Are You Susceptible To 'Seduction By Contract'?

The new iPhone is expected to be unveiled this week, and customers can probably get a discount if they sign up for a lengthy service agreement. But New York University Law Professor Oren Bar-Gill tells host Michel Martin that consumers should think twice before signing the dotted line for things like phones, credit cards or mortgages.

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MICHEL MARTIN, HOST:

Now, we want to talk about another kind of contract dispute, the one you might have with your cell phone company. Tech fans are holding their collective breaths because Apple is expected to announce the newest iPhone this week and, if the past is any guide, consumers may get a nice discount on the purchase price if they just sign a new contract.

And that might seem like a good deal, but our next guest says you will want to think twice whenever you sign up for a new phone or credit card or mortgage. New York University law professor Oren Bar-Gill writes about this in his forthcoming book, "Seduction by Contract: Law, Economics and Psychology in Consumer Markets," and Professor Bar-Gill is with us now. Thanks so much for joining us.

OREN BAR-GILL: Thank you, Michel. It's a pleasure.

MARTIN: So why do you use the word seductive when you describe these contracts?

BAR-GILL: Because they are seductive. These are contracts that lure consumers in with upfront perks and then they hit them with back-end costs. So let me give you a few examples. So think about those cell phones that you've just mentioned. You get the cell phones, basically, free if they're lower-end cell phones or heavily subsidized, if they are iPhones or other smartphones. And then you are stuck with a two year contract and this contract entails pretty high monthly fees. It entails overage charges. It entails early termination fees if you want to get out. So upfront perks, back-end costs.

MARTIN: Is there a better way or can you figure this out for yourself with a little digging? I mean, I think that the mortgage analogy is one that many people might have become educated about that many people - during the beginning of the crisis that we are kind of now working our way through, many people got mortgages that they couldn't really afford, but they got upfront, you know, rates that seemed very attractive, but when those rates ballooned, they couldn't handle it.

And then there's this - all this sort of discussion around whether or not people should have known better or not. Or were they deceived into this? I guess that's - so the question is, is this the kind of practice that, as a consumer, you should be able to figure out?

BAR-GILL: The truth of the matter is that these contracts are very complicated, so you mentioned the contract and, especially the subprime mortgage contracts that led up to the financial crisis of 2008. Many consumers who took out these loans - they were under the impression, sometimes enforced by mortgage brokers, sometimes not, that they would be able to refinance out of their initial loan before the higher interest rate kicks in.

MARTIN: One example that you give in your book is, with credit cards, many credit cards say, if you switch to this credit card, you'll get a lower rate, but you have to pay your bill off in a certain way. And you're saying - or you have to pay the balance off in a certain number of months. And you're saying a lot of consumers aren't going to do that and they're not being realistic about that.

BAR-GILL: Consumers appear to have relatively poor information about their own use patterns, so I might think that I will pay up the loan, the balance transfer loan, within the specified period of time, but it turns out that I won't. I won't be able to do that. This is, in part, due to our optimism about the future financial situation that we will be in.

MARTIN: Well, you used a nice phrase there. You said that people - consumers seem to have poor information about their use patterns. I think other people - being a little judgmental - might say that consumers are irresponsible or in denial.

BAR-GILL: Well, yes.

(LAUGHTER)

BAR-GILL: They could be in denial. I use slightly different terms, but I think it's very similar. We're talking about consumers that really don't know themselves very well.

MARTIN: If you're just joining us, I'm speaking with Professor Oren Bar-Gill about his forthcoming book, "Seduction by Contract." What about - with these cell phone contracts? Is there a way that you can get the phone you want without signing your life away for a two year deal?

BAR-GILL: So you can get all of these phones without a contract, but then you'll have to pay upfront for the full price of the phone. Consumers don't want to do that.

MARTIN: Why not just wait, especially when a new version comes out? The other one generally is available at a lower price. Why not just wait?

BAR-GILL: They can.

MARTIN: Does that work?

BAR-GILL: They can. And some people do, but especially when it comes to Apple products, like the iPhone that's coming out, you have to have the really new thing as quickly as you can. I just got back from sabbatical abroad and I - when I got to the United States, I got the new - not so new - iPhone 4S and then, a month later, I hear that the iPhone 5 is coming out. So I'm really depressed about it.

