Stayaway from Layaway

by on October 24, 2013 at 7:01 am in Economics, Law | Permalink

Layaway plans are immensely popular, a fact I find deeply puzzling much like the popularity of Justin Bieber, Snooki, and homeopathy makes me question the rationality of my fellow human beings.

The typical layaway plan requires a deposit of 10-15% of the price of the good, say a new TV. If the consumer pays the balance over the following 10-12 weeks (i.e. by Christmas) they can pickup the good. If the consumer doesn’t pay the balance they get a refund of payments made less a service fee.

Salvadanaio natalizioWalmart and Kmart advertise their layaway plans heavily. I am shocked, however, that so-called consumer advocates also have good things to say about poor people lending big corporations money:

Consumer advocates say layaway is a great way to manage a major purchase and stick to a budget, allowing consumers to spread the cost of an item over a number of payments without running up a lot of costly debt.

…”The fees, if any, are generally nominal and probably much lower than the interest you’d pay if you purchased those things with a credit card and didn’t pay off the bill for several months,” said Tod Marks, senior editor and shopping expert at Consumer Reports.

Stop the insanity! The relevant comparison is not to buying on credit but to saving. Instead of lending Walmart money, get yourself an old-fashioned piggy bank and avoid the cancellation fee and the hassle of going to the store to make the periodic payments.

Tod Marks, from Consumer Reports (!), also makes this astounding argument:

With layaway, you don’t have to worry that the store will run out of an item you want,” he said.

Are we living in the Soviet Union? Who worries about Walmart and Kmart running out of goods? Occasionally an item will be discontinued but then the replacement is usually better and/or cheaper. Similarly, layaway plans advertise that you can “lock-in” the current price. Right, and if the price goes down or you find a lower price elsewhere you are similarly locked in.

Still not convinced? In the spirit of Tabarrok’s Wager I offer Tabarrok’s Layaway Plan.

Send me $10 right away along with a message telling me what you want, when you want it and the current price. Save your money. If you save enough to buy the good at the requisite time send me a note and I will heartily congratulate you with a $10 reward. If you don’t save enough, thanks for the $10 and better luck next time. Unlike Walmart I will not guarantee the current price but Tabarrok’s Layaway Plan offers significant advantages that Walmart’s plan does not. On the day that you have saved up enough, Tabarrok’s Layaway Plan lets you buy at any store and at the lowest price that you can find! And that’s not all! Tabarrok’s Layaway Plan offers another great advantage, The Tabarrok Switch™. If you find a good that you like more than the good that you had originally planned to buy the Tabarrok Layaway Plan lets you switch to the new good!

Congratulations on choosing the Tabarrok Layaway Plan, the plan with the most options and flexibility of all layaway plans.

Really Curious October 24, 2013 at 7:13 am

Hahahaha ! And somehow all those human beings buying on layaway are supposed to in aggregate create an efficient market

Slocum October 24, 2013 at 7:49 am

Well, it’s an old-school commitment device used by lower-income people. I expect many, perhaps most layaway customers grasp the points Alex is making and participate anyway as a way of trying to force themselves to save. Banks used to offer ‘Christmas Club’ accounts for the same reasons:

http://en.wikipedia.org/wiki/Christmas_club

Apparently, the fact that the accounts didn’t really make a lot of sense wasn’t a big secret. This bit from the wiki article sounds a little like the complaints in Alex’s post:

“The December 23, 1949 episode of the radio program Life of Riley highlighted these problems with an episode featuring Chester Riley visiting the bank to withdraw his Christmas club money. Riley had made only one $2 deposit, but the account had accumulated so many fees (for the passbook, for early withdrawal, and for the mailing of reminders) that Riley owed the bank another 25 cents.”

mavery October 24, 2013 at 8:51 am

Gads! Its as if humans don’t always respond rationally to economic incentives but instead rely on an amalgam of heuristics to make decisions! If only there was an entire published literature on this subject called Behavioral Economics!

Diplomatbob October 24, 2013 at 8:52 am

Don’t spook anyone.

MikeDonnelly October 24, 2013 at 9:06 am

That is hilarious. Also we’ve long ago realized humans are not rational

Willitts October 24, 2013 at 10:40 am

I don’t think there is anyone who believes economic actors are completely rational and markets perfect. EMH and rational economican provide us a benchmark upon which to make better decisions. It does little good to recognisthat there are market failures if you can’t reliably and effectively exploit them. If retailers like Walmart are preying on weak minds, doesn’t there exist opportunity (like Alex’ proposal) to do better?

If you agree with Alex’ facts but not his solution, what is the answer – accept Wal-Mart’s plan as satisficing the consumers or regulate them?
In my opinion this is best left to the market and worst addressed by government. Alex knows, I think, that his target audience doesn’t read this blog. So I think he provides all of us a free lesson in economics.

Slocum October 24, 2013 at 12:06 pm

What makes us think that Walmart is preying on anybody? How do we know that value of the short term loan (plus service fees of customers who don’t complete the purchase) is significantly greater than the cost of running the program? Keep in mind that banks aren’t exactly falling all over themselves to provide low or no-interest checking and savings accounts to low-income customers.

And why do we think that the users of this program are hapless dupes? Why not give them the benefit of the doubt and assume that they are aware of their own weaknesses and are rationally choosing a program that may help them overcome them? Do we assume people who use commitment devices for weight loss (and even pay money for the privilege) are unsophisticated rubes who don’t realize they could exercise self-control for free at home?

Seb October 24, 2013 at 1:00 pm

Yes, behavioral economics explains why people mistakenly use layaway plans.

mavery October 24, 2013 at 4:15 pm

It gives us some intuition in understanding it. At the least, we should adjusted our priors to no longer be surprised that things like layaway exist and are popular.

Michael October 24, 2013 at 12:35 pm

Nicely put, Really Curious. But no sane person believes in an efficient market anymore, just like we don’t believe in gold’s intrinsic value, the benevolence of free trade, or similar fairy tales.

Cliff October 24, 2013 at 9:24 pm

Hmm… how about evolution? Global warming? Gravity?

david October 24, 2013 at 7:14 am

If you accumulate any significant savings as a lower-class American, you are liable to attract relatives and friends demanding that you pay for their miscellaneous emergency expenses or be hated forever…

Ed October 24, 2013 at 8:51 am

What David said. Its obviously hard for non-poor people to realize that usually poor people can’t save. Not “can’t” as in “don’t want to” or “don’t have the discipline”. “Can’t” as in the money gets stolen or appropriated by relatives.

And putting the money in a bank doesn’t help, its OK against petty thieves but the relatives always find out about the account, plus it gets appropriated by the bank itself through high fees.

Dan Weber October 24, 2013 at 10:38 am

People who avoid bad habits don’t do it via superior willpower. They do it by not putting themselves in situations where they would be tempted and avoid ego depletion.

I used to be That Guy who would talk about how bad it was for little people to lend money to the IRS, the banks, the stores, whatever. Eventually I came to realize that for the vast majority of Americans, they are taking tiny little losses in order to make it easier to avoid bad habits.

The best exercise equipment is the stuff you will use, even if something else is theoretically better. The best financial advice is the one that you will follow, even if something else is theoretically better,.

Willitts October 24, 2013 at 10:43 am

This is a very persuasive point.

My concern, though is that this type of suboptimal behavior and warped thinking spans the whole array of financial decisions for these people. That is, they are throwing away lots of pennies, and these are the people hurt worst by losing any pennies. Will they learn more from the painful shock or the slow bleed?

JosieB October 24, 2013 at 7:15 pm

A related point is that banks are not interested in offering accounts to poor people. Minimum requirements for savings accounts run into the hundreds of dollars, and there are not-inconsequential fees for checking accounts with less than thousands of dollars in them. People who have little or no savings do their banking with payday lenders and buy debit cards for cash. This paycheck-to-paycheck existence is difficult to break because it’s easier to spend money when it’s in your pocket than in the bank. I think we should give people credit for adopting the discipline to buy on layaway rather than wondering at their lack of financial sophistication.

Cliff October 24, 2013 at 9:26 pm

This is insane. How are your relatives going to find out if you don’t tell them?

dan1111 October 25, 2013 at 6:48 am

They might see you walk in to the bank? They might see bank statements mailed to the house addressed to you? They might notice you no longer cash checks at the grocery store? They might see an ATM card? They might notice that one day you had no cash, but you were able to obtain cash by the next day even though it is not pay day?

Brandon October 24, 2013 at 9:38 am

You’re also liable to have “something else,” a broken appliance, a car repair, etc. come up and suck those funds away. There isn’t excess cash flow, and the expectation that any money coming in will very shortly be going right back out regardless of your intentions. It’s something I’ve heard people who grew up poor but managed to make it to middle or upper-middle class say they struggle with a bit.

Jay October 24, 2013 at 10:19 am

None of these things make putting the money into Kmart any more attractive than a bank. If the mooching friends are liable to find out about one they will surely find out about the other right? Also, if an emergency comes up wouldn’t having the money in a bank (possibly close by) be easier than a Kmart or Walmart (probably not as close by)?

Brandon October 24, 2013 at 11:00 am

There’s a penalty for taking it out of the store but not for taking it out of your bank account. It’s forced savings.

