make the trip to the other store?

The two are really the same: would you drive 20 minutes to save $5 on a calculator? But when the discount was on a $15 calculator, 68% of the subject said they would make the 20 minute trip. When the $5 savings applied to the $125 calculator, only 29% said they’d make the trip.

The study is famous even outside behavioral economics, and rightly so. It points up one of the many ways that we are not perfectly rational when we think about money. But whenever I read about this result, I wonder: how many of those people actually did drive to the other store? The answer of course is none. There was no actual store, no $125 calculator, no $15 jacket. The subjects were asked to “imagine.” They were thinking about an abstract calculator and an abstract 20-minute drive, not real ones.*

But if they really did want a jacket and a calculator, would 60 of the 90 people really have driven the 20 minutes to save $5 on a $15 calculator? One of the things we have long known in social research is that what people say they would do is not always what they actually will do. And even if these subjects were accurate about what they would do, their thinking might be including real-world factors beyond just the two in the Kahneman-Tversky abstract scenario (20 minutes, $5). Maybe they were thinking that they might be over by that other mall later in the week, or that if they didn’t buy the $15 calculator right now, they could always come back to this same store and get it.

It’s surprising that social scientists who cite this study take the “would do” response at face value, surprising because another well-known topic in behavioral economics is the discrepancy between what people say they will do and what they actually do. People say that they will start exercising regularly, or save more of their income, or start that diet on Monday. Then Monday comes, and everyone else at the table is having dessert, and well, you know how it is.

In the absence of data on behavior, I prefer to think that these results tell us not so much what people will do. They tell us what people think a rational person in that situation would do. What’s interesting then is that their ideas about abstract economic rationality are themselves not so rational.

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* I had the same reaction to another Kahneman study, the one involving “Linda,” an imaginary bank teller. (My post about that one, nearly four years ago, is here ). What I said of the Linda problem might also apply to the jacket-and-calculator problem: “It’s like some clever riddle or a joke – something with little relevance outside its own small universe. You’re never going to be having a real drink in a real bar and see, walking in through the door an Irishman, a rabbi, and a panda.”

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