The Hindu Business Line : Going to the gym…

My friend claims to be a fitness freak. Two years ago, he enrolled himself in a gym. The gym offered him two payment options — pay-per-visit of Rs 100 per entry or a flat monthly fee of Rs 1,000. Even my friend, who does not quite like math, understood that the monthly option was better if he used the facility more than 10 times a month. He, therefore, chose the monthly option. Since his enrolment, he has visited the gym not more than three days each month! That works out to Rs 333 per visit. Yet, he refuses to choose the pay-per-visit option. Why? Behavioural economics throws some light on this.

You may have received several mailers from credit-card companies offering you zero interest rate for three months. The catch is that the rate will increase to 20 per annum after the introductory offer.

You accept the offer. Why? You intend to stop the credit facility after the introductory period. But do you? If you are a typical consumer, you will not have the self-control to do so. Card-companies know that. And they take advantage of your self-control or the lack of it.

Wealth-destroying contracts

It is the same with pay-per-use TV. If you choose a la carte, you may incur, perhaps, Rs 200 per month. But what if you have to watch Neo Sports, MAA TV or ETV Bihar? A bouquet is then cheaper. The problem, however, is that you do not watch all the channels that you subscribe too. Your per-viewed channel cost could be higher than the a la carte option.

So, why do we enter into such wealth-destroying contracts? The reason is that we tend to overestimate our needs. And fail to change our views on it.

My friend offers another reason. He argues that paying monthly fee forces him to visit the gym to derive value-for-money and, in the process, keep himself fit. Till now, he has overestimated his self-control. Perhaps, gym fee has not yet pinched his pocket. Or he is really poor with his math!

(The author is a Chennai-based financial analyst.)

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