It’s not an ‘emergency,’ it’s that basically by definition the poor do not have enough to cover day-to-day living costs and longer-term maintenance of everything else. Something is going to go without fixing or being bought. Putting those clothes on layaway to ensure that your child has some new outfits for the first week of school means committing to that expense instead of forgoing it in favor of another expense you’d like to make. You can do without fixing that dishwasher or buying those clothes, so putting the clothes on layaway means you’ve committed yourself to buying those clothes. It also means that part of your savings won’t be siphoned off for other reasons (ah, screw it, let’s just spend $20 on fast food for dinner tonight).

Just a guy October 25, 2013 at 6:44 pm

I was a kid in the 70′s and grew up in a household that regularly put things on layaway. While I agree with your comment, It’s not just about making a choice to spend $20 on fast food vs. clothes for your kids. In our family (dad – full-time school teacher, mom – church secretary), my parents were extremely careful about every cent. They put away for their own retirement, paid their mortgage and all their bills, and managed every day expenses. Layaway was a way for them to look at specific items, say “I want to purchase this specific thing, but can’t pay for it right now”, and basically put it on hold with the store. They did this pretty much every year with school clothes, winter jackets, Christmas toys, etc. Compare that with people who buy whatever they want on credit cards and then default, BK, or just ignore their debts. Maybe Mr. Tabarrok grew up in a household of plenty, or where parents spent irresponsibly. I grew up in neither, and layaway was a great way for our family to basically put items that we needed on hold, and then pay for them IN FULL as we were able prior to claiming the item (as opposed to buying shit we couldn’t afford at the time, and incurring penalties or defaulting on the loan).

Max Factor October 24, 2013 at 10:21 am

If you have savings or money in bank accounts you are disqualified from certain government benefits. For example, “federal policy stipulates that no matter how small the income or how large the family, persons with assets more than $2,000 — which include savings accounts — are not eligible to take part in SNAP.”

http://www.deseretnews.com/article/865585867/How-SNAP-keeps-families-in-a-cycle-of-poverty.html?pg=all

Spending (instead of saving) becomes a rational choice for the poor. Some poor people spend their wages on gold – which sounds like a rational decision based on the way some of the benefits systems are set up.

mpowell October 24, 2013 at 10:53 am

Wow, that is mind-boggling. I had no idea. And, of course, Paul Ryan wants to force all states to comply with the 2K asset limit. The depressing thing is that the guy in the story (who has 3K) says at some point: it’s not like I have 50K in savings. 50K in savings is not enough to retire on, even on a 15K/year budget! How many people complaining about the poor not saving know about this rule?

Max Factor October 24, 2013 at 11:12 am

Most smart, successful and talented people know little about the poor and care even less.

watermelonpunch October 24, 2013 at 3:54 pm

The irony about that is… that the people I’ve heard of that are in favour of such a very limiting asset test, also do not have $50,000 in savings, or anywhere near that amount, and earn barely more than most qualifying food stamp recipients.
It’s become a world where people in near poverty point accusatory fingers at other people in near poverty.

Willitts October 24, 2013 at 10:58 am

Excellent point. If we desire that they make better financial decisions, then how do we restructure the aid programs? Or can they be? In my opinion the recipients are comfortable living on the dole (not necessarily because of laziness but perhaps a rational evaluation of their human capital and natural preference to not work in undesirable jobs). The programs are self justifying, I.e. a government department is not going to create conditions for its own disbanding.

It would be refreshing to see examples of government that showed objective measures of permanent success, closed up shop, and went home.

mpowell October 24, 2013 at 2:23 pm

How about just increase the asset limit by a couple orders of magnitude? You could be extremely aggressive and say assets can return as much as 10% of their value in income annually. And so 100K in assets translates to an additional 10K in income for caclulating SNAP benefits. Then the poor rely on SS for their true retirement savings and can assemble a few 10s of K in savings for year to year needs. I don’t see what could possibly be objectionable about someone with 50K but only 20K in income getting SNAP. This just isn’t that hard of a problem if you’re not simply dedicated to slashing SNAP, regardless of moral cost.

Brandon October 24, 2013 at 3:43 pm

how many people earning $20k a year are going to be able to build up $50k in savings? The mean net worth of the bottom 40% of Americans is negative.

ed October 24, 2013 at 12:57 pm

Good news: these asset tests have been eliminated in most states. (The article you linked to was from Utah, one of the few states that still has a $2,000 asset limit.)

http://frac.org/newsite/wp-content/uploads/2009/05/map_eliminating_asset_test.pdf

watermelonpunch October 24, 2013 at 4:07 pm

That map is outdated. Pennsylvania re-instated the asset test in 2012. BUT… In PA the asset limit is $5,500.
(Or $9,000 if the household contains someone over 60 or disabled.)
(Not to say that’s reasonable, just at least it’s more sensible than $2,000.)

And they’re now talking about again eliminating the asset test:
http://articles.philly.com/2013-10-23/news/43327521_1_asset-test-snap-benefits-deserving-low-income-people

Also in PA, among assets, I believe households are only allowed 1 car to not count against assets. (Sorry but I don’t remember where I read that off hand, but I’m pretty sure it’s for SNAP – thought it may pertain to some other program requiring an asset test – like Medicaid.)
It’s kind of crazy since they want all people to have incentive to work, and a 2 adult household with one car, can hardly be expected to have 2 working adults in most regions of rural Pennsylvania. Even in many cities in PA, public transport is the pits, and it’s almost impossible these days to have your pick of shifts opposite one’s spouse, when jobs are so scarce.

jerseycityjoan October 25, 2013 at 1:05 am

I have seen two articles recently talking about very low income people that mentioned Food Stamps.
In both cases, the person was making less than poverty level — a little bit under $700 a month — yet they received less than $100 a month in Food Stamps.

The maximum benefit per person is $200. Where is somebody who only has $685 a month supposed to find the extra $115 to cover the difference between $200 and $85?

And as of next week, the maximum Food Stamps benefit will be lowered by $189. Families will get about $9-$10 less per person a month, generally speaking.

And then there are the people who don’t get any yet can’t really afford to live on what they make, considering how rent and other costs have gone up.

The whole thing is a sad and sorry mess.

We need to make work pay. Looking ahead, so many Americans seem to be so screwed.

greg October 24, 2013 at 12:06 pm

Has this always been the case? If not, what changed?

ed October 24, 2013 at 12:59 pm

This has been my pet theory for years. Is there any academic research about this “needy friends and relatives” effect?

RmDeep October 24, 2013 at 7:15 am

Gee, it’s almost as if layaway plans are designed to get around the part of the brain that will just take the money out of the piggy bank to make this month’s rent payment, or even just buy booze.

One could make a pretty good “greatest hits” of posts from this blog that just simply do not understand that IQ and time preference are a bell curve, and there are many people out there on the low end of the former and the high end of the latter. They are not homo economicus, and systems like layaway exist to serve them.

(Or in many cases, like no sex before marriage, systems used to exist, until the high-g elites dismantled most of them, because these rules stopped them from having as much fun.)

david October 24, 2013 at 7:18 am

Low-g methods of enforcing norms like “no sex before marriage” are pretty dang horrifying, though. They don’t wait for dainties like “family courts”.

Andao October 24, 2013 at 11:39 am

The bell curve theory doesn’t explain why people on the higher end (presumably journalists from Consumers Reports) would support the layaway idea. To me that’s more baffling than why poor people do it in the first place

Roy October 24, 2013 at 4:18 pm

Because they allow their hatred of easy credit for the poor exceed their reason. Denouncing easy credit is a shibboleth for these types.

Origami Isopod October 24, 2013 at 2:15 pm

“No sex before marriage”… yeah, because shotgun marriages were so much better for everybody involved.

And we can’t set up decent social benefits for single mothers because it offends gawd that women might have children without being appropriately “owned” by a man.

Cliff October 24, 2013 at 9:28 pm

Marriage is ownership? Someone better tell my wife.

Pshrnk October 24, 2013 at 2:30 pm

High G folks still don’t have as much early sex.

bluto October 24, 2013 at 4:34 pm

The important thing is they don’t feel as guilty about what the do have.

liberalarts October 24, 2013 at 7:20 am

Mark this down on the same mystery pile of why people buy whole life insurance when they could be cheap term insurance and put the (significant) saved premium into a Roth IRA filled with low fee Vanguard ETFs.

Max Factor October 24, 2013 at 11:22 am

I know a guy who has two degreses from MIT and he swears by whole life. He puts in $10K a year and insists the cash value with be worth tens of millions of dollars some day. Additionally, there are certain tax games you can play with whole life.

My insurance guy tried selling whole life to me, but I couldn’t understand the mechanics and there’s so much press on “buy term, invest the rest.” I spent many hours trying to understand how whole life works but it just didn’t make sense to me how the insurance companies could guarantee high levels of growth when interest rates were so low and insurance companies are mandated to invest in conservative things.

