How Return Policies Nudge You to Buy More
❝Ownership causes us to value things in ways that have little to do with actual value.❞ -Dan Ariely
My wife and I are sitting on a rock staring down at the tops of the trees. Beyond the trees, we can see the city of Boulder, Colorado, and off in the distance, we can see Denver. It's windy up here and quite scary. We wouldn't have climbed this close to the edge if so many other people hadn't done it already. Fear aside, this is pretty cool.
As we sit outside and enjoy the sunshine and the wind high above Boulder, I complain - again - about the quality of my hiking pants. They are worn out, don't fit quite right anymore, and don't have all the features I'd like. My wife reminds me that I've been saying this for a year, and I haven't done anything about it. She suggests going to an outdoor recreation store when we get back to Denver to find some new pants. I resist, of course, because these pants work just fine. My wife tells me that that argument might make sense if I hadn't just finished complaining about them.
Back in Denver, we go to the store, and I'm having difficulty deciding. We found pants from three different brands that all seemed pretty good. There was a slight difference in the cost of each brand, and now I'm trying to decide if it's worth the extra $20 to get the more expensive pair or not. I'm really struggling with this decision. I go back and forth, and then I go back and forth again. I'm stuck in a sort of analysis paralysis situation.
The salesperson tells me that it might make sense if I just buy all three pairs. Then, I'll have them at home, and I'll have more time to decide which pair works best for me. I can always return the ones that don't work, she says. I told her that that sounds great except for the fact that I don't live in town. She simply reminded me that I could return these pants to any store, including the store back at home.
Brilliant! I'm fortunate enough to be able to afford all three pairs right now, especially knowing that I'm going to get two-thirds of that money back when I return the pants I don't want.
Over a year later, I still have all three pairs.
That's not a fluke nor an accident. The salesperson and the managers of the store know very well how consumers behave. They designed their return policy around that.
ENDOWMENT EFFECT
Return policies are driven heavily by what psychologists call the endowment effect. The endowment effect simply says that if you own something, you will think it is worth more than if you didn't own it.
Think about your home for a second. The value of your house to you represents not only the market value but also the value of all of the good memories you have in that home. That's the home where your children learned how to play the piano. The backyard is where you had all of those family barbecues. You may even have some blood, sweat, and tears invested in your house. The problem is, a person who may want to buy your home isn't interested in buying those memories or other intangibles.
Perhaps have experience with IKEA. IKEA is a furniture store where you buy furniture that isn't yet assembled. You have to go through a lot of effort to find what you want and get it home. Then you have to try to put it together without losing your temper. Finally, you have to do something with all those extra parts. When it's done, though, you've got something that you made. You created it, and it feels like there should be value in that. However, if you were to try to sell that to somebody, they wouldn't care. They only see the piece of furniture, not the effort that went into it.
LOSS AVERSION
The second aspect of return policies has to do with how we feel about losing something. The endowment effect says that we value things in our possession higher than if we didn't own them. Loss aversion says that losing something we have stings more than gaining something we didn't have.
In other words, if I gave you $100, it would feel pretty good. Alternatively, if I took $100 from you, it would feel pretty bad. The thing about loss aversion is that we are averse to losing. We will fight more to keep something we have than to get something we don't have. That means that losing the $100 would hurt you more than gaining $100 would feel good. It feels pretty good to get something, but it feels awful to lose it.
RETURN POLICIES AND SPENDING
How do the endowment effect and loss aversion play into return policies? It's pretty simple, really. If you get something you didn't already have, it feels pretty good; it's not amazing, but pretty good. Then, once you have it, the endowment effect says that you will think it is worth more simply because you have it. It's in your possession, and it's yours. If you were to return it, you would be losing something that you placed a lot of value on. Lots aversion says that losing that thing would feel really bad.
It's not an accident that they let you take items home and offer to take them back. If you were on the fence about buying a particular product, you might buy it if you went home to think about it and then came back to the store. However, you are far more likely to buy it and not return it if you take it home today with permission to bring it back.
FAILURE TO RETURN
If you think about it for a second, you realize that a company is under no obligation to take back a product that you bought from it. Sure, you may argue that competition leads to more companies having return policies because if one company has a return policy and a second one doesn't, more people are likely to shop at the first company. But there's something deeper at play. Companies are willing to take back products because they know they'll sell more by having that policy.
In order to take something back, you have to exert a lot of energy. You have to get up and drive to the store. You have to wait in line at the counter. For some people, there's a feeling of embarrassment or fear of judgment for returning items.
So even if the endowment effect and loss aversion don't get you, the hassle of bringing it back may. If that thing you bought cost $40, then you have to decide if it's worth $40 to get up and drive all the way across town to the store in order to get your $40 back.
MINDFUL SPENDING AS AN ANTIDOTE
The defense against this is simply being aware of your spending patterns and habits. Just the awareness that having a liberal return policy is likely to get you to spend more can be enough to prevent you from bringing too many items home. Even before you get to that point, though, if you understand money's purpose in your life, you can start to think through your purchases ahead of time so that you don't have to return things. You can ask yourself if the purchase or purchases you were about to make are aligned with your purpose and values. You can ask yourself how you will feel tomorrow if you make this purchase.
As the awareness of your spending increases, you'll start to notice that you make better financial decisions. You'll start to buy things if and only if they will add value to your life.
On the surface, return policies seem like a benefit to you. It seems like the company is being nice, allowing you to return things that you purchased by mistake. Beneath the surface, though, you realize that there are some psychological biases at play that are meant to pull your strings and get you to buy more. Knowing that is the first step towards combating it.
You get one life; live intentionally.
With gratitude,
derek
If you know someone else who would benefit from reading this, please share it with them. Spread the word, if you think there's a word to spread.
Related Money Health® ReadingReferences and InfluencesAriely, Dan: Predictably Irrational
Ariely, Dan & Jeff Kreisler: Dollars and Sense
Cialdini, Robert: Influence
Hagen, Derek: Money’s Purpose in Your Life
Hagen, Derek: Your Money, Your Values, and Your Life
Kahneman: Daniel: Thinking Fast and Slow
Millburn, Joshua Fields & Ryan Nicodemus: Essential
Note: Above is a list of references that I intentionally looked at while writing this post. It is not meant to be a definitive list of everything that influenced by thinking and writing. It's very likely that I left something out. If you notice something that you think I left out, please let me know; I will be happy to update the list.
