The right price for something is dependent on our state of mind. Anchoring, mental accounts and other behavioral tricks we rely on when buying.
In this episode, you’ll learn:
- Why does it feel like you are overpaying when you pay $27.95 for a book.
- What is anchoring and mental accounting and why we find it easier to pay for a sit-down dinner versus a hardbound book.
- What makes us happier, buying things or buying experiences.
- Why we are willing to pay much more for unique experiences.
- Why economists worry about our behavior during periods of deflation.
- Why you can’t buy a vintage camper trailer in Idaho even though they are everywhere.
- What is the right price?
Overpaying For Books: A Case Study in Behavioral Economics
I recently visited Dolly’s Bookstore in Park City, Utah. I like this store because it has a homey feel with hardwood floors, tall wood shelves that form little nooks that feel sheltering as you browse, and it has a fluffy cat.
The book selection is good with classics and new releases, hardbounds and paperbacks. The store is small so the collection is thoughtfully curated.
Dolly’s is on Main Street and sits behind a chocolate store. Books and chocolate. Who could ask for more?
I decided to buy a book. I had recently read a sample of Steven Pinker’s new book on writing, A Sense of Style. I liked it so it seemed like a good choice.
Ebooks Versus Physical Books
I can’t remember the last time I bought a new hardbound book at a bookstore. I like the convenience of eBooks because I can highlight passages without feeling like I am defacing the page. I like the ability to quickly find sections I want to reread based on a keyword search. I like that I can carry hundreds of books with me on my Kindle or iPad and I don’t have to dust them. And I like that most eBooks cost $10 or less.
Sometimes, though, it feels good to hold a physical book and turn real pages.
I found Pinker’s book on the shelf. It was $27.95. Ouch.
I could buy the same hardbound book on Amazon for $16.77 including shipping, and it would arrive at my home in two days. Or I could buy the eBook for $12.99, which is high for an eBook but 45% cheaper than buying the book at Dolly’s.
I felt the book in my hands. It didn’t feel very thick for $27.95. Maybe it wasn’t even that good. I put it back on the shelf.
I knew why Dolly’s was asking $27.95 for the book. Rent on Main Street in Park City is expensive. Workers that curate the book collection need to be paid. There’s cat food to buy and power bills to pay.
I told myself I was really paying $17 for the book and $10.95 for the opportunity to experience the homey feel at Dolly’s.
It still felt like I was overpaying.
Anchoring and Mental Accounting
I’d fallen victim to what in behavioral economics is known as anchoring and mental accounting.
I’m so accustomed to paying $10 for books that in my mind that is what books ought to cost so if I pay more than that I feel like I’m overpaying. $10 is my anchor price for books.
Yet, I paid more than $27.95 for dinner that evening with my daughter at a Vietnamese restaurant down the street from the bookstore, and I didn’t feel like I was overpaying.
Restaurant charges fall under a different mental account. Yes, sit-down meals are more expensive than carryout, but you pay for the atmosphere, the service and the use of glass plates and silverware.
Why was I willing to pay a premium for those niceties at a restaurant but when asked to do so at a bookstore I felt ripped off?
That is the power of anchoring. It is why physical bookstores are struggling across the country. It is why the U.S. garment industry has been obliterated by cheap imports. $15 is the new anchor price for shirts.
Buying A More Expensive Book
How could I overcome the power of anchoring and support Dolly’s Bookstore without feeling like I had overpaid?
In the end, my daughter solved the problem for me. She found a book she wanted, 21st Century Herbal – A Modern Encyclopedia of Herbs.
It was $35. But it was also thick and heavy—a hardbound book of 500 pages with color glossy photos.
I checked the price of the book on Amazon using my phone. $26.03.
We left the store with the herb book, and I felt good about it.
Why? In this case, the physical book felt superior to the eBook because the encyclopedic content was presented on paper in a way that was easier to absorb.
I still paid an “entertainment” premium to shop at Dolly’s versus buying on Amazon, but with the herb book that premium was $9 instead of almost $11 for Pinker’s book.
That’s only a $2 difference, but it felt much less because the premium was only 26% of the herb book price versus 40% for the writing book. That’s another example of mental accounting.