Ultimately I just bought term.

greg October 24, 2013 at 12:27 pm

I don’t think that’s very analogous. Whole life is sold, not bought. Because it has higher commission, life insurance salesmen try to steer clients to whole life even when term would be more appropriate. Whole life is a complicated financial product. Even a very smart person can fall for a good sales pitch. A lot of people that get burned on whole life are high-income professionals. The financial mistakes of the poor are of a different nature, in my opinion.

critic October 24, 2013 at 7:24 am

So you are shocked by the “consumer advocates?” Think how bad the advice on economic questions is in Consumer Reports. Or the mistakes made by financial advisors in newspaper columns and on TV. Nothing new here.

Isabel October 24, 2013 at 7:30 am

Understand your logic, and I would agree with it, but I have been saving up since August to justify £200 on some VERY lovely boots I walk passed in a shop window every day. Walked passed again yesterday… they are gone.

Finch October 24, 2013 at 10:38 am

Fashion and children’s toys, for example, are often deliberately made scarce and once they’re gone, they’re gone. For things like that it may make sense to pay some money to make a reservation for the eventual purchase.

But I also agree with other commenters who argue this is a way to pre-commit to the purchase. It’s a way for people to recognize their biases and work around them.

Isabel October 24, 2013 at 4:02 pm

Yes, I completely agree with both paragraphs. (I’ll just go off to the corner and have a cry about the boots, though :).)

soonerhokie October 24, 2013 at 7:30 am

Ummm, I think you have hit on your billion dollar idea. Oh wait. You are simultaneously depending on the intelligence and stupidity of the American consumer. That is not business model.

Ed October 24, 2013 at 8:54 am

Yes, I also forgot that in my experience -though grant it I’ve rarely shopped at Walmart- big chains do run out of or discontinue carrying the exact items you want. Its happened fairly often, and economists have a big blind spot about the efficacy of substitution.

Keith October 24, 2013 at 11:53 am

That is why the internet exists. You can buy board games from the 1960′s that are still in the wrapper so I am pretty sure you can buy anything people are making now.

dead serious October 24, 2013 at 1:36 pm

Says a guy who obviously has not shopped for toys during the holiday season.

bob October 24, 2013 at 1:50 pm

Tell your kids to switch to videogames, and barring the black swan event of the Nintendo Wii, scarcity disappears.

Brandon October 24, 2013 at 3:44 pm

You do not remember console launches or blockbuster games like Goldeneye.

wait October 24, 2013 at 7:48 am

“Right, and if the price goes down or you find a lower price elsewhere you are similarly locked in.”

If the price drops at the same store or elsewhere by more than the service fee before you’ve made your last payment, can’t you buy the item at the lower price, stop making payments, and get your previously made payments (minus service fee and forgone interest) at Christmas? I’m sure this option is suboptimally exercised, and may not cover the forgone interest even if it were, but it still seems like it’s there.

derek October 24, 2013 at 9:33 am

I wouldn’t be surprised if many layaway plans had a feature in which you got the lowest sale price that an item had been sold for during your layaway period. Regardless, locking in a price is probably a huge advantage for many layaway users. They may not be liquid enough to take advantage of a good sale (eg Black Friday) for something that they plan to purchase anyway, so the layaway would allow them to pay the lower price after they save enough money.

Overall, the OP was one of the most poorly considered MR posts in a great while.

Matt October 24, 2013 at 10:33 am

“Overall, the OP was one of the most poorly considered MR posts in a great while.”

This is right. Next time just write, “I don’t understand poor people. But I like to make fun of them!”

Willitts October 24, 2013 at 11:03 am

The impression I got is he understands the irrational behavior of the poor very well, and is dismayed why people who should know better are encouraging this. Indeed, the very people who claim to be fighting against such inefficiencies are its proponents.

Not a lot of poor people are reading this blog, and those who do likely understand and accept what he’s saying. Consider his target audience.

Brandon October 24, 2013 at 11:09 am

He seems to have never been poor himself and to not really have talked to any poor people before declaring their choices irrational.

derek October 24, 2013 at 4:24 pm

It is much worse than failing to understand poor people. He does not grasp the completely rational reason for layaway to exist, especially around the holidays: it allows people with low liquidity to lock in sale prices! There is also the commitment mechanism, but I am more willing to cede that as sub-optimal.

Norman Pfyster October 24, 2013 at 10:04 am

I had a similar thought. I wonder if Alex thinks that options and futures are also economically irrational.

Boris October 24, 2013 at 7:49 am

We know that people are more motivated to avoid losses than to pursue gains. So placing a deposit forces you to save (ok maybe it’s not technically savings but has the same effect) to buy the big ticket item, all without the negative psychological impacts of going into debt.

This post lacks empathy for those living in scarcity. Actions taken to counter the irrationality that scarcity imposes are far from irrational.

Really Curious October 24, 2013 at 9:42 am

Pretty irrational to pay the fees for saving, when you could just save with no fees and potential interest

Urso October 24, 2013 at 10:29 am

No, because absent the fees, you would not save.

This is like Ulysses binding himself to the mast. Wouldn’t it have been more rational to avoid the discomfort of being tied up and just sit on the deck, and make the decision *not* to run to the Sirens? But of course he knew that’s not what would have happened.

Really Curious October 24, 2013 at 10:40 am

It’s irrational not to save to begin with.

Isaac October 24, 2013 at 10:48 am

Humans are irrational.

Dan Weber October 24, 2013 at 10:45 am

But you are ignoring the $0.005 that they could have made in a savings account!

Brandon October 24, 2013 at 11:10 am

BoA is currently offering an astounding 0.01% APR! Think of all of the fractions of a penny you could earn while making weekly $20 deposits for three months!

Willitts October 24, 2013 at 11:17 am

The sirens’ song was supernaturally irresistible. The victims didn’t lack self-control, they lacked volition. (In reality, I know that the metaphor is a copout)

The point of contention with respect to the poor seems to be self-control. Those who have little self-control seldom arise from poverty. Commitment mechanisms, while limiting losses in isolated decisions, do nothing to teach or reward self-control.

Almost every anecdote of rags to riches I know involved squirreling away pennies for many years while working hard and avoiding luxury items.

Some people here consider the plight of the poor to be lack of self-control. Others consider this belief demeaning and counter-productive, and regard the poor as victims of opportunism. In my opinion, the former group gives the poor credit for having the ability to control themselves and the latter group want to assert it as a given.

Urso October 24, 2013 at 11:33 am

Well I don’t mean to speak for others’ self-control or lack thereof. But isn’t putting something on layaway an admission of one’s own lack of self-control? It takes some level of self-awareness – I know if I don’t do X, I will do Y instead, and I will regret Y. Maybe that’s fatalistic, or pessimistic, but it’s not irrational.

Rigby Reardon October 24, 2013 at 11:54 am

“Almost every anecdote of rags to riches I know involved squirreling away pennies for many years while working hard and avoiding luxury items.”

There’s a reason we call them “anecdotes” and not “data.”

Eric October 24, 2013 at 12:24 pm

Self control is, in part, arranging your environment to support your decisions. Using commitment mechanisms, rather than “doing nothing to teach or reward self-control” is a part of self control – and learning to use them is learning to increase one’s self control.

A quote from: http://www.psychologytoday.com/blog/dont-delay/201101/external-supports-your-willpower, which, in turn is summarizing a point from “Procrastination and the Extended Will,” a chapter in The Thief of Time: Philosophical Essays on Procrastination

However, more often than not, “. . . what looks like sheer willpower is the result of more or less well-orchestrated attempts by individuals to arrange their lives in such a way as to economize on willpower, by avoiding situations that call for its exercise. We refer to this as distributed willpower, since it involves individuals creating more than one locus of self-control” (p. 241).

Jon H October 24, 2013 at 8:20 pm

“The sirens’ song was supernaturally irresistible.”

So are Furbies. (When that horrible toy is what your child wants more than anything.)

Andao October 24, 2013 at 11:44 am

You’re only getting interest in a savings account, and many savings accounts require a minimum balance. It might make more sense to use layaway if you’re unsure about maintaining the minimum balance.

Rahul October 24, 2013 at 7:58 am

I wonder, does Alex find the $100 bill shredding alarm clock an irrational idea too?

Self-imposing a irrevocable penalty to get yourself to do something you otherwise wouldn’t is a motivational device that doesn’t seem so novel. The problem with a piggy bank is that it doesn’t have a “cancellation fee”.

Nylund October 24, 2013 at 8:36 am

You could make a piggy bank that requires feeding (ie, regular deposits). If it does not get fed, it’ll “digest” what’s inside (ie, destroy the money already in there). The device could have a date-based lock that can only be opened at some future date to prevent early withdrawals.

Rahul October 24, 2013 at 8:40 am

You could indeed. But how’s that any better from the spender’s point of view?

Brandon October 24, 2013 at 9:41 am

They could put the clock on lay-away if they can’t afford it today!

Sbard October 24, 2013 at 7:12 pm

One of the heirlooms that my parents own was a small dime-register bank from my great-grandfather. It was a small metal bowl with a locked lid on the top. The lid had a slot/switch to accept dimes one at a time, and for each dime you put in, a counter would increment up by one. The bank wouldn’t unlock itself until you had put in 50 dimes. An early technological method to enforce savings.

Matt October 24, 2013 at 7:59 am

Isabel’s point suggests an alternative, “rational” explanation. Layaway insures the consumer against stockouts. I think it is incorrect to assume that the store will always realize the demand for a product and have on hand as many items as consumers want at all times. We’ve all been told “we’re sold out” at one time or another.

