Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats a Discount as a Loss
Transcript
- Lucas: So we've talked a lot about how our brains treat prices — round numbers, price increases, surcharges versus fees. But there's one pricing move that should be the easiest sell in the world, and it turns out our brains often reject it. Luna: A discount. You'd think 'hey, it's cheaper now, that's good' — but apparently not always. Lucas: Exactly. There's a really interesting study from the University of Chicago's Booth School of Business, published in 2023. Researchers looked at what happens when you put a product on sale — but instead of seeing a bump in purchases, they saw a drop. Luna: Wait — a discount makes people less likely to buy? That sounds backwards. Lucas: It does, but here's the setup. They took a kitchen appliance — a blender, priced at $50 — and showed it to two groups. One group saw the blender at $50 straight up. The other saw it marked down from $60 to $50. So same final price of $50. Luna: But the discounted group knew it had been $60 before. Lucas: Right. And that group was 12 percent less likely to buy than the group that only ever saw the $50 price. Now, 12 percent is not trivial — in a retail context, that's a meaningful swing. Luna: So what's going on? The obvious explanation is that people think 'if it was $60 before, maybe it's not worth $50 now'? Or that the original price was inflated? Lucas: Both of those are part of it. The study's authors point to something called 'discount aversion' — it's a cousin of loss aversion. When you see a discount, you don't just see a lower price. You also see that you 'missed' the higher price. There's a sense of loss attached. Luna: So the brain registers the discount as a reminder that you could have paid more. That's wild. Lucas: It's even more pronounced with bigger discounts. The researchers tested 20 percent off versus 40 percent off. The deeper the discount, the more suspicion it triggered. People started questioning product quality, wondering if the item was defective or about to be replaced by a newer model. Luna: So at some point, a discount becomes a negative signal — not a gift, but a warning. Lucas: Exactly. And this has real-world consequences. Think about a brand like J.Crew — they ran constant sales for years, and eventually customers stopped buying at full price because they knew a discount was coming. But then when they tried to pull back on sales, customers felt like prices had gone up, even if the 'sale' price was the same as before. Luna: They trained their own customers to be discount hunters. That's a classic pricing trap. Lucas: Patagonia is an interesting counterexample. They famously almost never discount. Their Black Friday campaign one year was 'Don't Buy This Jacket' — urging people not to buy unless they really needed it. And that reinforced the idea that their products are worth full price. No discount aversion because there's no discount to be suspicious of. Luna: But most brands can't do that. They need to move inventory. So how do you discount without triggering the aversion? Lucas: One tactic is to frame the discount as a 'reward' rather than a markdown. Loyalty programs do this — you get 20 percent off because you're a member, not because the product was overpriced. That shifts the reference point from 'what I missed' to 'what I earned'. Luna: So it's about controlling the narrative around the price cut. Lucas: Exactly. Another approach is to anchor the discount to a specific event — a holiday, a clearance, a limited-time offer. That gives the brain a reason for the lower price that isn't 'the product is bad'. Luna: There's also the 'dynamic pricing' angle — like how airlines and hotels change prices constantly. If there's no fixed reference price, you never feel like you missed out because you don't know what the 'real' price is. Lucas: Right, but that can backfire too. Amazon faced backlash when people realized prices fluctuated based on browsing history. The perception of unfairness triggered a different kind of aversion. Luna: So discount aversion is really about trust. If I trust the seller, a discount feels like a gift. If I don't, it feels like a trap. Lucas: That's a great way to put it. And the study found that trust moderates the effect significantly. When the retailer was a well-known, reputable brand, the discount aversion was much weaker. For lesser-known brands, it was stronger. Luna: Which brings us back to Patagonia — they've built so much trust that a discount from them would probably feel like an anomaly. Lucas: Now, there's another layer here. The researchers also looked at what happens when you add a reason for the discount. Like 'this model is being discontinued' or 'overstock from last season'. That actually reduced the aversion — because now the lower price makes sense. It's not arbitrary. Luna: So transparency helps. Just tell people why the price is lower. Lucas: Exactly. And that connects to something we've talked about before — the anchoring effect. The original price serves as an anchor. When you see a discount, you're comparing the sale price to that anchor. And sometimes the comparison creates a negative feeling instead of a positive one. Luna: So if I see a $100 jacket marked down to $50, I might think 'wow, the jacket must be really cheaply made' rather than 'what a deal'. Lucas: And that's exactly what happened in the study. The deeper the discount, the more people inferred low quality. So there's a sweet spot — a moderate discount signals a good deal; a steep discount signals a problem. Luna: What about the flip side? Do people ever react positively to discounts? Lucas: Of course — especially when the discount is unexpected or framed as a surprise. The study found that if the discount is presented as a 'bonus' after the purchase decision — like a coupon for next time — it doesn't trigger the same aversion because there's no reference price comparison. Luna: So the timing matters. A discount before purchase is suspicious; after purchase, it's a gift. Lucas: Exactly. And that's why 'cash back' offers work well — you already bought the item, the discount comes later. Your brain categorizes it as a reward, not a markdown. Luna: This makes me think about the broader implication — if I'm a consumer, how do I protect myself from my own biases? Should I be more skeptical of discounts or less? Lucas: I think the takeaway is to be aware of the emotional reaction. If you see a steep discount and feel suspicious, ask yourself: is the suspicion based on actual information about the product, or just the price change? Sometimes a discount really is just a sale. Luna: And if you're a marketer, the lesson is to be careful with frequent discounts. You might be training your customers to distrust your regular prices. Lucas: Which is exactly what J.Crew did. It took them years to rebuild their pricing strategy. So yeah, discounting is not a simple lever — it's loaded with psychological baggage. Luna: If today was actually useful to you, the way these stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, and we really appreciate that. It's what keeps these conversations going without any sponsor interruptions. Luna: So next time you see a '50% off' sign, maybe pause and think — is this a great deal, or is my brain just trying to protect me from a bad one? Lucas: And if you figure out the answer, let us know. We'll be back next time with another puzzle from the economy.