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January 21, 2008
Self-Control, Delusion and Why Subscription Services Rule
Whether the subject is buying or selling stocks, avoiding chocolate, or subscription software, you think you have more self-control than you do. That point was driven deliriously home today in scanning a 2002 paper on the deranged economics of health clubs. Here is the summary:
Experimental evidence suggests that people make time-inconsistent choices and display overconfidence about positive personal attributes. Do these features affect consumer behavior in the market? To address this question we use a new panel data set from three US health clubs with information on the contract choices and the day-to-day attendance decisions of 7,978 health club members over three years. Members who choose a contract with a flat monthly fee of over $70 attend on average 4.8 times per month. They pay a price per expected visit of more than $17, even though a $10-per-visit fee is also available. On average, these users forgo savings of $700 during their membership. We review many aspects of the consumer behavior, including the interval between last attendance and contract termination, the survival probability, and the correlation between different consumption choices. The empirical results are difficult to reconcile with the standard assumption of time-consistent preferences and rational expectations. A model of time-inconsistent agents with overconfidence about future time inconsistency explains the findings. The agents overestimate the future attendance and delay contract cancellation whenever renewal is automatic.
In short, people think they will go the club more often than they do, to the point they predictably lose money on 'em every time. But they refuse to believe they won't go, even when there is per-day pricing that would work out better they lose money instead -- and refuse to cancel go to per-day pricing when given the chance. People are the best, aren't they?
Some other amusing implications here.
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"The empirical results are difficult to reconcile with the standard assumption of time-consistent preferences and rational expectations."
Laughed, I nearly cried.
Maybe the point is that people sign up for a health-club service to entice them to go to the health club more often than they would otherwise go on a pay-as-you-go plan. If you know its costing you so much every month to be allowed to go, you better go as often as you can stomach (which, in this case, seems to be relatively infrequently). For many folk, if they just paid $10 each time they wished to go, they'd probably go even less frequently, because there is short term leisure/laziness cost of going to the gym, and because the cost of not going is so low ($0). In a sense, gym members are paying the gym so that they feel obligated to go more often than they otherwise would.