This is according to Colin Morgan, director at used car retailer getWorth, who says that experts have identified a number of different types of errors of judgment that people can make, called “cognitive biases”.
* Anchoring. Your mind has a tendency to latch on to an initial piece of information and then base your future judgments around that. In the car industry, that anchor is normally a price. Think of yourself walking into a new car showroom and driving out in a new car, proud and happy that you got it for a R30000 discount. Discount off what? Off the manufacturer’s recommended sticker price. It’s an anchor and has little to do with the intrinsic value of the car.
Studies have found that properties that were listed for higher prices ended up selling for more on average than comparable properties listed for lower initial prices. The same is true in the car industry - one can see this in used cars, where one can find huge variances in price for an almost identical car listed by different dealers. Chances are that the dealers who list their cars higher also achieve higher average sold prices - it’s good for the dealer, less so for the buyer.
* Endowment effect. Once we own something, we give it much more value than when we don’t own it. In a famous study, half a class of undergraduates was given a coffee mug. They were asked what they would sell their mug for, and the other half of the class (those without mugs) were asked what they would buy one of the mugs for. The sellers averaged $5.25 (R78.40), while the buyers were only willing to pay from $2.25 to $2.75. In the car industry, we see this with trade-ins. Customers are much more focused on getting a good price for their current car than the new car.
* Loss aversion. We tend to overvalue gains and undervalue losses. Simply put, we prefer to win. Imagine yourself in two scenarios: Your boss calls you in and gives you a R1000 raise or your boss calls you in and says your salary is being dropped by R1000. The level of upset you’d feel at the salary cut is probably a lot greater than the happiness at the raise.
In the car industry, one often sees this in marketing offers or in high-pressure sales tactics such as: “Hurry up and buy now, or you lose this deal!” Insurance and warranty products use the same logic - that people are willing to pay a premium to reduce the effect of possible future losses.
* Bandwagon effect. We are hard-wired to fall in line with something if we believe it is popular with others. One doesn’t need academic studies to see the effect - just look at fashion fads, or the hot new kids' toy this season.
Cars are no exception - a model perceived as popular will hold its value a lot better than one that isn’t. We can see that this is a result of perceptions - it is common to find the relative resale values of two different cars being very different in a foreign market where their popularity is reversed
* Left-digit bias. If we see a number, we tend to focus most strongly on the left-most digit - there’s a good reason that most cars (and prices in general) are marked something like R79999, rather than R80000.
We’d like to believe we’re different, but we all have these biases to a greater or lesser extent. The best you can do is be aware of them and question your own views.
- PERSONAL FINANCE