11 Simple Economic Lessons to Make You a Smarter Shopper on Black Friday

11 Simple Economic Lessons to Make You a Smarter Shopper on Black Friday - Getting the best deals starts with understanding the science of prices -- and the games retail companies play to fool us into paying more than we should

Reuters

The first and last rule of prices is that nobody knows what anything is really worth. Shoppers are guided by shallow clues ("this is cheaper than that") and latent emotions ("it just feels like a good deal") rather than knowledge and deliberate thinking. Smart shopping might be an oxymoron. But smarter shopping? That's a noble goal. Here are 11 tips from microeconomics, behavioral economics, and social psychology to guide you to successful and as-smart-as-possible Black Friday.

(1) Remember Why It's Called "Black Friday." 

No, not because it starts at 3 am. It's called Black Friday because it's the beginning of the season when many stores go from being in the red to being in the black. That doesn't sound like much of an economic lesson for you, but that's the point. Black Friday isn't for you. It's for the stores. 

The biggest mistake that people make on Black Friday is that they assume that the most popular day of the year to shop is the best day of the year to buy anything. If you're walking into a store at 5 AM Thursday morning, you're probably expecting floor-kissing prices in every corner. But store-wide discounts aren't in the best interest of the store. It's more common that a few tantalizing items will be sold at a loss to lure shoppers through the door while smart floor design guides them toward more profitable (even full-priced) items. "Black Friday is about cheap stuff at cheap prices, and I mean cheap in every connotation of the word," Dan de Grandpre, a veteran deal expert, told the New York Times. 

Stores know you're making this mistake, and they know how to manipulate floor traffic to their higher-margin stuff. As experts in "retail ergonomics" (it's a thing) have shown, counterclockwise traffic flows result in more spending; putting high-margin items at eye-level to the customers' right is most likely to motivate a purchase; and forcing you to walk around a display is an easy way to draw our attention to items the store wants us to throw in the cart.

(2) The Best Deals Aren't This Week (Probably). 

The two most common reasons for steep discounts are price discrimination and inventory pressure. Price discrimination is the store saying: "Hey you, cheapo, I know you won't buy this steel pot at $50, so we're selling it at $40. Buy it now!" Inventory pressure is the store saying: "You didn't buy our steel pot at $50, or $40, and now it's taking up overhead and costing us money, so how about $38?"

It's in the stores' interest to make you think prices will go up after Black Friday. But for many items, they probably won't. Instead, as inventory piles up, prices will stay low or go lower in early December. Still, it's better for the economy if more customers buy into the Black Friday hype and behave as though we're in a mini-inflationary cycle where prices on all goods are about to jump. The alternative -- everybody sits on their hands and waits until December 26 to shop for gifts -- isn't particularly good for anybody. Plus, predicting exactly when prices on your single favorite item will be lowest is like trying to buy a plane ticket at its single lowest price. Even our smartest algorithms struggle to do it. 

(3) Two Words to Remember: Net Cost. 

The damage from Black Friday won't be found on your mall receipts. To appreciate the net cost of your shopping trip, remember to include the gas you use commuting from mega-sale to mega-sale, the shipping and handling costs, and the warranties and rebates (much more on those later). 

We tend to ignore net cost when we shop because we're focused on the bargain story. Shoppers love stories -- "This skirt was 80% off, EIGHTY!!" -- precisely because we don't know what most items are really worth. Narratives fill the space where knowledge should be. If you drive 40 minutes to a super-sale and sit in a parking-lot line for another 20 minutes, that's an hour of your time and gasoline. That hour might not be part of the story you tell yourself and your friends later. But those are real costs counting against that magnificent 80% discount you found inside.

(4) Make a List. Check it Twice. 

Shoppers understand that spending a little money makes it easier to spend a little more money. We get a dopamine rush from buying the perfect thing. We also allow past savvy purchases to guide future (dumber) purchases. Making choice after choice depletes our good judgment. This effect, called decision fatigue, exhausts our ability to resist items that feel cheap at the end of a shopping trip. 

Keeping track of how much you've spent sounds like sage advice, especially if you're keeping a budget. But be aware that that number will also frame prices in a negative way. Economist Dan Ariely has called this the "problem of relativity." Imagine you see a fetching $50 chair. Would you be more likely to buy it after a $5 lunch or as part of a $500 spending spree? Fifty dollars is $50, no matter how you cut it. But it's easier to swallow when it's "only" a tenth of your total haul. 

The best way to overcome decision fatigue and "the problem of relativity" is to write a list and buy only what's on the list. That way you approach Black Friday not as an exploratory mission into the dark world of discounts and window shopping, but as a pure check-the-boxes trip.

(5) Beware of "Free." 

Something weird happens to our brains when the price for something goes from $1 to $0.01 to free. We stop thinking clearly. Getting things for free feels like such a good deal that we'll go out of our way to get it. Here's Dan Ariely in his book Predictably Irrational:

"A few years ago, Amazon.com started offering free shipping of orders over a certain amount. Someone who purchased a single book for $16.95 might pay an additional $3.95 for shipping, for instance. But if the customer bought another book, for a total of $31.90, they would get their shipping FREE! Some of the purchasers probably didn't want the second book (and I am talking here from personal experience) but the FREE! shipping was so tempting that to get it, they were willing to pay the cost of the extra book."