Imagine if everyone saved instead of buying on layaway during the Christmas season. Then early sales for big-ticket items would be a skewed signal of market demand for those items. Retailers are left to guess on how many to stock nearer the end of the season, leading to more overstocks and stockouts at the critical time.

Willitts October 24, 2013 at 11:27 am

Yes, I think this is another weak point in his argument. However, his argument would be more correct with a large screen TV than a Tickle Me Elmo doll. I tend to think that the items most likely to stock out are also the least essential. He makes an apt point that the TV will be better, larger, and cheaper a year from now.

Some would say that having the latest and greatest toy will maintain a poor child’s self-esteem. As a father who never bought his daughter’s the latest fad gifts, I have at least two counterexamples.

Turpentine October 24, 2013 at 8:17 am

“makes me question the rationality of my fellow human beings”

As much as it may shock my economist mind, it is only one example in a very long list that points at clear departures from rationality, at least the way we think of rationality generally.

Brandon October 24, 2013 at 9:41 am

Shockingly, real people aren’t equations in a cell of an Excel spreadsheet.

Steve October 24, 2013 at 8:34 am

The cost of self-control when you are saving in that piggy bank is non-trivial.

grumpy October 24, 2013 at 8:34 am

What I question after reading this is not the rationality of my fellow human beings (of course they’re not rational – rationality is a useful assumption which oversimplifies real life decision-making, which is too difficult to model). No, what I question is the author’s ability to understand what is like to be poor, to live to paycheck to paycheck, or even (gasp) without a predictable source of income. All of these things could lead a person to make different economic decisions than someone with a steady source of income that covers their basic necessities and also provides them enough extra to build up some sort of savings.

Roberta October 24, 2013 at 8:36 am

As a small business owner in Pittsburgh, with two specialty retail stores, I beg to differ. We rely on customers who love our unique, often hand crafted merchandise, and who, if they ask for layaway, are invited to make payments using a reasonable, no interest schedule that accommodates their ability to pay. We have great relationships with them, and are as flexible as possible. No one has ever lost their deposit if they change their mind, nor do our products change price the day after the holidays. Please consider that Walmart is not the only retail model in this country, and that small business still remains the best place to shop and support this economy. Thanks, Roberta Weissburg

OneEyedMan October 24, 2013 at 8:58 am

I don’t think TC’s comment applies (at least as strongly) to unique or goods with high search costs like yours. But that’s not what Walmart and Kmart sell.

Jay October 24, 2013 at 10:24 am

I think they would, I don’t see how it is any less irrational (with respect, Roberta). Unless you get to take home the product first and have some utility while making payments, the customer will always come out behind which is TC’s point I believe.

Brandon October 24, 2013 at 11:04 am

It’s AT’s point, but how does the customer come out behind if they put $20 in a 0.01% APR savings account every week for 90 days or if they put $20 on their layaway for 90 days?

Jay October 24, 2013 at 11:57 am

There’s still a fee associated even if you don’t take the money out, it isn’t free (not always I know, sometimes its suspended during Christmas).

OneEyedMan October 24, 2013 at 4:10 pm

Because if you don’t either purchase it today or put it on lay away those goods could be sold before you are ready to buy. That is, the option to purchase the good is valuable for these goods.

MikeDonnelly October 24, 2013 at 9:00 am

How is it news to any economist that humans are not rational ? I thought this was pretty well understood and disseminated in the profession.

Willitts October 24, 2013 at 11:36 am

Are the people irrational or is the model incorrectly specified?

Someone above pointed out the disincentive to savings given by social welfare programs. Others point out limited stock or specialty items.

So even as we deconstruct Alex’ point about a better savings plan, we rescue the concept of rational economic man. Another thing to consider is that we are imposing our own concepts of value onto others. People with strong positive time preference may seem self destructive to us. My feeling is that I will stop criticizing them for being myopic and lacking self-control when they stop complaining about the natural consequences of their different preference.

Rob October 24, 2013 at 9:05 am

“The relevant comparison is not to buying on credit but to saving.” — Actually (devil’s advocate here), there is a scenario in which the relevant comparison is buying on credit. If a pricey item is put on sale temporarily, and you can’t get that price after the sale ends, then saving-and-waiting doesn’t work. To obtain the lower price, your options are: commit to the purchase with a credit card, or commit to the purchase with layaway. Neither option leaves you any flexibility to change your mind other than by returning the item after purchase.

In that scenario, if the layaway is offered without a service fee (which is often the case around the holidays), layaway can serve to lock in a low price *while* you save and wait.

Another benefit, but unrelated to economics: Parents could use layaway as a method to hide the kids’ Christmas presents. You’re required to pick your items up by a certain date, but until then, you won’t need to worry about finding a hiding place for them.

Tenured E. Conomist, Ph.D October 24, 2013 at 10:36 am

Hiding your kids’ Christmas presents is also irrational. Ceteris paribus, a present today has more value than a present tomorrow. Ergo, maximal utility is achieved by handing the presents to the child as soon as they are purchased (wrapping, of course, is simply a form of transaction cost and should likewise be avoided).

Finch October 24, 2013 at 10:45 am

Surely you just give them cash?

Dan Weber October 24, 2013 at 10:49 am

My kids only get certificates good for a fractional value of next year’s targeted NGDP. I’m sure they will thank me for my rational behavior when it’s time to put me in a home.

Tenured E. Conomist, Ph.D October 24, 2013 at 10:52 am

I realize I have an unclear antecedent in they phrase “as soon as they are purchased.” The word “they” here refers, of course, to the children, see eg Posner (1987).

Marcos October 24, 2013 at 12:35 pm

> Ceteris paribus, a present today has more value than a present tomorrow.

Nope, it’s not. A present tomorrow carries a different educational value than a present today, one that is much more valuable.

But, of course, I get that you were joking. I just wanted to point out that the joke’s subject is deeper than it appears at first glance.

Slavoj Zizek October 24, 2013 at 2:23 pm

Acha! The ideolochie revealch itchelf!

James October 24, 2013 at 9:06 am

Sure, if you are purely rational, or merely rational enough to read this blog, save and do not use layaway. You are not the target of layaway advertisements and advice (nor Jersey Shore nor Beiber albums. (I feel like I just wrote a line for a horrible new Christmas song)). Further, it seems like the targets of layaway are those who are, or can be made, _aware_ of their shortcomings, and thus help manage them. The hypothesis that layaway is welfare-improving, all things considered, is not comically dismissible.

It would be nice to have some research to consider, but I found none in a brief search. The wikipedia page on layaway is pathetic: http://en.wikipedia.org/wiki/Layaway There is no welfare analysis, several of the links are broken, none of the links is to a study, and none of the linked pages seem to cite a study. It seems likely someone with even a vague awareness of whatever literature there is could drastically improve it.

Really Curious October 24, 2013 at 10:46 am

It is comically dismissable. Why do you need any product other than food, shelter and medicine so badly that you are willing to pay extra fees, when you are poor to begin with ?

Brandon October 24, 2013 at 10:51 am

The poor and those receiving any form of public assistance should be living meager, grinding existences devoid of any form of enjoyment or luxury. How else will they have any motivation to escape poverty?!

Also, if you don’t break the layaway, there are not extra fees.

Willitts October 24, 2013 at 11:41 am

Those who escape poverty often do live austere, grinding existence until their prosperity is self sustaining. Need I point to tens of thousands of immigrants working in difficult jobs and running small businesses 12 hours a day, seven days a week?

Law school was a meager, grinding existence devoid of luxury and pleasure. What motivated me? (oh, and I didn’t remain an attorney)

You appear to want the comfort to precede the effort.

Brandon October 24, 2013 at 11:47 am

Many more who live austere, grinding existences working difficult, exhausting jobs (definitely plural) with long hours never escape poverty. Poverty in this country is pretty austere and grinding whether you save up money for “self-sustaining prosperity” (which is a highly dubious proposal given that the poor often barely have enough to cover day-to-day living, let alone saving up substantial capital so as to escape poverty) or if you occasionally buy your kids some new clothes or buy some decent food at the grocery store once a month.

mcarson October 25, 2013 at 12:00 am

Most of the immigrants working in their small business came to the country with a chunk of money. They bought and ran a business because you can do that as an immigrant when you can’t get a green card. Their nest egg was probably extended family money from back home, that needed to be paid back quickly, so they lived very frugally, but eventually ended up well off.

I did taxes for an Indian family that never took more than $25,000 a year as income, but ended up with 3 7-11′s, all paid off and employing extended family. They were set up with funds from 7 different families back home – not “spare” money, but selling house and farm and car and living 2 or 3 families to a house, for years, until the store in the states paid off.

I know a young German man who came with family money to buy property and cut timber, remodeled existing houses on the land as rentals, grew mushrooms for market and moved family from Germany to the U.S. He controlled the entire fortune of 4 families at one time, gradually paying it off.

Most people telling the noble immigrant stories don’t know about the capital. Having $250,000 at age 23 increases your odds of success, risking the fortune of 4 different families improves your judgement of what money is O.K. to spend. These are unusual people, to have 12 to 20 family members give up everything to send them on their way. Don’t use them to bash the poor.

