How 'math anxiety' costs us money
Researchers say our fear of arithmetic causes us to choose deals that aren't really deals. Another study says poor math skills increase the likelihood of defaults.
You're shopping for dress slacks and find two styles you like for $59.99 -- and they're both on sale! One brand is $15 off; the other manufacturer offers a 33% discount. Which do you choose?
If you're a savvy shopper you'd whip out the cell-phone calculator, or maybe even do the math in your head. What's more likely is that you'd choose the $15-off slacks, even though the other pair is actually the better deal ($40.20 vs. $44.99).
The average consumer's "math anxiety" often means taking the easy option (i.e., dollar-formatted) even if the person is capable of doing the math, according to research led by Rajneesh Suri of Drexel University.
Occasionally I see store signs that translate percentages-off into actual dollar amounts for the objects on sale. More often retailers seem assume we know basic arithmetic. Or maybe they're counting on (as it were) that math anxiety.
Paying an extra $4.79 on slacks may not seem like a big deal, but it adds up over time. And if a second group of researchers is to be believed, people with poor math skills are five times more likely to default on their loans.
"Numerical ability predicts mortgage default," published recently in the Proceedings of the National Academy of Science, was based on interviews with several hundred U.S. residents who got mortgages in 2006 and 2007. The conversations included questions designed to determine numerical and cognitive abilities.
One-fourth of the lowest-scoring borrowers had defaulted within five years. By contrast, only 5% of the highest scorers defaulted.
Incidentally, the type of mortgage didn’t matter: "Those lacking (math skills) will still get in more trouble later on even if they pick a plain vanilla mortgage," said co-author Stephan Meier, an associate professor at Columbia Business School.
Do the math
Several hundred people is a fairly small study. But it's not surprising that if you can't handle numbers you'll struggle with dollars and cents.
On one of my previous posts about retail math, a reader left a comment about getting a 3% rebate on gasoline with a rewards credit card -- and the co-worker who insisted that her 3-cents-per-gallon discount with a store loyalty card was the same thing.
Um, no. The rebate was on the total purchase: 3% of 10 gallons of gas at $4 per gallon equals $1.20, vs. a 3-cent-per-gallon discount that amounts to 30 cents. Until the reader took out pen and paper to demonstrate this mathematically, the co-worker insisted that "3% and 3 cents are the same."
Retail math can be tricky if you aren't paying attention. Does the "6 for $10" sale price make some arithmetically impaired folks think each one is 60 cents?
A supermarket's unit pricing tags may list one product's price in terms of ounces and a competing brand's in quarts. If a sign says "save an additional 20%" on an item that's already 50% off, you won't be saving 70% total.
Making monthly car insurance payments may seem easier on the budget than a bigger payment twice a year, but you'll pay more overall. That low monthly payment in the automobile ad is probably based on a 72-month loan (bad idea), but once in the dealership you're likely to be dazzled by the pretty new cars and the super-friendly salesperson. (He's such a nice guy he wants you to have a new car today!)
Not stupid, just susceptible
Math-based marketing favors retailers because consumers "make decisions based on clues and half-thinking that amount to innumeracy," notes Derek Thompson of The Atlantic in an article called "The 11 ways that consumers are hopeless at math."
What he calls "the shopping brain" is easily fooled by things like:
- Comparisons. If the first item you see costs $5,000 you might snort. Then you see something you love and it's "only" $220. What a steal!
- Extremes. If it costs too much or too little we get nervous. Something in the middle seems like a reliable price (even if it's no better than the "cheap" one).
- The number 9. Somehow $19.99 sounds cheaper than $20. (It's only a penny, folks.) That makes it feel like a deal even if it isn't.
Tools exist to help anyone whose number skills aren't the best. For example, MSN Money has calculators for compound interest, life insurance, auto or student loans, long term care insurance, tax withholding, college savings and other personal finance topics.
The calculators in smartphones and tablets can help you when you're out and about. (Why pay more for those slacks than you have to?) Pay attention to other marketing tactics, too. "Buy one and get 50% off the second" sounds a lot sexier than "save 25% on each of two items."
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