Tis the Season for Discounts!

Let Daniel Kahneman Help You Through Black Friday and Cyber Monday!

I started focusing on discount strategies a few years ago when my husband and I visited a small town in Wisconsin. We were traveling to Chicago for his 50th high school reunion, and decided to spend a few extra days in Lake Geneva, Wisconsin. The tourist magazine in our hotel had an ad for a fudge shop that sold “Mackinac Island” fudge. Conjuring memories of the delicious fudge from my childhood trip to Mackinac Island, Wisconsin, I was intrigued.

My husband and I went to the fudge shop and I asked “what makes it Mackinac Island fudge?” We were told it is the process of making the fudge on large marble tables that originated on Mackinac Island. I was further perplexed that a ? lb slab of fudge cost $11.00, but there was a special: if you bought two slabs you got one free. We left the store with three slabs, and spent $22 plus tax. Without the special, we likely would have purchased one slab for $11. I considered this marketing strategy to be bordering on genius, and I began paying close attention to discount strategies.

Technically, this was a 33% discount because we bought two slabs and got one free. What I found more amazing was that the discount strategy enticed me to spend $22 rather than $11, so the fudge shop owner doubled his revenue! (Admittedly, his profit margin per slab declined, but the higher revenue was more important). I suspect many customers spent $22 in the shop due to their creative marketing ploy. An added bonus was that I was a happy customer, leaving the shop with three slabs of fudge when I expected to only buy one. We ate one slab during the trip, and froze the two remaining slabs when we got home.

Pondering this discount strategy led me to Daniel Kahneman’s research.

Kahneman was a cognitive psychologist who won a Nobel prize in economics in 2002. He devoted his entire career to studying human behavior, and wrote a fascinating book titled Thinking Fast and Slow.

He determined there are two ways we make decisions, and he labeled them System 1 and System 2.

System 1 is fast, intuitive, and emotional. It runs automatically and cannot be turned off. It allows us to complete the phrase “bread and …….,” to go into a restaurant and know that we will sit in a chair at a table, and to drive the same route each day to our office. System 1 is working when we have an established habit. It runs on autopilot.

In contrast, System 2 is slow, and is required in complex computations and analysis. Examples include filling out a tax form, comparing two washing machines for overall value, or doing due diligence when selecting a financial planner. Only System 2 can follow rules.

Neuroscientists have shown that rational thinking (System 2) originates in the prefrontal cortex, which sits immediately behind our forehead. This is where contemplation occurs, such as weighing the pros and cons of an idea. The human brain has evolved with a larger prefrontal cortex than other animals, which allows us to consider different points of view. Or, to ponder concepts such as which discount strategies works best, and why.

Established habits (System 1) are stored in the basal ganglia portion of our brain, which is sometimes called the “ancient” or “reptilian” brain. Kahneman warns us that System 1 is eager to provide us with first impressions, intuitions, and feelings—all without any rational thought or analysis. Accepting the quick answers provided by System 1 can lead to irrational decisions, as shown in the following example which Kahneman describes as emotional framing.

Physicians at Harvard Medical School were given statistics about the outcomes of two potential treatments for lung cancer: surgery and radiation. The five-year survival rates clearly favored surgery, but in the short term, surgery was riskier than radiation. Half the participants were given statistics about survival rates; the remaining half received the same information in terms of mortality rates. The two descriptions of the short-term outcomes of surgery were:

• The one-month survival rate is 90 percent.
• There is 10 percent mortality in the first month.

You can predict the results. Surgery was much more popular when physicians were given the first statement. In fact, 84 percent of the physicians chose it. For the physicians who were given the second statement, 50 percent chose radiation. Kahneman offers advice for not allowing System 1 to lead us to make irrational decisions:

“The way to block errors that originate in System 1 is simple in principle: Recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement from System 2.”

His advice to slow down and deliberately engage System 2 is pertinent for many current dilemmas. Consider the Roe vs Wade issue in the United States? I always wondered how the folks who are opposed to abortion rights for women could describe their stance as pro-life. I am definitely pro-life, but I believe women have a right to make their own decisions about health care. If I disagree with them, am I anti-life? Or, am I pro-choice? Perhaps I am pro-human rights and pro-women’s rights.

How about the gun lobby? They say “guns don’t kill people….people kill people.” Yet, my heart aches for the many people who are exposed to random violence from guns – especially the parents and siblings who lost loved ones in the many school shootings in America. System 2 forces me to ponder these issues.

Black Friday and Cyber Monday are upon us.

Kahneman’s research (and System 2) led me to wonder about the effectiveness of commonly used discount strategies. There are strategies for 20% or 25% off site-wide, which I consider to be transparent and fair, and there are the “buy one, get one at 50% off (BOGO@50%) off strategies. This equates to a 25% discount, but only if the two items purchased cost the same amount. Otherwise, the discount may be much lower because the 50% off is on the less expensive item. This is deceptive, and can lead to a very small discount if the consumer does not engage System 2.

Then there are the “up to 40% off” deals, where the item I am interested in is often not discounted at all. The deception in this strategy sometimes makes me angry, and I wonder how other consumers react to misleading strategies. How do retailers gauge the effectiveness of their discounts? If they discount too often, consumers expect a discount at all times. If they don’t discount, some consumers may stop buying because they only want to make a purchase if they are receiving a discount.

The pandemic drastically changed buying habits for many consumers. I am much more likely to order online now, even when I would prefer to try on a clothing item first. Online retailers are accustomed to large numbers of returns. Years ago, I don’t recall expensive cosmetics ever being discounted. It is now easy to find discounts when buying online from major department stores. Some stores—such as Bloomingdales and Nieman Marcus—offer gift card rewards, such as the “spend $200 get a gift card for $50” or “spend $2,000 get a gift card for $500.” From the retailer’s standpoint, this strategy makes more sense than providing a discount, because it ensures the customer will be coming back to spend the gift card at a later date.

The timing of discounts has also changed. There are steep discounts being offered in November of 2024. ?In 2023 the discounts lessened after Thanksgiving and through Christmas. In mid-January they were back, with high-end clothing brands offering deep discounts to entice customers to buy their “old” merchandise to make room for new merchandise for spring. Several outdoor specialty sites offered big discounts in February.

Discounting has now become routine for many retailers. This year has a shortened period between Thanksgiving and Christmas, so retailers are likely being more generous with enticing discounts. I’ve learned to be patient, and wait for sales before I buy. Retailers may not be happy with this tactic, but I suspect they track my buying patterns so it is not a secret.

Daniel Kahneman’s work is important to me. I engage System 2 frequently. It allows me to delve into the discount strategies of retailers, and ponder far more important issues. Sadly, Daniel Kahneman died on March 27, 2024 at the age of 90. He left a tremendous legacy through his work, showing us that we are far less rational than we think!

Thank you for reading and joining me at Becoming Enriched. I appreciate you, and welcome your feedback.

Let me know what types of things you’d like to see in this newsletter – what topics you want me to cover, what appeals to you and what doesn’t. Comment below or email me directly at [email protected]. Find more like this on my website.

Donna Skeels Cygan, CFP? is the author of The Joy of Financial Security. She owned a financial planning firm for over 20 years before retiring from serving clients in late 2021. She is currently writing a book titled Secrets of Wise and Wealthy Women, which will be published in 2025.