Really Curious October 24, 2013 at 1:07 pm

Yes, but layaway is a zero interest rate loan to the seller. Why would you give Walmart a zero interest rate loan ? that makes no sense

Anon October 24, 2013 at 1:46 pm

As a tax-preparer initially I was surprised that people didn’t realize any Tax Refund is an interest-free loan to the Govt. But people were always happier getting refunds than owing Uncle Sam a small amount (which would be optimal). Tax Refunds are the biggest Layaway plans that exist!

Brandon October 24, 2013 at 1:51 pm

Bank savings account interest rates are so low as to be essentially zero for people with small balances. Even $10,000 at BoA would only earn you $1 over the course of a year. Many bank accounts also have minimum balances that, if not met, result in hefty fees.

It’s a savings mechanism that, for many people, is more practical and realistic than a savings account. And since we’re talking about amounts that are generally a few hundred dollars at most and over a 90 day period, the amount of interest you can earn elsewhere can be rounded down to zero.

Mike W October 24, 2013 at 11:01 am

“It would be nice to have some research to consider…”

What would be irrational would be a taxpayer funded research grant to a tenured social science professor to study “Layaway”.

Seth October 24, 2013 at 9:08 am

This is a good example of what I call ‘personal preference bias.’ Some people prefer to use layaway over a piggy bank. Rather than assuming they are irrational because they don’t share your preference, it might be more productive to ask why people have different preferences.

Rahul October 24, 2013 at 9:21 am

A Piggy bank does not serve as a commitment device; so in some situations a layaway might be better even.

Rob42 October 24, 2013 at 9:58 am

This is often my complaint when I hear someone snark about how people aren’t “rational,” and I was surprised to see that line of thought here. People often are rational, its just that their preferences differ from what we think they should be (or, we’re not properly calculating their actual utility). I recall Tyler giving a talk once about whether his daughter was irrational for refusing to do the dishes in exchange for a payment of money from him and his wife. He concluded she was rational because she realized that her parents generally had a fixed amount they would spend on her, whether she “earned” it or not, and as a result, she actually did not have any increased utility as a result of the cash payment for doing dishes.

RM October 24, 2013 at 10:28 am

What about if Tyler and his wife had to choose between paying a cleaning service and paying his daughter? Do Tyler and his wife use any kind of cleaning services? If not Tyler and his wife, extend the thought to rich folks.

C October 24, 2013 at 9:22 am

I like Alex’s posts, but as others are arguing, I think he’s viewing this as the rational economist, and not as the poor family that has daily competing demands on any excess capital they may have at any given moment. The analysis in this post, while being correct from a rational investment perspective, is completely and hopelessly flawed from a real lived experiences perspective. I suspect those consumer advocates “get” the reality of the daily experiences of people living close to the poverty line, or paycheck to paycheck, in a way that Alex doesn’t seem to be getting it here (at least that’s how it appears judging from this post).

I thought the recent piece on check cashing companies was much more correctly focused on the realities and psychological landscapes of poor and lower income families.

shecky October 24, 2013 at 10:40 am

Libertarian who doesn’t understand a poor family may have daily competing demands on any excess capital at any given moment? Many will be shocked to hear this.

Brandon October 24, 2013 at 10:52 am

yeah, there may be instantaneous excess capital, but sort of by definition, the overall excess capital is going to be negative. You may be able to afford day-to-day expenses (though not all can), but you can’t afford to fix that broken appliance, the car that’s running really rough, that leaky water heater that’s about to go.

C October 24, 2013 at 11:24 am

Exactly. In the case of my family as a kid, you couldn’t afford to have the tires replaced by new safe tires but you could scrimp together the money to have them retread. That’s the relative difference between the excess capital of a libertarian academic and the excess capital of a poor person or lower middle class person. And it’s also the relative difference between what “competing demands” means to each of those types of persons.

Slocum October 24, 2013 at 12:54 pm

He’s not criticizing the poor people who use the service or even Walmart and KMart for offering so much as he is criticizing consumer advocates for endorsing the idea. And not for the reasons being given here (as a commitment device, to avoid temptation, etc) but because, for example, ‘You don’t have to worry that the store will run out of an item’.

C October 24, 2013 at 1:11 pm

But you frequently *do* have to worry about the store running out of the item, as others have mentioned throughout the comments.

Silas Barta October 24, 2013 at 3:46 pm

… I suspect those consumer advocates “get” the reality of the daily experiences of people living close to the poverty line, or paycheck to paycheck,

I don’t actually disagree, but if that’s the case, they should actually mke arguments relevant to that point, rather than economically unfounded ones. That would actually advance the debate. But as it stands, they’re making the uninformed arguments that Alex_Tabarrok is correctly refuting.

IOW, they should be saying,

“This is great for poor people, who have a hard time planning for the future and committing to those plans.”

not

“wow-zee! You can lock in a nice low price, awesome deal!”

Beefcake the Mighty October 26, 2013 at 10:44 pm

I have to say, Silas wins the thread here.

Beefcake the Mighty October 26, 2013 at 10:48 pm

It should be said, though, that Alex’s real beef is with the confusion/dishonesty of these consumer advocacy groups. The fact that he doesn’t simply say what Silas says indicates that he feels bound by the same zeitgeist strictures as they do. I.e., he’s part of the problem.

JR October 24, 2013 at 9:23 am

Group,

I grew up LOWER LOWER middle class in Lorton, VA (when DC’s prison was there and it wasn’t affectionately called Gunston, Fairfax Station, etc). For the same reason WalMart has those debit cards now, is why Layaway was successful. MANY of my family members cashed their checks and did NOT have active bank accounts. Layaway was seen as a tool of self control for those that would otherwise drink it, gamble it, get it stolen or other.

JR

C October 24, 2013 at 9:35 am

I couldn’t agree more. Like I say, I enjoy reading Alex’s post, but this one made me think: “we’re well and truly lost if this is an example of an economist’s ability to really understand the lives these people are living.”

AndrewL October 24, 2013 at 9:29 am

Lets say you want to buy a large TV, it costs 2000$. One day, you seet it on sale – One day only!! for 20% off making it 1600$. That’s a great deal! 400$ savings! Unfortunately, you still don’t have 1600$ for the TV. Put it on layaway! lock-in the discount!

Jay October 24, 2013 at 10:29 am

Wouldn’t a responsible person’s response be you shouldn’t make an impulsive $1600 purchase if you’re living that paycheck-to-paycheck, perhaps food on the table would be a wiser purchase? One-day only sales are only common during the holidays (exceptions, I know, but they are few) which is at a known time, the rational person would say you should be saving leading up to Black Friday versus layway + service fee.

Steve October 24, 2013 at 11:06 am

There is no Service Fee.

Jay October 24, 2013 at 12:01 pm
Brandon October 24, 2013 at 11:12 am

$2000 TVs are probably a really unrealistic example of how and why most people use layaway.

regularjoeski October 24, 2013 at 9:32 am

how about an alternative hypothesis. 1) WalMart reinstated lay away plans following the banking crisis. 2) Poor/lower middle class have been forced out of the banking system by extra fees/high interest/etc. 3)It is in WalMarts best interest to allow people to prepay for goods. Essentially WalMart is acting like a bank for the poor but is being more humane. Fewer fees, less draconian penalties, etc.

Rahul October 24, 2013 at 9:36 am

Didn’t Walmart want to start its own bank circa. 2009? I remember it faced some sort of regulatory hurdles so finally gave up. I could be wrong.

Sbard October 24, 2013 at 7:32 pm

They wanted to do it mostly so they could be their own credit card processor, not to accept deposits from their customers.

Jay October 24, 2013 at 10:31 am

Who’s getting kicked out of banks? To my knowledge free checking is still available.

Urso October 24, 2013 at 10:38 am

Available? Certainly, but to whom?

Finch October 24, 2013 at 10:50 am

Generally people with minimum balances. I.e., enough money that the bank can make up the foregone fee with what it earns on the capital.

Max Factor October 24, 2013 at 12:18 pm

Banks use a database called Chex Systems to deny new accounts. If someone has a poor banking history – a bounced check or two – they are denied new accounts.

Frequently, vicitms of identity theft cannot open new bank accounts because the thief used the stolen identity to open checking accounts and bounce checks. And for what it’s woth, most victims of identity theft are poor – the thief is a friend, neighbor or relative.

A little responsibility goes a long way and nobody likes welfare frauds, but poor people really are disadvantaged in so many ways.

Brandon October 24, 2013 at 1:53 pm

Being poor in America is expensive.

Hadur October 24, 2013 at 9:47 am

If you are a consumer advocate, your #1 priority is preventing lower-income consumers from running up debt on credit cards or payday loans. These forms of lending have so much potential for economic disaster that anything is preferable. If you think layaway is more likely to be bought into than savings, you plug layaway.

(or pawn shops…behavioral types increasingly love pawnshops)

Brandon October 24, 2013 at 10:11 am

Avoidance of a debt spiral through credit/loans is a pretty important goal.

John Mansfield October 24, 2013 at 9:48 am

Is lawaway used more for TVs or for clothes? Finding the clothes you want in the right size is hit or miss, with fewer hits when they are on sale. If the pants I want are on the rack today, they probably won’t be there three weeks later.

