Holiday shoppers beware. That pleasantly surprising sale price can actually bust your budget. A new study by a behavioral scientist shows why we often spend more when we're convinced that we're saving. Economists call it the "spillover effect" when a sale on one item can spur extra spending on unrelated items throughout a store.
Behavioral economist Robert Meyer, a researcher at the Wharton School of the University of Pennsylvania, says that retailers take advantage of this when they use discounts to hopefully create a ripple effect throughout the store. "That little local surprise not only affects how many units that you buy of that one product, but also it affects your whole attitude towards what you do elsewhere in the store," Meyer says.
But no one knows exactly why it happens. To figure out the mechanisms behind this phenomenon, Meyer teamed up with the University of Arizona's Narayan Janakiraman and Arizona State University's Andrea Morales. They had volunteers shop in a virtual grocery store and instructed them to supply their household cupboards over a simulated 35 weeks. A $50 prize was given to the four volunteers with the lowest shopping costs.
Meyer found that, on average, if the price of the needed item was cheap, volunteers felt an obligation to stay in the store and shop. But if the item was expensive, volunteers punished the retailer by leaving. "What mattered more was the negative shock," Meyer says. "When suddenly they went in and they saw that the price of coffee which they had to buy was suddenly five times the price they normally pay, they would buy one can of coffee they had to have and then at that point walk away and not buy other goods including goods that were on sale."
In another experiment with a trip planning simulation, Meyer and his colleagues found that a complimentary upgrade to a better quality hotel room boosted spending in other unrelated purchases, such as a guidebook to their destination or t-shirts for the trip.
The researchers designed these controlled-condition games to figure out the psychological cause for these spillover effects. Their results challenge the idea that consumers mentally budget. Instead, Meyer says, these studies add evidence for "attribution theory," which states that consumers react to subconscious and irrational feelings that cause us to treat the store like a fellow person.
"One of the most fundamental instincts that we have in having exchange relationships with other people is, if you do a good thing for me, I should do a good thing for you," he says. "And if it's the case that you do something bad to me I should do something bad to try to get back at you." He says that's inappropriate because transaction relationships at your local mall are much more complex than barter-and-trade relationships of the past.
Meyer admits that sometimes he's not the smartest shopper either. But he tries to make a plan ahead of time and stick to it while he's shopping, which can help counter spillover effect. While he concedes that this might take some of the fun out of shopping, he stresses that some people cannot afford to splurge on unnecessary items, and they should know what factors are at work.