Why we love discounts

We all love a discount, and in the current economic climate, tracking down the best deal is an absolute priority for many people trying to keep their costs down. 

The ability to find a great discount is a valuable skill, and shoppers can save a bundle with a few savvy shopping habits. 

However, people can also trip up attempting to find that incredible bargain, and that applies to the share market as well. But more on that later. 

Firstly, why do we love discounts? 

One reason is that discounts make us feel happier and can reduce our stress. A study by Dr Paul J. Zak of Claremont Graduate University, found that receiving a discount coupon, can raise our levels of oxytocin (the happy hormone) by up to 38%. 

Discounts also have the effect of making us feel smarter because we have saved money. According to Prospect Theory, the savings associated with taking advantage of discounts are considered a ‘gain’, which makes us feel happier.  

Feeling happier and smarter is definitely a good thing, but when it comes to finding discounts there are also a few traps to watch out for, and one of these relates to the way our senses naturally work. 

Contrast Misreaction 

As our senses do not measure in absolute units, they rely on a method that is much simpler, and that is by using ‘contrasts’. As humans, we notice the big contrasts around us, but tend to miss the smaller ones. 

For example, you may have heard of the fable that if you put a frog into boiling water, it will jump straight out, but if you put it into cold water, then raise the heat slowly, it will be boiled alive. 

When we see a major discount, it can be like the boiling water, in that we notice it straight away, but we don’t always react correctly to it. This is known as the Contrast Misreaction Tendency. 

For example, we may find a leather jacket that is 60% off, but we then tend to focus on the size of the contrast (i.e. the 60%), and think less about the quality of the product and whether its final price is still expensive. 

Investing 

Buying quality stocks at healthy discounts is the holy grail of investing, but on occasions it can go wrong. 

When a perceived quality stock falls in price, sometimes buying it can be like ‘catching a falling knife’, especially if there’s an underlying issue with the stock that we are yet to fully appreciate. 

As per the Contrast Misreaction Tendency, we can be so focused on the size of the stock’s discount, that we don’t pay enough attention to why it has fallen, and whether the stock is still expensive at its new reduced price. 

So, the key is to do careful analysis, and always focus on the final price. 

The savvy shopper 

So how can we sharpen our buying skills? Here are eight ways:  

1. Focus on the final price, not the size of the discount. As per the Contrast Misreaction Tendency, it’s the final price that counts. 

2. Remember Grandma’s rule, “It’s not a bargain if you don’t need it”. 

3. Shop around. We may think we have a great bargain when a TV is 20% off, but the same model may be selling at a competitor for an even cheaper price. 

4. Avoid purchasing on the credit card. If the purchase is going to stay on your credit card for an extended period, your discount could be totally negated by the extra interest costs. 

5. Be careful if there are strings attached. If you need to buy one full priced item to get the second item 50% off, you are effectively getting just 25% off overall. 

6. Be careful that it’s not a scam. If you are offered a heavily discounted new Rolex watch somewhere, it’s probably a scam. If it sounds too good to be true, it probably is. 

7. At supermarkets, focus on the unit price. All items, whether it be cheese, cornflakes, or chocolate, must display the unit price. Use this price to guide you as to which size of the item is best value for money. It’s usually the bigger sizes, but sometimes it can be the smallest. 

8. Grapes or raspberries? Become familiar with the price of comparative goods. On a recent trip to the supermarket, I noticed grapes were $4.90 per kg and raspberries were $56.00 per kg. Now, I do like raspberries, but are they worth 10 times more than grapes?