The Implications of Behavioral Economics Are Not Obvious

Yesterday’s post, Stayaway from Layaway, elicited lots of comments but less analysis.

Some commentators suggested that people who use layaway plans have commitment problems (self-control problems) but that they are meta-rational and choose layaway programs to help them overcome. The problem is that when people are irrational at one level and rational at another it’s difficult to know which level is in control and which level is being appealed to by firms.

People who have self-control issues may think that they are being meta-rational by entering into layaway programs but perhaps, ala Dunning-Kruger, they are fooling themselves and will soon find it difficult to pay on the installment plan. According to one marketer, “up to 25% of layaway orders, on average, are cancelled.” Canceling exposes the consumer to service and cancellation fees. Moreover, I wouldn’t be surprised if some people never get around to reclaiming their payments. We know, for example, that billions of dollars on gift cards are never used.

We also need to keep in mind the incentives of the seller. Walmart, Kmart and Best Buy offer layaway programs because they increase profit. Are the higher profits a result of selling commitment to the meta-rational? Or are the higher profits the result of getting the less than perfectly rational to buy more? The ultimate commitment plan is to not buy what you can’t afford and layaway doesn’t help you with that problem. What layaway does do is encourage you to commit now to buy at Walmart. In other words, it binds you to Walmart and, fyi, it does so weeks before goods typically go on sale.

The way the programs are often advertised and discussed–layaway in case the store runs out!–is also a classic sales technique to encourage buying by eliciting feelings of (false) scarcity and potential loss.

I would like to see more data but I have not yet seen any reason to revise my belief that layaway plans are often a bad deal for consumers. I have, however, discovered one reason for layaway that does make some sense. Namely, to keep the presents hidden from snooping children.