Rahul October 24, 2013 at 9:53 am

Speaking of clothes, why do I always feel like the XXXL, XXL, S sizes are in stock but the sizes corresponding to the median American are so often out of stock.

Is that just my perception or…..?

RM October 24, 2013 at 10:36 am

American sizes are all wrong when it comes to satisfying–on average–the dimensions of Asian and Latin American populations. (I am aware that Walmart stocks smaller sizes in areas with heavy Latin American populations (at least they use to), but that is the exception rather than the rule.)

Rahul October 24, 2013 at 11:52 am

What is the average American dimension? I assumed my 184 cm & 200 lbs was close to that metric…..

Anon October 24, 2013 at 1:56 pm

Thats pretty tall and large for average. And if you are of Indian origin , thats XXL by Indian standards.

Rahul October 25, 2013 at 4:11 am

@Anon:

Yes, but I’m talking about my shopping experiences in US stores.

Finch October 24, 2013 at 11:00 am

I think that to ensure roughly equal probability that any consumer within a size range will find a product in stock, you need to keep a higher ratio of inventory to expected demand for sizes with lower expected demand. So stores relatively overstock items on either end of the bell curve.

There’s also a discreteness problem which manifests as a greater percentage of low numbers. You can’t stock 2.6 XXXL shirts. The percentage difference between 2.6 and 3 is greater than the percentage difference between 8.6 and 9, say, for L shirts.

This manifests in more unsold clothing at very large and very small sizes.

Rahul October 24, 2013 at 11:58 am

Neat argument. I hadn’t thought of it like that.

Though, now I’m tempted to say stores are shooting for the wrong metric then: A 10% chance that a median size is out of stock might mean 100 unsatisfied customers a day. A 10% chance that an XXXL size is out of stock might mean only 10 unsatisfied customers.

Shouldn’t they be attempting to maximize total satisfaction? (or total potential sales equivalently)

Finch October 24, 2013 at 1:55 pm

I’m not sure how rigorous that side of the argument is. The way I heard it from a retail marketing person was that you sort of choose where you’re going to compete, and then you have to be broadly competitive with everyone else. So you don’t choose to provide lousy service to small guys, you just choose not to sell to them. I have no idea whether big retailers benchmark their competitors’ stocking processes. I imagine they would, but I don’t know. I could imagine a world where most firms chose to relatively ignore 165 pound men/boys and 275 pound men, but it doesn’t seem to be what big retailers do. Maybe they overstock, but not to the extent necessary to provide the same probabilistic experience?

bob October 24, 2013 at 2:16 pm

If you are that late in the season that the average sizes are not available, you are not really in their target market anyway: That late, you might be buying on sale, or with a bunch of coupons. You might even go look at the rack full of last year’s clothes.

You often only buy stock once, and there you are aiming to meet the demand of those that buy early, who might not even have the same average size as your more casual consumer. By the time you go, they might not be that far ahead selling to you than selling to the liquidator.

Sbard October 24, 2013 at 7:37 pm

Also, the manufacturers don’t sell clothes by piece, they do it in runs that consist of a distribution of sizes. In order to get enough mediums to fill the demand of your customers, you may be stuck with a bunch of extra XXLs.

Rahul October 25, 2013 at 4:10 am

Maybe, but it just means then that the manufacturers are making the wrong distribution of sizes? is so it ought to be easily correctable in the long run?

RR October 24, 2013 at 1:54 pm

The median sizes finish faster . You are correct ; I generally also feel stores are poor in ensuring a bell distribution of clothes’ sizes .If they did we wouldn’t see so many XXL and S left .

John Mansfield October 24, 2013 at 9:51 am

Could anyone who understands finance explain the difference between layaway and “options”?

AndrewL October 24, 2013 at 11:47 am

an “option” is a contract to buy or sell an asset at an agreed price by the contract’s expiration date. You buy and sell “options” contracts, their prices change with market conditions.

Layaway is basically paying for an asset in installments with no interest or fees. It is a value to retailers as it gets people who might not otherwise purchase the item from them, or at all, to purchase it. (Makes it more affordable). For example, if two competing retailers are selling the same item for the same price, the retailer that offers layaway may attract more buyers for which that item maybe just out of their reach.

Jay October 24, 2013 at 12:03 pm

There are frequently service fee’s too (not just cancellation penalties), another reason for retailers to do it:

http://frugalliving.about.com/od/christmas/qt/Stores_Offering_Layaway.htm

Leigh Caldwell October 24, 2013 at 9:58 am

I’ll do it for $5.

Rory Sutherland October 27, 2013 at 8:35 am

Leigh, like you, I am a Brit. I had never heard of this layaway option. I was really quite interested.

Now, what’s strange about this is that I am really quite rich. But when I read the description, unlike the economists here, I did not think “what a stupid idea” but instinctively thought “hey, that’s neat. I might do that myself.” I saw it as a way for fate (rather than impulse) to help me decide whether to buy things I want but don’t need, and to reduce the guilt I may feel when buying such things (just as my Starbucks stored value card makes me feel less guilty paying $4 for a coffee – since I have already paid for it in advance).

I suppose I saw it as a kind of mental gamble. Look, I would quite like a telly for the kitchen. This one looks quite good as is on offer. Let’s punt some money in up front. If, in the next six months, my Jag doesn’t need a new set of tyres, I’ll get the telly; if some crisis happens I’ll take the money back. I suppose I could invest that money instead – at about 1.3% – but I’m not autistic, so I don’t do that. (I also thought the layaway offer would also be a great way to teach my children self discipline.)

What this really demonstrates is that companies are missing out on huge sales opportunities because they are constrained in their thinking by conventional economic assumptions. It also shows that the financial services industry really needs to get its head around cookie-jar economics. Walmart 1 Citibank 0.

But the bigger reason given above – that poor people don’t have easy ways of saving – is inarguable.

Rory Sutherland October 27, 2013 at 8:44 am

Also I trust Walmart a hell of a lot more than I trust my bank.

sam October 24, 2013 at 10:07 am

Commenters here are assuming that layaway exists as a commitment device for people who are simultaneously lacking sufficient self-control to save, but have just enough self-control to participate in layaway.

This is likely untrue, as if you fail to make sufficient payments to cover your purchase, or if you request disbursement, the money you put into layaway comes right back to you. The impulsive Wally World shopper can easily get the money out of layaway as quick as a bank account.

Layaway is actually perfectly rational.

The real reason for layaway is exploiting an asymmetry: among the lower half of the IQ curve, money is seen as communal, but stuff is seen as personal.

When idiots make bad life decisions, they will come to you and say they “need” your money. They won’t say they “need” you to sell your TV.

By putting money in a layaway account earmarked for a specific consumer good instead of in a bank account, the money now is put into the mental category of “stuff”, and is safe.

Thus, the use of layaway is a perfectly rational way for higher-IQ poor people to shelter their money from lower-IQ poor people.

Rahul October 24, 2013 at 10:25 am

The money comes “comes right back to you” minus a fee. Walmart has a $10 fee.

Even assuming a $100 median layaway that’s a 10% penalty.

RM October 24, 2013 at 10:31 am

Less than perfectly rational people do not use percentages. $10 is a small absolute cost.

Chris S October 24, 2013 at 2:53 pm

Perfectly rational people should not use percentages either. A $10 fee costs $10, whether its on a new talking doll or a mortgage.

sam October 24, 2013 at 10:58 am

Walmart does indeed have a fee. You are paying Walmart to store your money in a place where people are unlikely to take it. The fee may even be part of the appeal, in that you point out the fee to your less-intelligent associates as a way to deter them from asking you to withdraw money from the layaway account.

Shane M October 24, 2013 at 5:21 pm

how much interest am I going to make on my savings anyhow? Several of my brokerage accounts pay 0 interest now, and on some it’s often more trouble than it’s worth to do the book-keeping for the small interest amounts.

Rory Sutherland October 27, 2013 at 8:38 am

I entirely agree with this. Brilliantly put.

Turkey Vulture October 24, 2013 at 10:12 am

If you (1) think prices on the item you want to buy will rise in the next 90 days, (2) receive little or no interest on bank savings, and (3) are highly confident in your ability to attain the amount needed in 90 days, layaway seems like a good choice even without considering the commitment-device aspect.

Turkey Vulture October 24, 2013 at 10:14 am

Also, a lot of checking and savings accounts have fees. Walmart’s only fee is $10 if you cancel the purchase, so you can use Walmart as your bank for 90 days and pay a $10 maintenance/ATM/whatever-equivalent fee if you need the money for something else, or can’t achieve the goal.

prior_approval October 24, 2013 at 10:35 am

‘receive little or no interest on bank savings’

This is a joke, right? Who receives more than little to no interest at this point in the U.S.? My current Apple Federal statement lists 0.150% for savings, and .17% for money market accounts. No wonder I prefer the lesser joke of current eurozone interest rates for my casual bank accounts.

The measured inflation principal compensation on my TIPS beats those commerical interest rates, by the way.

Brandon October 24, 2013 at 10:42 am

It seems like you’re misreading Turkey? They are saying that layaway isn’t much different than sticking the money in a zero or near-zero interest savings account, especially if you’ll have to pay fees for that account. Who cares about that $0.01 you’ll earn over 90 days?

