There are Free Lunches Statement of Intentions

There are Free Lunches: Behavioral Clues to Live Happy in the Economic World is a blog that intends to present updated and relevant information about the "hidden" and only recently uncovered dimensions of the economic science: the behavioral factors. With this blog we intend to promote in Europe and in the rest of the World, the top research articles and perspectives on behavioral economics, decision making, consumer behavior, and general behavioral science. We aim to be followed by journalists, academics, managers, civil servants, and everyone who wishes to improve their daily interaction with the economic world and consequently, their lives' happiness.

Monday, 9 May 2011

Principle 4: Buy Less Insurance

If the bad news is that we adapt to good things. The good news is that we adapt to bad things as well. Research on how well people cope with a wide variety of traumas and tragedies—from heart attacks to terrorist attacks—suggests that people are not the emotionally fragile creatures they often imagine themselves to be (Bonanno, 2004; Ubel, 2006). Just as the physical immune system wards off maladies, the “psychological immune system” wards off malaise by marshalling the remarkable human capacities of reconstrual and rationalization (Gilbert, 2006). But research suggests that people don’t know much about their own psychological immune systems (Gilbert, Pinel, Wilson, Blumberg, & Wheatley, 1998), and as a result they overestimate their vulnerability to negative affect. Businesses often trade on that ignorance by offering various forms of insurance against unhappiness, from extended warranties to generous return policies. With price tags reaching as high as 50% of a product’s original cost, extended warranties sold by retailers and manufacturers provide huge benefits to the seller and are widely acknowledged to be “bad bets” for the buyer (Berner, 2004; Chen, Kalra, & Sun, 2009). Why are consumers willing to pay so much for these overpriced warranties? Owning something instantly makes it more delightful (Kahneman, Knetsch, & Thaler, 1990; Morewedge, Shu, Gilbert, & Wilson, 2009), and as such, a plasma TV that has just become my plasma TV may seem worthy of protection. The prospect of loss is highly aversive to people, who expect the pain of losing $5 to exceed the pleasure of gaining $5 (Kahneman & Tversky). But research shows that this expectation is wrong. Kermer et al. (2006) gave participants $5, and then flipped a coin. Participants were told that if the coin came up one way they would get an additional $5, and if it came up the other way they would lose $3 of their initial endowment. Although participants expected to be more emotionally affected by the loss of $3 than by the gain of $5, they were not. Participants who lost $3 out of their initial $5 endowment were significantly less upset than they expected because they instantly framed the event as a $2 gain. Research like this suggests that buying expensive extended warranties to guard against the loss of consumer goods may be unnecessary emotional protection. The psychological immune system also provides the key to understanding the ability to “spin” events in a positive direction after they have occurred—thereby dodging regret. Recent research demonstrates that ordinary people are remarkably adept at reconstruing events in order to avoid self-blame and the regret that accompanies it, a capacity that these same individuals may fail to appreciate in prospect. When passengers on a train were asked to estimate how much regret they would feel have felt if they had missed the train by five minutes or by one minute, they estimated that they would have felt more regret in the latter case than the former. And yet, passengers who had actually missed their trains by one and five minutes reported remarkably little regret, and equally little regret regardless of whether they had missed the train by five minutes or by one (Gilbert, Morewedge, Risen, and Wilson, 2004). What explains this discrepancy? When passengers who had made their trains were asked to imagine having missed them by a minute, they imagined blaming themselves for the near miss (e.g., ―I would not have missed the train if only I’d woken up earlier and gotten out of the house faster‖). Passengers who had actually missed their trains, however, tended to blame anyone or anything but themselves (e.g., "I would have missed the train if only all the gates were open instead of just one"). Because people are highly skilled at dodging self-blame, they experience less regret than they predict. Unfortunately, this handy mental mechanism may actually be short-circuited by generous return policies. Gilbert and Ebert (2002) offered participants the choice between prints of paintings by artists ranging from Van Gogh to El Greco. After participants made their selection, half of them were presented with the equivalent of a generous store return policy: they were told, “If you change your mind about which poster you want to take home before you leave today or even any time in the next month, you can just let me know and we will exchange it for you”. The remaining participants were informed that no such exchange would be possible and that their choice was final. Participants who knew they were stuck with the poster they had chosen responded by inflating their appreciation of it, seeing the poster in a more positive light than they had initially. In contrast, participants who knew they could exchange their poster anytime were deprived of this emotional benefit of commitment and found the poster no more attractive than they had before selecting it (see also Frey, 1981; Frey, Kumpf, Irle, & Gniech, 1984; Girard, 1968; Jecker, 1964). Interestingly, however, participants failed to predict this difference and thought they would be equally happy whether they could exchange their poster or not. People seek extended warranties and generous return policies in order to preclude the possibility of future regret, but research suggests that the warranties may be unnecessary for happiness and the return policies may actually undermine it.

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