One More Reason It Pays To Switch Banks

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Illustration by Alexander Ho; Getty Images

Recent media focus concerning the price of brand loyalty—sparked in part by Bank of America’s decision to start charging fees for debit card users—recalls some interesting research from a few years back that suggests there’s good reason for you to consider switching brands more often. Because it’s not just greedy companies who punish loyal customers. It’s the customers themselves. As a post by our TIME Moneyland colleague Brad Tuttle recently explained, consumers are ripe for exploitation by their favorite brands in part because the “status quo bias” and other sources of inertia keep people from switching. But something else may also be at work, a powerful admixture of two other principles central to behavioral economic theory: the “endowment effect,” or the tendency to overvalue something because it’s ours; and the “confirmation bias,” the habit of paying too much attention to information that supports our ideas and too little to that which doesn’t.

(MORE: The Odd Reward for Being a Loyal Customer)

The effects of this combo were evident in a study by marketing professor Dick R. Wittink and his colleague Rahul Guah. Their work suggests that people who replace cars with newer models of the same make pay more than what other consumers pay. A lot more. Analyzing data from a survey of three thousand new car buyers, for example, Wittink and Guah found that loyal Buick customers paid $1,051 more on average than customers who switched from another make to Buick. Even more striking: Mercedes “loyalists” paid an average of $7,410 more for their new cars than buyers who switched to Mercedes from another make.

Wittink and Guah were not investigating the confirmation bias or endowment effect, but it’s hard to miss how both tendencies might have contributed to their results. Pro Buick from the start, whether they knew it or not, Buick owners were likely to view other aspects of that carmaker’s product with less skepticism—including the asking price. So they paid more, on average, than people buying the same car who didn’t have that bias. On the flip side, buyers without such loyalty were more likely to bargain and negotiate when switching to that brand. So they paid less than Buick loyalists, on average.

Put another way: There were sets of buyers evaluating the same cars, and the group with less knowledge of the product to start with turned out to be the better shoppers.

Sometimes ignorance is bliss—if “bliss” means “savings.”

(MORE: Could ‘Bank Transfer Day’ Pit Americans Against Their Big Banks?)

The lesson here is important, and it transcends car buying. Challenge yourself whenever possible: your thoughts, preferences, assumptions, beliefs. It’s not easy or natural. As we go through life, its myriad complications and endless options push us (consciously and otherwise) to use a variety of simplification tricks to make our day-to-day decision making easier. This strategy is broadly rewarding, but it can erode your wealth in a variety of ways. Not only by priming you to pay more for a favorite brand—of cars, clothes, appliances, shoes and hotels to name just a few—but also by getting you in the habit of making the easy financial choices rather than the right ones.

To paraphrase Socrates, the unexamined dollar is not worth spending.

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