Free isn't bad. It's good. It's great. It's free! But we're often so enraptured by free that we overreact, tailoring our purchases around getting to FREE! shipping, or FREE! membership, or FREE! headphones, and wind up spending more in the process. Don't do it. Instead, just buy exactly what you want and nothing more.

(6) Warranties and Rebates Are Dastardly Tricks. 

Price discrimination is most dangerous when you can barely see it. Buying insurance on an electronic toy? Ah, such peace of mind! Rebates? Ah, such savings! 

Perhaps. But both are forms of price discrimination. Warranties push risk-averse customers into paying a higher price for the same product. "[Warranties] make no rational sense," Harvard economist David Cutler told the Washington Post. "The implied probability that [a product] will break has to be substantially greater than the risk that you can't afford to fix it or replace it. If you're buying a $400 item, for the overwhelming number of consumers that level of spending is not a risk you need to insure under any circumstances."

Rebates test customers' memories and willpower. A $10 rebate on a $40 candlestick feels right in the moment. But four months later, when the words "candlestick rebate" flash in your brain at work, are you really going to take time out of your day to save the equivalent of one day's lunch? Retail companies are betting that many of you will answer that question with a "meh."

(7) Avoid the Rush. 

Your brain is smarter in slow motion. Feeling hurried can force bad decisions in all aspects of life, as nowhere is it true more than a crowded store. When we're bombarded with stimuli, racing to grab cardboard boxes before the frantic mother of five behind us, we forget the key question in shopping: Will I still want this thing when I leave the store?

Thinking about how much we'll regret our purchases can radically change our shopping behavior. A recent study of holiday shopping out of Harvard and Columbia Business Schools devised a mischievous three-part experiment. First, shoppers chose between an expensive or cheap article of clothing. Second, they were randomly divided into groups and asked how much they expected to regret their purchase in one day or ten years. Third, they were released into a mall. The economists found that thinking about short-term regret moved shoppers to buy discounted products. Those primed to take the long view bought more extravagant goods.

One conclusion from the study is that short-term thinking leads to discount hunting while taking a longer perspective on our buying habits motivates us to price quality over bargains. In the frenzied atmosphere of a Black Friday store, we're manically focused on saving money. But a broader perspective might move us to spend more on the few items we really care about.

(8) Beware "Good Deals" on Items You Know Zilch About. 

I love this story from Priceless by William Poundstone. Once, Williams-Sonoma couldn't sell their $279 breadmaker, perhaps because, you know, it was a $279 breadmaker. But when the company introduced a $429 breadmaker next to their $279 model, sales of the cheaper model doubled even though practically nobody bought the $429 machine. 

Plausible Lesson 1: Williams-Sonoma shoppers are inscrutably nuts.

Plausible Lesson 2: We don't know what anything's worth, especially weird stuff like breadmakers, so we're more susceptible to cues that tell persuasive stories about what they *should* cost. Don't let that happen! Don't fall for what looks like a "good deal" just because you can justify it to yourself on the basis of "it was 40% cheaper than the other model." Research prices before you allow store cues to give you answers.

(9) The Most Efficient Gift Is the Worst Gift. 

It's cash. Yes, it's awful. It's cold and bloodless and impersonal and everybody will hate you if you get it for them. It's also extremely efficient for buying somebody exactly what they want for the perfect price. The famous economic paper "The Deadweight Loss of Christmas" showed that gift-giving "destroys" between a tenth and a third of the value in what we buy. That means the recipient of a $100 shirt would value it between $70 and $90. Cash is better.

You can't get cash for that special someone, unless you happen to be dating an economist studying deadweight loss. So best to follow the advice of Geoffrey Miller, the University of New Mexico professor, whose book The Mating Mind informs us the best gifts are "the most useless to women and the most expensive to men."

(10) Waking Up at 2 AM to Stand in Line For Hours Isn't *Necessarily* Crazy. 

Your shopping experience, like any experience, has a value. In other words, it has a price. It might seem silly for people to waste perfectly good hours of sleep to wait in line at Best Buy. I happen to think it is silly. But it is not irrational, for two reasons. 

First, it's another example of price discrimination, since retail stores are essentially gifting their best deals to their most discount-desperate customers. Second, if you love waiting in frigid Walmart lines at 2 AM, well that's just, like, your time-cost preference, man. Maybe the absurd inconvenience of the wait is a part of the story you want to remember and tell friends later. We pay for memories and stories and extreme experiences that will bring us joy later down the line all the time. Maybe this isn't any different. So don't think: While I was sleeping, my friends were wasting their lives for a slim bargain. Think: While I was sleeping, my friends were paying for an entertaining experience with their time.

(11) One Last Thing: Don't Buy That One Last Thing!

Black Friday is exhausting. And when you feel exhausted, your brain gets drunk with stupid. It's decision fatigue, it's leg fatigue, it's everything fatigue. Retail stores know this. So they put cheap stuff tantalizingly close to our arms in the checkout aisle. It's so cheap, and small, and cute, I have to have it, your decision-fatigued brain will plead. Don't listen. ( theatlantic.com )