If you enrol into a gym which offers us two payment options - Either a pay-per-visit of Rs.100 or a flat fee of Rs. 1000 per month, which one would you choose?
Most of us end up choosing the flat fee option. We calculate that with this option we would be better off, if we end up using the gym more than 10 times in a month. However, if we were to do a true audit of our own behaviour subsequently, a significant portion of us would have actually visited the gym less than 10 times in a month. Yet we all fall into this trap of not choosing the pay per option. Behavioural Economics throws some light..
We tend to overestimate our needs and fail to change our views on it. Most companies understand this behaviour of ours and rightfully exploit us. Most of us fall into the trap of "zero interest rates for the first three months" in our credit card. Even if we knew upfront that the rate increases to 20% after three months, we end up choosing this option thinking that we would stop using the credit after the offer period. But if we are like a typical customer, we will not have the self control to do it.
Another case in point. For pay-per-use TV, we end up choosing a bouquet as against an a-la-carte option. The problem is, we may never watch all the channels we have subscribed to.
Coming back to initial gym example - Some might argue that they chose the flat fee option because it will then force them to use the gym and in the process keep them fit. Yet if we reflect on our own actual behaviour, we will understand that this never translates into reality.
P.S: This article appeared in Business Line.
