Transaction Utility Theory

You walk past the sale rack at a department store and see a coat that used to cost 200,000 won (about $140) marked down to 70,000 won (about $50). Your heart skips a beat. You don't need a coat right now, but the thought of 'I saved a whole 130,000 won (about $90)!' sends your card swiping before you know it.

In a 1985 paper, behavioral economist Richard Thaler argued that shoppers feel two different kinds of satisfaction. The first is acquisition utility. It's the value the item gives you, minus what you actually paid. The real usefulness of a coat, like keeping you warm or making you look sharp, is the base of that value.

The second is the thrill of getting an item for less than the reference price, called transaction utility. Put simply, it's the victory feeling of 'I paid less than everyone else' or the joy of snagging a bargain. We often click 'Buy' because we're hooked by this transaction utility, not by what the item is really good for.

You're on a hot beach, and a friend offers to go get a cold beer. If it's from a fancy hotel bar nearby, you'd happily say yes even at 10,000 won (about $7). But if a run-down corner store sold the very same can for 10,000 won, everyone would be angry about getting ripped off.

The taste and ingredients of the beer that cools you down are exactly the same. So why is your willingness to pay so different? It's because the price you have in mind (the reference price) changes with the place.

Beer at a hotel bar is expected to be expensive, so 10,000 won causes no complaint. But for corner-store beer your reference price is 2,000 won (about $1.50), so paying 10,000 won gives you a big negative transaction utility (a feeling of annoyance). Transaction utility comes from the gap between the money you paid and the reference price.

Traditional economics taught that consumers coolly compare an item's real value (acquisition utility) with its price, and then buy rationally. But in real stores and online shops, sellers actively use transaction utility to get into shoppers' heads.

Cross out a regular price of 100,000 won (about $70) with a red line and add 'Special price: 70% off, 30,000 won (about $20),' and the shopper's reference price is easily pulled up toward 100,000 won. The shopper isn't buying a 30,000 won item. They come to feel they're gaining 70,000 won worth of psychological profit.

So to be a smart shopper, pause in front of a sale tag and ask yourself, 'If this had always cost 30,000 won, would I still have bought it?' If the answer is no, you didn't buy the item. You bought the feeling of a discount.