Consumer Empowerment: The High Cost of a "Feeling" of Safety

Readers, today I want to share an unsettling insight into consumer psychology, using an experiment described in Daniel Kahneman's striking book Thinking, Fast and Slow.

Edit: see the follow up to this post: The Taboo Tradeoff
The question below is adapted from a study of the rationality of consumer valuations of health risks, which was published by a team of economists in the 1980s. The survey was addressed to parents of small children.

Suppose that you currently use an insect spray that costs you $10 per bottle and it results in 15 inhalation poisonings and 15 child poisonings for every 10,000 bottles of insect spray that are used.

You learn of a more expensive insecticide that reduces each of the risks to 5 for every 10,000 bottles. How much would you be willing to pay for it?

The parents were willing to pay an additional $2.38, on average, to reduce the risks by two-thirds from 15 per 10,000 bottles to 5. They were willing to pay $8.09, more than three times as much, to eliminate it completely. ...This premium is compatible with the psychology of worry, but not with the rational model [of decision-making].

So: it's clear that we humans will gladly overpay for vanishingly small increments of perceived safety, in total defiance of both math and probability. With that in mind, a question for readers:

Do you think the companies that sell to us are aware of this? Is it likely they price "safer" products accordingly, thereby (essentially) profiting from our worry?

Duh, of course. Yes, yes, and yes. Here are some consumer products categories where we can see this exact phenomenon:

Organic foods
"All natural" food products
"No added nitrites" meats
DEET-free mosquito repellent
Bisphenol-a free canned foods

Do you expect these products to carry premium prices, typically? Yes, in all of them. But more importantly, are the price premiums commensurate with the increased costs to the producer or retailer? In other words, is the producer charging more because the "safer" product actually costs more to make, or are they charging more simply because they can?

Admittedly, we don't know all the direct costs in each of the examples above. But we do know, for example, that grocers make significantly more profit on organic foods. Also, thanks to the enormous economies of scale in the modern-day chemical industry, the cost of the chemicals in a DEET-free insect spray is likely to be very close to the cost of the raw materials in DEET-based spray. The cost of the plasticized liner inside a can of food is an irrelevancy compared to the value of the actual food in that can. Finally, it's quite likely that production costs for "no-added nitrites" meats are actually less then "nitrite-added" meats. You just have to think about it for a minute to see why.

So if the costs are the same, yet we see 30%, 50% and 100% price premiums for these products, let's be honest and call it like we see it: these products are obviously aspirational, and they're priced and marketed that way by design.

So, consider the following question as an empowered consumer: What value do you really get by paying substantially more for a label or sticker that may make you feeeeeel safer, but in reality offers you, at best, an imperceptible increase in safety?

Asked a slightly different way: how much extra will a disempowered consumer pay for the "feeling" of safety?

The consumer products industry already knows the answer to this question. Do you?

Read Next: Divorce Yourself from the False Reality of Your Grocery Store

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Anonymous said...

I'll go with Ruhlman on this one: “given the current FDA and USDA regulations on the use of nitrites, the risk of developing cancer as a result of consumption of nitrites-containing food is negligible.”

(Replace Nitrites with _________.)

Also just caught on youtube at series on "E Numbers." You will probably like it too. (Nitrites, colors, etc. have E numbers in Europe.)

Lauren said...

While I take your point about statistical risk (which is a notoriously misunderstood concept), and agree that the definition technically fits, I find it interesting to suggest that seeking products containing LESS extraneous crap is an aspirational act. What does it say about a society when purchases driven by beliefs about health constitute conspicuous consumption?

Daniel said...

I think you're asking a great question Lauren, and I don't know the answer.

It's interesting, too, to ask: what, exactly, makes this product aspirational and that product not? I don't believe that wanting to buy safer or better-for-you products is aspirational in and of itself, and in no way am I saying that in this week's post. What I want to do is protect consumers from paying much higher prices for insignificant improvements in safety.

But what is it that makes it aspirational? Is it the price premium? Is it the brand? What? I think in a lot of cases the high price itself communicates the aspirational content of the product. I'll be getting deeper into this issue in a few different posts in the coming weeks.


Marcia said...

I really have a tendency to overdo it, and have tried *very* hard to overcome that tendency over the last few years.

Like on my blog, keeping a budget My husband made the comment "stop trying to keep a tight grocery budget, cook from scratch, and keep everything local!"

So anyway, I like organic foods - I find organic produce to be tastier than non. But it's important to note that most of my produce comes from my local CSA, and price-wise, it's generally the same, or cheaper, than the grocery store.

I supplement with produce from Trader Joe's, organic for the dirty dozen and not for the other. When I had more time, I would get the rest of the produce at the farmer's market.

I also used to make my own yogurt, bread, etc. No processed foods! I enjoy the blog "100 Days Of Real Food" and when she asked on FB recently what is holding us back from going all-in, I said "time, and the thought that I HAVE to go all-in!"

I think we have to not make ourselves crazy. Yes, I cook from scratch a lot on the weekends. I have a friend who is REALLY into local/organic/free range. They have bees, avocado trees, a small garden. They buy a side of beef, or a whole pig (I went in with him and a couple of other families on a local pig.)

I mentioned that I have plenty of Trader Joe's chicken fingers and Costco pizza on my menu, and he said "no, order pizza from this local organic place! You can do better!"

Sure I can, but that pizza is $20, the Costco pizza from the freezer is $3.25 and I make it 2x a month. The farmer's market that is most convenient is only Saturday mornings, Trader Joe's is open every day.

So I buy the "better" product when I can, and when it's convenient, but these days I happily supplement with conventional stuff. It's about 1/2 and 1/2. My friend who I bought the pig with? He's retired. He recognizes that it's hard with a full time job and 2 kids, but doesn't quite realize how much easier it is to throw a frozen pizza in the oven for 25 minutes and steam a vegetable.

chacha1 said...

When it comes to things like pesticide residues on my food, or artificial nitrites, I am willing to spend more to get what I consider to be "cleaner" food, and I am also willing to spend more for convenience.

I find the price differential on "cleaner" foods relatively insignificant, as I am among those fortunate people who do not have a strict grocery budget.

But extra money for convenience is actually quite significant. Living in L.A. it can take me two hours, round trip, not including shopping time, to get to the best supermarket in my area - which is only a little over a mile from my apartment.

Some things may cost more at the Bristol Farms or Whole Foods that are closer and more directly on my way home from work, but I am okay with that.

I don't consider it aspirational. I consider it Buying Time, which I am happy to do because I have more spare money than I do spare time.