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For years I had a 401(k) from my first job that sat neglected, quietly collecting meager interest as I willfully ignored it. I wasn’t necessarily scared or intimidated by deciding what to do with it — roll it over, change the investment allocation, leave it be — I just never wanted to address it. So I didn’t.
“There’s something about financial decisions that goes beyond knowledge,” Aner Sela, an associate professor of marketing at the University of Florida whose work focuses on how people make choices, told me. “They have a unique flavor, and there’s something about that flavor we don’t like. They feel very cold, very abstract and analytical, and it’s something that you just don’t want to do.”
As it turns out, there may be a reason some of us avoid making those decisions, according to a study by Professor Sela and Jane Jeongin Park in The Journal of Consumer Research. It comes down to how we perceive ourselves.
Many tend to think that financial decisions require a similarly cold, abstract, analytical mind-set, Professor Sela said. So if we perceive ourselves as the type of people who rely on emotion in our decision-making processes, we’re more inclined to avoid making financial decisions because we think they don’t “feel like me,” he said.
In fact, we’ll avoid making decisions about money even if we think we have the knowledge and ability to do so.
“I have a Ph.D. in business and an M.B.A. in finance, on top of a degree in architecture, so I think I can understand financial products pretty well,” Professor Sela said. “But still, every time I get a letter from my bank, my instinct is to shove it in some drawer.”
The key to getting around those roadblocks is to reframe the way we think about money decisions.
For example, let’s say you’re like me and struggling to decide what to do with an old 401(k). Rather than look at that decision as one involving stock and bond allocation and portfolio diversity, think of it in terms of the lifestyle you want for your future. Do you want to have a future in which you can eventually retire, maybe travel and have the ability to eat out a few times a week? The decision that will get you there is figuring out what to do with that 401(k).
“It’s just a different framing of the same data,” Professor Sela said. “If you just call it by a different name that brings to mind different things, it certainly makes a difference.”
Indeed, Professor Sela found that people were more comfortable making a financial decision after reframing it in lifestyle terms — for example, a choice about annuities versus a choice about life experiences — even if the decision was the same in both scenarios.
So the next time you’re struggling to do something about your credit report or at a loss for how to go about building your nest egg, think of it as a decision about the type of life you want to have. Future you will thank you.
How to Stand Up for YourselfOur subscriber-exclusive guide will help you avoid being a doormat. With simple tricks and a bit of practice, you can learn to ask for the things you want in an effective way.
How to Prepare for a Stock Market Surprise The markets have been fairly calm lately. But when financial stress returns, will you be prepared? We offer a classic solution, as well as market insight and analysis, in our quarterly report on investing.
Tip of the Week
This week I’ve invited Rachel Sugar, a writer in Brooklyn, to give us what I think is one of the most brilliant pieces of relationship advice I’ve ever heard.
I dislike being rushed. I leave for the airport early, and I like to be at the movies with time to spare.
It’s not because I am a punctual person by nature — I am not — but rather because I am both slow and easily stressed. Part of adulthood is knowing oneself, and what I have learned so far is that, under pressure, I am happiest moving at the pace of an arthritic retriever.
My boyfriend is the opposite. He loves rushing. The more rushed, the better, he says. He walks at a respectable marathon pace. He loves the thrill of impossibly tight train connections, because it makes him “feel like Jason Bourne.”
For years, this was a source of tension. Then we discovered the answer: leave at different times. “I’m going to get a head start!” I’ll say, and leave for the restaurant, while my boyfriend is still showering. And then I go, at my pace — a pace ideal for noticing new storefronts, or attractive dogs — and he shows up at his pace, and no one is angry or stressed or secretly resentful.
When we tell friends about our system, they are often baffled: You leave at … different times? To go to … the same place? Yes. That is exactly what we do. And you can, too! It is even (sort of) romantic, in a way. As the old saying goes: If you love something, set it free and then meet it at the movies.
Some fights are necessary; what time to leave is not one of them.
Tim Herrera is the founding editor of Smarter Living, where he edits and reports stories about living a better, more fulfilling life. He was previously a reporter and editor at The Washington Post. @timherrera•Facebook
A basic rule of economics is that the price depends on how willing consumers are to buy something else.
The less consumers pay attention when they buy — and the more they just follow a set shopping pattern — the greater the market power possessed by the seller, and the more that seller can charge.
Modern companies know this very well, and they do what they can to improve their advantages over unwary consumers.
I’ve unwittingly been caught in consumer traps myself.
About 15 years ago, for example, my wife and I decided to send out holiday cards using an online photo service rather than writing them out and sending them by hand. We picked Shutterfly, which did a good job. And we’re still using it, largely because after we had typed 100 addresses into the Shutterfly site, it would have taken a heck of a deal to persuaded us to type them in again somewhere else.
So the truth is we haven’t bothered to shop around much. We’ve just stuck with Shutterfly, and that is undoubtedly costing us money.
