Fast and slow thoughts about extended warranties

Dozing through the early business news this morning, I heard that extended warranties are back in the frame for offering consumers a bad deal (I’ll add the link when the programme is up on the iPlayer). It brought back memories. More than ten years ago (in 2002-3), I was a member of a Competition Commission inquiry into the UK extended warranties market.

For the great majority of consumers, these service or insurance contracts on domestic electrical goods are never a good deal. Appliances are well covered against malfunction by manufacturers’ warranties and UK consumer law, and often against accidental damage by normal domestic insurance policies too; and are anyway not all that prone to breaking down these days. The expected cost of repair bills or replacement is sufficiently low that most people are better off self-insuring (i.e. using their savings). A small number of cash-constrained (i.e. poor) people will benefit from paying for an extended warranty when they have the money upfront, but that’s about it.

At the time on the Competition Commission, we debated whether or not we should ban the sale of the warranties in-store. It was a close call – we decided instead to insist that stores display the warranty price alongside the price of the item so customers had a bit of time to think about it rather than (as was then the norm) being pressed to buy one when paying at the till.

With hindsight, I think we should have banned their sale in stores. Knowing what we now do about behavioural insights – especially how bad people are at assessing probabilities and expected values – would have tipped the decision, I think. The OFT looked at the market again in 2011, and the ombudsman is still saying the market isn’t working well for consumers. Oxera has a nice report about behavioural insights for these products. The right behavioural remedy it alludes to in the conclusion is probably to stop people having to decide under any pressure at all whether or not to buy one – they should do so at home, at leisure, and stores could always send them home with a form or email them a link. Maybe a copy of Kahneman’s  as well?

[amazon_image id=”0141033576″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]

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