Thursday, March 23, 2006

You get what you pay for?

See this interesting paper by Freakonomics (pdf) about how estate agents exploit informational asymmetry to their advantage and at the expense of their clients. I suppose this finding is consistent with the belief that there is a positive correlation between the amount of money we pay for goods and services, and increasing quality.

But, go into google and type in "you get what you pay for" and you'll get an endless number of sites, most selling pricey products. The truth of the matter is, however, that the statement "you get what you pay for", is as valid or as invalid as the statement, "you'll never get what you paid for", because both are dependent on an individual's expectations of the benefits of a certain product or service. Neither is fact!

In so saying, I appreciate that there is a far greater tendency for people to say that you'll get what you paid for than to say the opposite. This is a cashable concept that allows sellers to play with the reservation prices of their consumers, without needing to know what their consumers' absolute price ceilings are. People would rather believe that when they pay for something, it will be quality. For instance, when seeking financial advice, as a result of paying it, customers attach an immediate value to it. They then believe that it is superior to public-domain information and will, as a result, over-appreciate it.

What about paying for mediocre services and goods? I have come across TVs that are supposed to be high spec, but their technological attributes are apparently not noticeable to the naked eye? Then what good is the product? But the shopkeeper replies that my comfort should lie in the knowledge that I am paying for quality and I will get what I pay for. I should have asked him, "what about government officials who don't do their jobs properly?" I have already paid for their services in my taxes.

Granted, when dealing in areas where knowledge is limited, consumers in general would rather risk being conned under the guise of quality advice than listen to people who – they think – don’t value their own advice enough to charge for it. The flip-side to that is that there are many companies out there that will charge so that they can reveal to you that the sky is blue. After all, it is not illegal and you can – after you’ve been charged – dismiss the "advice".

Consider that in believing in always getting what you pay for, you’ll have a bias towards paying more for perceived quality, and when the quality aspect disappoints, you’ll have a bias for believing that it was one-off bad luck, as a form of self comforting. Essentially, as a consumer, you develop a habit of paying over the odds for goods and services, which then concludes that you're actually not getting what you paid for, you're getting less, an outcome that is a complete opposite of the initial intention.

Conclusion: Through consumers at large believing in always getting what they pay for, the opposite becomes true, as unscrupulous arbitrageurs appear to take advantage of this bias, something that is second nature to humans.

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