February 10, 2011

What $2 Can Teach You About Irrationality

You go to Burger King after work. You're about to buy a Whopper. Then, all of a sudden, you remember seeing something on Facebook earlier that day. That the Burger King 10 minutes away is giving away Whoppers for free tonight, and would save you $2. Do you drive to that Burger King for the free sandwich? Sure.

The next day, you're at IKEA, buying a lamp for $80. When you remember that the Target 10 minutes away has the exact same lamp for $78. Do you drive to Target for the $2 savings. Probably not.

Is this irrational economic behavior? Yes, but only partly. If $2 is really worth the 10 minutes to us, we should always side that way. But, the reality is that the 100% burger savings completely outweighs the 2.5% lamp savings in our minds. It's a comparison issue.

Should it be? No. And remember that the next time you blindly say ok to a hidden $400 fee for your new car purchase.