ESSAY ALINA TUGEND

“There’s one way to be rational about money and many, many ways to be irrational, said Dan Ariely, a professor of behavioral economics at Duke University in North Carolina.
Some people fool themselves to the point of ruination - those who run up huge credit card bills and pay only the minimum, ignoring the fact that the high interest they are being charged means they are paying many times over for the same item. Others try to fool their spouses by paying cash so the other won’t see it on the credit card bill.
But there are smaller ways we deceive ourselves as well, ways we’re often not aware of.
Professor Ariely has found that the word “free acts like a drug for many people.
“It’s no secret that getting something free feels very good, he wrote in his book “Predictably Irrational. “Zero is an emotional hot button - a source of irrational excitement.
In an experiment, Professor Ariely and his colleagues priced Swiss Lindt chocolate truffles, which cost about 30 cents when bought in bulk, at 15 cents, and less expensive Hershey Kisses - a less tasty option, many would say - at 1 cent each.
When customers flocked to the tables, they made what would appear to be fairly rational choices, comparing the price and quality of the chocolates. In the end, about 73 percent chose the truffle and 27 percent chose a Kiss.
Then the experimenters decided to lower the price of each chocolate by one cent, meaning the Lindts would be 14 cents and the Kisses free. The relative price difference was unchanged, and according to the standard economic theory of cost-benefit, the price reduction should not have led to behavioral differences, Professor Ariely said.
But guess what happened- The percentage of customers choosing the Kisses jumped to 69 percent while those selecting the Lindt truffle tumbled to 31 percent.
Aha! you might say. People probably did not want to search for change, so they just grabbed a Kiss for a free treat. Professor Ariely and his colleagues offered the chocolates at a college cafeteria near the cash register.If the students wanted a chocolate, they could simply add it to their purchase. The students still chose the free Kisses.
Free is not bad, but it can lead us to make unwise or at least useless choices. Who hasn’t bought two DVDs to get the third free when you had planned to purchase only one- But it is more insidious when we are blinded by what in reality will be a higher price. Take, for example, a credit card that may appear to be a better deal because it charges no annual fees. But it’s not necessarily better because it charges a higher interest rate than one that does require yearly fees.
In this age of online shopping, the phrase “free shipping acts like an aphrodisiac. David R. Bell, an associate professor of marketing at the Wharton School of the University of Pennsylvania, says that a free-shipping offer that saves $6.99 is more appealing to many customers than a discount that cuts the purchase price by $10.
“Psychologically, shipping is seen as an extra, removed from the cost of the good, he said.
In a study on how free shipping affects online shopping, Professor Bell and his colleagues found that when people are offered free shipping on their order if they reach a particular spending threshold - Amazon, for example, provides free shipping on certain items if you buy $25 worth of goods - “they increase their average order size and also increase the time between shopping trips, Professor Bell said. So it may balance out, right- More is purchased at one time, but less frequently?
Not necessarily, Professor Bell said. “People may buy things they don’t need or want to attain free shipping, he said.
Not only do we often fool ourselves that we’re not spending as much as we really are, we often feel virtuous while doing so.
One good example is when we feel as if we’re thrifty shoppers when we buy things on sale. Paying with a debit card can have the same effect. I’m not recklessly putting it on my credit card, I’m just using an easy way to pay cash.
Using a debit card makes us “feel like we’re getting away with something, said Mary Hunt, a founder and editor of a Web site called Debtproofliving.com, which seeks to help people get out of debt. “We pretend that a debit card is the same as cash. But in reality, it has a hidden danger, which is that we will spend more when we use plastic than when we have cash. And studies show, she said, that is true for both debit and credit cards.
For most of us, money and budgets are abstract, and we are pretty bad at thinking about what we will have to give up in the future to buy something right now.
If we want to buy a new car, we don’t think “I won’t be able to buy 700 books and take two weeks of vacation, Professor Ariely said. “People who are on an hourly wage do this the best. If someone gets $20 an hour, they can do a direct trade-off with labor -to get a new bicycle, I’ll have to work 20 hours.