Don,
That makes a lot of sense.
But even ignoring all that, the apparent preference for percentage discounts vs absolute discounts is, contrary to the problem statement, often completely logical.
One simple demonstration of this is to change the goods involved to some low priced single good and a much higher priced case lot of the same good. Clearly, it would be generally be pretty illogical to buy a case lot at a smaller percentage discount than is available for a single good.
More generally, we can go all the way back to the Austrian theory of the demand to hold a money cash balance. This demand to hold money is what gives money value. According to Mises, there would be NO demand to hold money whatever if the future were not uncertain. If you knew precisely what payments you would need precisely when in the future, then you could loan out your money at interest, due for repayment at exactly the moment you need it. Alternately, you could negotiate for prepayment discounts for goods to be delivered in the future. But the main demand for money comes from the flexibility it provides in both taking advantage of unpredictable bargains that may appear and dealing with unforeseen emergencies, or other changes of subjective valuations of goods that may come along.
If I have a discretionary spending capacity of $150 per month, my buying a $125-$5 coat limits my flexibility much more than a $15-$5 calculator and precludes a number of other possible 33% discounts that may well come along.
Of course, the availability of credit can serve for both bargains and emergencies, but in fact this DOES REDUCE the demand for money and reduces its purchasing power as less of it needs to be held by an individual.
My discretionary spending of $150 per month includes a wide distribution of goods at various prices. The more I spend on high-priced, low percentage discount goods, the less far the $150 will go.
A couple of years ago, there was a 75% off liquidation sale at a local sporting goods store. I spent a large amount of money there, more than I would normally spend in a given year on sporting goods. I literally bought many years worth of tennis shoes. Would I be correct in saying that the reason I did so is at that time, by demand to hold money was relatively low due to the high % discount I was receiving for the goods, and the high unlikelihood that such a % discount would appear again?
Another question -
From the article:
Prospect theory led to "loss aversion," which explained why investors clung to losing stocks rather than sell. Investors were more likely to sell stock they purchased at $50 a share if it rose to $70 and seemed overvalued; but if they bought the same stock at $90 and it fell to $70, they were disinclined to sell, even if shares still seemed overvalued.
What do you think about this? Does the percentage aspect of the gain or loss affect the analysis in the same way? Since the analysis you presented used only net gains for the shopper (bargains), I am having trouble thinking of an analogous situation which involves the percentage of loss for the shopper.
Wildstar |