(LAUGHTER)

MARTIN: Even you, huh? So what are you going to do? Are you going to do like those people in one of those ads for somebody's phone? Like, you throw the - you accidentally on purpose throw your phone into the river so you can get a new one?

BAR-GILL: No. I probably won't go to that length, but - yeah. I'll stick to my old iPhone for now.

MARTIN: What is your best advice for teaching consumers to avoid being seduced into deals that may sound good in the short run, but are actually not good in the long run?

BAR-GILL: They should look out for these freebies, the short-term perks and the too-good-to-be-true deals because these usually come with a back-end cost. They need to look for the catch in these contracts. Another tip I use myself and I recommend to others as well is to avoid contracts and products that seem to be too complicated and too complex. If you don't understand it, don't buy it.

MARTIN: One more thing. You make the surprising point in your book that companies that offer consumers, quote, unquote, "good contracts," or contracts that are actually to their benefit in the long run actually lose business to companies that offer seductive contracts. How'd you figure that out and how - why is that so? You'd think that people would want to reward people who are doing right by them - but not so.

BAR-GILL: Right. I think there's - the story is a complicated one, but the point that I make in the paper is the companies want to make money and, in order to make money, they need to attract consumers. If consumers are imperfectly rational, if they're myopic, and they are attracted by these upfront perks and they don't care that much - you know, care sufficiently about the back-end cost, then that is exactly what companies are going to give them.

Now, obviously, this is not always the case. We do have situations where consumers do appreciate the reputation of good companies, but there is, at the very least, a very powerful force working in the opposite direction.

MARTIN: This sounds uncomfortably like the argument that women prefer jerks. Did you - I just want to know.

(LAUGHTER)

MARTIN: Did you test this theory out at home with - or with, maybe, your wife or your sisters to say, you know, just - I don't know. It's just uncomfortably close to that argument, but unfortunately, is this true? And is this cross-gender, that people prefer companies - tech companies that are mean to them?

BAR-GILL: I think what is interesting here is that, when you make this choice, the contract choice, you don't understand that the company is mean to you, and the question is really how quickly you learn. If consumers learn quickly enough that the company was mean to them, that they have been tricked or seduced, then they will punish that company and won't buy from them next time around.

But, in many of these circumstances, that doesn't happen. So again, if you're thinking about the mortgage contracts that we talked about earlier, you take maybe one or two mortgages throughout your life and there is very little possibility or opportunity to learn and to punish the bad companies.

MARTIN: Oren Bar-Gill is a professor of law at New York University. He joined us from our studios in New York. His forthcoming book is called "Seduction by Contract: Law, Economics and Psychology in Consumer Markets." It's already out overseas. It's due out in the United States later this month.

Professor Bar-Gill, thanks so much for joining us.

BAR-GILL: Thank you.

(SOUNDBITE OF MUSIC)

MARTIN: Just ahead, if you caught any of the coverage of the political conventions that just ended, you might have seen both candidates and their wives making a pitch to the nation's moms.

ANN ROMNEY: It's the moms who have always had to work a little harder to make everything right. It's the moms of this nation - single, married, widowed - who really hold this country together.

MICHELLE OBAMA: At the end of the day, my most important title is still mom-in-chief.

MARTIN: Did you find yourself agreeing or gagging? We'll ask our panel of moms how they reacted to all the mommy talk at the conventions and if the candidates are, in fact, talking about the issues that matter to them and to their families. That's just ahead on TELL ME MORE from NPR News. I'm Michel Martin.

(SOUNDBITE OF MUSIC)

MARTIN: Reporters of color were shut out of this year's presidential debate, so the Spanish language TV network, Univision, will host two forums of its own. President Obama and Mitt Romney are both in and moderator Jorge Ramos thinks he knows why.

JORGE RAMOS: That's the new rule in American politics. No one can make it to the White House without the Hispanic vote.

MARTIN: More on this next time on TELL ME MORE.

(SOUNDBITE OF MUSIC)

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