Turkey Vulture October 24, 2013 at 11:00 am

Yeah, what Brandon said. I just mean that unless they have some special account giving them a high rate of (real) interest, there is little to no opportunity cost in giving the money to Walmart to hold onto rather than Bank of America.

I’d also suggest looking at Sallie Mae’s online savings, which currently gives 0.8%. Peanuts, yes, but slightly more in peanuts than you’re currently getting.

Jay October 24, 2013 at 12:05 pm

“I just mean that unless they have some special account giving them a high rate of (real) interest, there is little to no opportunity cost in giving the money to Walmart to hold onto rather than Bank of America”

Yes there is, not always as in Walmart, but it depends, Best Buy charges 5% to store your money for you:

http://frugalliving.about.com/od/christmas/qt/Stores_Offering_Layaway.htm

Turkey Vulture October 24, 2013 at 12:59 pm

Bank of America charges a flat fee to store my money for me (well, someone else’s money for them): $12 per month if they aren’t doing Direct Deposit or maintaining a $1,500 balance:

https://www.bankofamerica.com/deposits/checking/checking-accounts.go

I’m not saying layaway is the greatest thing ever for everyone. I would never use it. I am frugal, and if I can’t afford a non-essential item today then I won’t buy it (with the significant exception of law school). My parents, as far as I know, never used it, although that may have been because my mother controlled the checkbook rather than my less-financially-careful father. But for my brother, it could be a better option than his next-most-likely alternative (buying the item on credit and then maybe carrying a balance at 15-20% interest).

I’m not sure what exactly goes into determining our spending and saving patterns, but I don’t think my brother can wake up tomorrow and say “I’m going to be frugal now.” But he could say “I want this TV. I think I can afford it over time. Maybe it’d be better to put it on layaway and maybe pay some fees if I can’t end up saving enough, rather than outright buying it and carrying a balance on a credit card.”

Jay October 24, 2013 at 1:20 pm

My bank (Wells Fargo) charges me nothing to hold my money and I get a free debit card with points. We can go back and forth with anecdotes, but it is simply not true that free checking is available (albeit with minimum balances or direct deposit, if you don’t have these things you should not be putting TV’s on layaway).

Layaway is certainly better than credit but it is still an irrational (even if sometimes useful as in the case for your brother) product that costs more than just saving up your money (in a bank presumably).

Brandon October 24, 2013 at 1:55 pm

“TVs on layaway”

There’s that odd assumption again.

Look, despite your beliefs that people who don’t have direct deposit and a minimum of $1500 in the bank at all times shouldn’t be buying anything, they do.

Jay October 25, 2013 at 12:06 pm

I brought up TV’s because his example used them, a store is unlikely (I could be wrong) to go through the hassle of layaway just for a bunch of small staples or clothing, so TV’s and electronics are, in my opinion, a much more popular example.

Brandon October 24, 2013 at 10:25 am

Alex, before writing this piece, did you talk to anyone who uses layaway or who the service is targeted at?

Ray Lopez October 24, 2013 at 10:29 am

AT’s suggestion is flawed, since he lacks the same credibility as Walmart. The entire exercise of layaway is a forced means of saving. The saver has to go to the Walmart every week, make a deposit, which becomes a habit. Sending money to Alex runs the risk of Alex absconding with the saver’s money. Layaway plans are not rational, just behavioral economics at work.

“In the spirit of Tabarrok’s Wager” – I read this blasphemous piece, and AT will go straight to hell for writing it. Furthermore, it too suffers from a credibility gap: why should AT have a direct line to God? Even the Pope is questioned by Catholics as having a direct line to God, much less AT. Finally, AT’s Pascal’s Wager idea fails to mention something that I deduced about the Wager when arguing with some atheists (I had to come up with this argument on *their* behalf, as they failed to see it, but I enjoy playing Devil’s Advocate): the Wager does not fail, even for atheists, since you can posit a god who will reward only those people who fail to believe (that is, all people who do NOT accept Pascal’s Wager will go to heaven, according to this unknown god). Against this, I’ve argue that such a God would be against historical precedent, as most gods in history want some form of recognition, and a god that only rewards people who don’t believe in him would be historically unprecedented. So in terms of historical precedent and Pascal’s Wager, it pays to believe in one of the traditional religions, probably the older the better (for the same reason that God would want even ancient peoples to be saved, hence He ministered to them in ancient times through one of the traditional, established religions). Hence, Zoroastrianism, ancient Greek, Roman, Egyptian or Mesopotamian or New World religions, and/or classic Judaism (which BTW did not have the idea of a heaven, which was a Hellenistic invention due to the Maccabees) should be your “best bet” in Pascal’s Wager. Against that, if God is signaling his disapproval of these religions today by the fact they went extinct, it would be the “most popular” religions of today, such as Christianity, Islam (both of which are Judaic offshoots).

“So it is written, so it shall come to pass. I have spoke.” – Ray Lopez

RM October 24, 2013 at 10:34 am

One Walmart perspective that is missing: Isn’t this another way that Walmart segments the market? (Not that this helps much with our understanding of why people use layaways).

mcarson October 24, 2013 at 10:39 am

This is where we need to set up a charity where someone with opinions on the poor submits their column to a poor person for editing before publishing it. From the “no-money” perspective, this guy is a flaming idiot. Ted Cruz can stop Oboma care if you just believe him worshipping lunatic. 2 + 2 = 5 moron.

Look at the diffence between sale price and list price on the things poor people buy. The diffence is often 30%. For crying out loud, look in the grocery store. Ketchup is either $.99 or $2.69. Kids pants are $14.99 or $24.99. The “in” colors change every year, so if you’re matching stuff, especially girls clothes, you need to buy the shirts and pants at the same time, the pink from 2 years ago will probably be the wrong shade. Also, I know how much it costs me to drive to the store, and only go when I really have to. It’s about $3.50 for me to go to Target, round trip. Bus fare is $3 – $5 per day. We can’t just stop by and pick up what we can afford, we’d go broke buying stuff in 6 or 8 trips.

It also overlooks all the new info on stress and decision-overload. There is a huge advantage in having all the tough “What will I get the kids?” decisions made at one time. I know there is info available on what percentage of lay-aways are essential, vs. what is optional.

Last point, for all you looking to bash the poor. We don’t watch T.V. any more. The old T.V.’s let us get T.V. over the air, the new T.V.’s require cable. We can’t afford cable any more. Comcast has the info on their changing demographic. We have the internet because our kids need it for school. We can watch shows on the network website, but it’s not as fun as on a big screen. Our kids may have a big T.V. for their video games, but they may be using a $25 cathode ray job from the Goodwill.

You can still bash us for our phones, though. Lots of us have I-Phones.

Brandon October 24, 2013 at 10:45 am

FWIW new TVs do not require cable/satellite. New TVs (since at least 2008, when I bought my TV) have an HDTV tuner built in and can pick up broadcast channels using a standard antenna from rabbit ears to the classic big roof-mounted style. We haven’t had cable TV since we moved two years ago. Older TVs do require an HDTV tuner to work, though there were coupons provided by the government when the transition was made.

Ray Lopez in the Philippines October 24, 2013 at 10:52 am

You think you’re poor? Come to the Philippines and I’ll show you poor. People who save money by not eating poor.

You’re right about the iPhone though. Even the poorest person here has a mobile phone, and the iPhone is the ultimate Giffen / Veblen good, and prized even above a place to sleep. I once had a poor girlfriend who, given a choice between me fixing her teeth, which were rotten, and buying a iPhone, choose the iPhone (which was cheaper anyway). She’s typical of how the poor think. Even street people here have mobile phones.

Das October 24, 2013 at 11:28 am

You once had a poor girlfriend with rotten teeth and let her choose between fixing the teeth and getting an iPhone? Must have been love…

mulp October 24, 2013 at 9:15 pm

But the offer was a test of character that was cheap relative to a lifelong commitment.

Turkey Vulture October 24, 2013 at 11:02 am

I think the difference between list price and sales price exists for most goods, for both the poor and the non-poor. It seems to be the combination of taking advantage of people’s tendency to Anchor on the list price, and perhaps also free-riding on a bygone era (which may or may not have existed) where list price actually did mean something about the “typical” price, and thus was a useful signal.

Shane M October 24, 2013 at 5:28 pm

There’s probably something to this idea of elimination of choice creating value. I’ve noticed also how much better I “feel” after I’ve made a choice and moved on. I have a problem with researching things to death anyhow, and sometimes I force myself to make a choice and move on just so I can get back to my normal life. I could always find a better deal somewhere, but there’s opportunity cost to maintaining and cultivating a large set of choices/options.

K Webb October 24, 2013 at 10:45 am

“Are we living in the Soviet Union? Who worries about Walmart and Kmart running out of goods? ”

Believe it or not, but demand at a particular time and place does often outstrip a retailer’s ability to restock an item, and Christmas gifts are much more valuable on December 24 than December 26.