Economists have thought a lot about markets like the one exemplified by Shutterfly — those with significant “switching costs” and “lock-in effects.”
In such markets, companies should be extremely generous up front trying to earn your business, knowing you will be stuck with them. And, in theory, you will think about their future market power carefully when you first decide whether to sign up. That’s what a rational, forward-looking consumer should do.
But that theory might not describe the actual marketplace that well. When my wife and I chose Shutterfly, we didn’t really think about what competitors might exist 14 years later or how the prices might change once they got us signed up in 2004.
We probably should have thought about all of that, realizing that, down the road, cloud storage prices would become immensely cheaper and we could get better deals if we maintained our flexibility. Instead, we bumbled our way into giving a company the power to monopolize us.
That kind of thing happens a lot these days. People make quick shopping decisions that have long-term consequences.
Let’s say you bought an Alexa to help with tasks around the house. Did you know that Alexa would also consistently try to steer your purchases to Amazon’s house brands when you asked her to order something? Maybe not, but you gave Alexa market power the moment you plugged her in.
Big companies know that the more convenient they make their product or service, the less you will shop around and the more market power they will have. Plus they’ve gotten good at tailoring products to certain consumers to get them to give up comparison shopping altogether.
In a fascinating new analysis, the economists Brent Neiman and Joseph Vavra at the University of Chicago Booth School of Business studied data on 700 million purchases in grocery and big-box stores for 160,000 households over more than a decade to determine how specialized American consumers have become when they make purchases.
The researchers (who are, incidentally, my friends and colleagues) found that while companies sell many more products than before, as individuals we are increasingly buying only our one favored product in a given category. In other words, we are not comparison shopping or forcing companies to compete for business.
Take the case of tortilla chips. Fifteen years ago, Tostitos dominated all other chip makers, but sometimes consumers would buy Mission chips or a local brand if they were cheaper or the mood struck them.
Today, Tostitos is still the dominant brand but has expanded into 13 specialized varieties like Tostitos Hint of Lime, Tostitos Bite Size and Tostitos Multigrain. It also has five party sizes, four Simply Tostitos organic or sea-salted varieties and three different Tostitos Cantina styles.
Today, the same consumer tends to go into the store looking just to buy one of the specialized varieties of Tostitos: She really loves Hint of Lime or is intent on buying Tostitos Scoops (chips in the shape of tiny taco bowls). People don’t try alternatives the way they used to. They act as if they are locked in.
On the one hand, consumers shouldn’t complain about this. After all, Tostitos (or Frito-Lay, the Pepsi subsidiary that owns Tostitos) created lots of new products that people like better. That’s innovation. Good for them.
But this innovation comes with a downside. The more specific consumer tastes get, the more the companies can exploit their ability to cater to those tastes without competition. The Neiman and Vavra study shows exactly what you would expect: The more specialized the demand, the higher the prices people pay and the greater the market power possessed by a company.
Creating specialized demand is an intriguing way of locking customers into a product. Another method is selling a discount subscription — cable, magazines, pest control — that automatically renews at a higher price. Consumers have to remember and make the effort to cancel if they want to shop around. Companies offer convenience, but they make the consumers pay for it.
These behavioral traps may seem far removed from the macro-level discussions of market power that dominate economic analysis such as the staggering increases in corporate earnings and profit margins and the simultaneous stagnation of wages. Economists often argue whether the underlying causes of these phenomena are lax antitrust enforcement, rapid technological development, globalization, declining unions or other factors.
But even as we debate these larger notions, let us not forget the ways in which we, consumers at the very base of the economy, increase corporate market power with the ways we shop.
That isn’t meant to deny the importance of conventional macroeconomic factors in the rise of market power. And it certainly isn’t meant to play down the role that could be played by government policy like more aggressive antitrust enforcement, consumer protection or regulation.
But beyond the effects of government or technology or globalization, individual choices matter. Companies don’t want you to comparison shop, which could force them to compete for your business. They want you to develop regular shopping habits. The more people do that, the higher the prices everyone will pay.
I try to remember that when I shop now. I remind myself not to just buy the first thing listed on a website or displayed on the rack at the checkout aisle. When I take a ride-hailing service, I will check both Uber and Lyft before choosing. Sometimes I check the price of things online without logging in or shift my browser to private mode to see if a company is offering better deals to new customers.
For an individual shopper, these actions are a bit of a pain, and they may not do much to improve matters over all. But if enough people behave this way — keeping companies guessing and making them work for our business — these small acts of consumer resistance can help keep corporate market power in check.
Austan Goolsbee, a professor of economics at the University of Chicago’s Booth School of Business, was an adviser to President Barack Obama. Follow Austan Goolsbee on Twitter: @austan_goolsbee
A version of this article appears in print on , on Page BU5 of the New York edition with the headline: Companies Are Happy When Customers Are Trapped. Order Reprints | Today’s Paper | Subscribe