Comment by DenisM | Hacker News Reader

Comment by DenisM | Hacker News Reader

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For a big-ticket purchase people tend to act more rationally and thus margins are lower but for extended warranty people tend to make snap decisions.

The effect is amplified by two factors:

1. When the product is hedonistic, anticipated pleasure undermines rational thinking, and anticipated loss of almost-real-already pleasure (brought up by the sales agent) leads to excessive risk aversion

2. Timing. To pony up a large sum of cash one has to go through some emotional upheaval, and the moment right after that is the moment where a person is likely still convincing himself how valuable the purchase is. Anyone who didn't convince themselves is not buying, thus all buyers are either indifferent (not enough money) or momentarily very attached to the product. Timing is very important here and commands 100% higher margins as demonstrated by the 2x different between in-store and after-market warranty costs.

Good in-store salespeople also master the art of looking slightly surprised and/or disappointed when you decline the extended warranty, the implication being "Oh dear, Sir cannot afford the extended warranty, Sir is not quite as magnificent as I estimated him to be."

The disappointment, however, is genuine as as the article points out the warranty is about 80% pure profit.

I agree with you although I wonder what happens in the case of repeated purchases. Wouldn't the store with lower prices and lower profits on these warranties attract more buyers? Or what if it's Christmas time and I'm buying a gift, I would consider the extended warranty much more rationally.

I suppose when people comparison-shop they compare on prices, not thinking about extended warranty yet. That part comes later.

You are also neglecting an important factor - someone who is that much into forethought and rational decision-making (such as yourself) so that he is comparing extended warranties before shopping is more likely to buy after-market insurance or better yet skip it altogether because it's pointless.

In fact, I would prefer to shop in stores with more expensive extended warranty because such stores can allow lower margins on the products themselves.

Like the lottery, extended warranties can be thought of as a tax on the mathematically-challenged.

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