There’s a bad Schwarzenegger film about this.

timb October 24, 2013 at 10:47 am

Alex, no offense, but wonders if you have kids or have ever lived paycheck to paycheck. Stores run out of popular toys all the time in December. Actual consumers know that

Brandon October 24, 2013 at 10:49 am

They also frequently cycle clothing styles, and won’t have all sizes at all times. If you’re an odd size and have trouble finding clothes, it’s perfectly rational to put them on layaway if you can’t afford them today but can over the next 90 days.

JFA October 24, 2013 at 11:00 am

This is an unusually unthought out piece from a generally clear thinker. Layaway is obviously a better commitment mechanism than a piggy bank at home. Some people (possibly most of those with low incomes if you by the Bryan Caplan hypothesis) are impatient and can’t control themselves. Putting money in a piggy bank at home means you have the ability to just take that money for something else before you save up enough to by whatever it is you want. So, yes, the relevant alternative is saving at home, but the likelihood of saving the targeted amount is much higher by using layaway than using a piggy bank.

As an aside, even if the relevant alternative to layaway was buying something on credit, the people buying things on layaway would be using title loans or check cashing services (which provide much worse rates than layaway) instead of credit cards… why don’t we here rants against these types of businesses. If Walmart or Kmart layaway programs keep people from going to check-cashing firms, this is certainly something to be lauded, not panned.

Yancey Ward October 24, 2013 at 11:02 am

The “experts” supporting irrationality don’t surprise me. Never really thought they were experts in the first place, just hucksters selling to their audience.

Katie October 24, 2013 at 11:17 am

I used to work at Kids R Us and the free layaway plan was really helpful for parents shopping for “back to school.” We would often sell out of styles and sizes very quickly and each summer offered a buy-one-get-one-free denim sale that would save parents tens of dollars. Many parents came in and shopped in early August getting discounts and a larger selection of styles, and came back at the beginning of September to pick up the clothes right before school started.

Das October 24, 2013 at 11:21 am

“Stop the insanity! The relevant comparison is not to buying on credit but to saving.”

This is true for you and me and this site’s commenters.
But to me this seems to be a classic case of a second best policy for those who would indeed buy their new TV set on credit.

Nonetheless: Your post made me laugh and cry a little. Thanks.

Brandon October 24, 2013 at 11:30 am

Why are we assuming luxury goods like new, expensive televisions and not, say, a few new outfits so your kid isn’t embarrassed on the first day of school or some Christmas presents to put under the tree?

Edward Sung October 24, 2013 at 11:43 am

This article strikes me as a little out of touch with the experiences of the working poor. My parents owned retail stores that offered layaway plans, and working there showed me several good reasons why people go that route.

(1) Many products actually are only available for a limited time — in particular, clothing, which tends to be seasonal and in many cases the styles turn over quickly. A customer might want a specific dress (often for an upcoming occasion, like a wedding), but there’s an excellent chance that the dress won’t be there the following month, let alone 3 to 6 months down the road.

(2) As another commenter pointed out, if the item is meant for a Christmas gift, there are many, many cases where the item won’t be available anymore by Christmas. (Toys, for example.)

(3) For many people who are struggling financially, it can be extremely difficult to save even modest amounts of money. There are always pressing expenses clamoring for every dollar. Many customers in my parents’ store who bought things on layaway, did so because it was pretty much the only chance they had to save up for a non-critical purchase.

(4) As a means of paying for something in installments, layaway beats credit by a mile. Most of the time there are no, or modest, fees. The customer may already be drowning in debt, or have bad credit. More importantly, unlike credit, you’re not forced to make monthly payments. You pay as you can. If you’re having a bad month, or several months, you can skip payments entirely until you have the funds — try this with a credit card company.

Sure, in an ideal world, there would be no need for layaway. But the reality is that layaway plans can offer much needed relief for people who don’t have the means to just walk into a store and buy whatever they want outright. And it’s a far better option than predatory loan companies or rent-to-own outfits that exist only to gouge people struggling under financial pressure.

Rigby Reardon October 24, 2013 at 11:46 am

Alex, I’m curious: did you actually talk to any poor people who use layaway to find out *why* they use it? I assure you, it’s not because they’re idiots.

Tim October 24, 2013 at 11:49 am

Alex agrees that everyone is not rational–that’s why he thinks some people choose layaway plans! Thus, the question is whether the layaway plan is a rational response to a behavioral issue (the so-called behavioral view) or is a consequence of a behavioral issue (Alex’s view).

FE October 24, 2013 at 12:25 pm

Layaway also provides a psychic benefit by increasing the a sense of having “earned” the purchased item by completing the payment plan. Users also get the satisfaction of having their achievement recognized by the merchant. Which sounds like more fun to you, walking proudly to the layaway counter with your last payment, or making a routine ATM withdrawal?

Jules October 24, 2013 at 12:53 pm

“The relevant comparison is not to buying on credit but to saving.”

How so, other than the order of events? Layaway – Fee, payments, purchase. Credit Cards – Purchase, payments, fee[s].

Except with a credit card you don’t get your money back if you can’t make all of the payments in a timely fashion.

Maybe the comparison isn’t relevant, but how is it worse?

Thomas October 25, 2013 at 2:56 am

The benefit of credit is that you get to use the item before you pay for it. Layaway is a savings account without the traditional benefits – security, liquidity, interest.

Dave S October 24, 2013 at 1:11 pm

“”With layaway, you don’t have to worry that the store will run out of an item you want,” he said.

Are we living in the Soviet Union? Who worries about Walmart and Kmart running out of goods? Occasionally an item will be discontinued but then the replacement is usually better and/or cheaper.”

Mr Tabarrok obviously has never bought toys for children, nor turned on a TV in the days leading up to Christmas. If he had, he would know that every freaking year, the toy stores run out of This Year’s Must Have Toy that nobody could have predicted would be so popular… and so the Magical Free Market doesn’t actually stock the stores with enough of the item by the Must Have Date. And children aren’t exactly swayed by arguments that the other toys that are in stock are superior in quality… even if they are “better” substitutes for the item they really wanted.

Dave S October 24, 2013 at 1:13 pm

I mean, entire movies have been made about parents bidding up the price and practically killing each other to snag Insert Name of Toy Here. Layaway allows the poor family to secure their children’s wishes to Santa in a cost effective and guaranteed way.

Jay October 24, 2013 at 1:22 pm

Best Buy charges 5% by the way, non-refundable, “cost effective” is subjective.

Brandon October 24, 2013 at 1:58 pm

I can’t think of anything you could want at Best Buy for your kid that you couldn’t get at Walmart, which is offering free layaway.

AndrewL October 24, 2013 at 2:08 pm

Monster Branded cables! *snicker*

arg October 24, 2013 at 2:27 pm

The Tabarrok plan turns Alex into an Indian moneylender, who charges usurious interest rates for the convenience of forced savings, smoothed consumptions, and cognitive-load (decision-making) reduction, as detailed in Banerjee & Duflo’s Poor Economics.

Chris S October 24, 2013 at 2:57 pm

Alex’s rational layaway consumer model needs more refinement to include the incentives outlined above, a la Gary Becker on the rational addict.

Curt October 24, 2013 at 3:04 pm

I am tempted to take you up on the layaway plan just so I can get a hearty congratulations from you.

J William Suggs October 24, 2013 at 3:26 pm

I am so sick of people being so superior when they have never been poor. Try eating one meal a day for 3 days at the end of the month then looking at that piggy bank in a whole new light. Were I commenting in person I would have more colorful language.

Yancey Ward October 24, 2013 at 4:10 pm

So, bury the piggy bank in the next town over.

sam October 24, 2013 at 9:29 pm

I do know many people for whom one meal a day for the few days at the end of the month would have been considered a great luxury during the harder times in their life. In spite of that, they made good decisions in poverty and are no longer there.

Of course, they’re also Asian.

jerseycityjoan October 25, 2013 at 12:26 am

Using lack of food and other terrible difficulties that some people around the world have experienced to beat our own down and out folks seems grossly unfair to me.

Who knows how many of our poor would go abroad in search of a better life if they could? Nobody will take them. They are stuck here, competing with new people from overseas for lousy jobs that often used to be good jobs but are no longer — partly due to the influx of foreign workers who will work harder for less.

Ask your Asian friends if the poverty they viewed in their home countries was, on the whole, character-building or character-destroying.

We hear about people who say that a rough life in early days ended up being beneficial in the long run. Some of them end up here. We don’t hear from many casualties who didn’t see things that way. Those people stayed at home.

Thomas October 25, 2013 at 3:07 am

Must we be so sensitive now, Mr. Suggs, that “layaway is an irresponsible decision” is too offensive to speak of?

Shane M October 24, 2013 at 5:01 pm

Apparently many folks have an easier time “spending” than “saving.” No surprise. Many people, even those with good paying jobs, will spend most of what they have. If there’s extra money, they’ll find a way to spend it. A savings account just taunts them with thoughts of “what will I spend it on?” Through experience they’ve found they can’t consistently save up enough for a larger purchase. For this reason, some folks even rent expensive homes because they can manage that, but cannot save up enough for a down-payment on their own. If they save up too much excess money for too long they’ll end up spending it on vacations, toys (like boats), a new car, renovations, clothes, etc.

Shane M October 24, 2013 at 5:03 pm

oops: maybe not renovations – lets say “new furniture”

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