Most of you typically buy an extended warranty on your new computer and mobile phone or on your recently upgraded high definition TV. You are more likely to buy an extended warranty at the store during the purchase of the product than later. Why do you buy extended warranty, even when you know that it is expensive?
Your purchase decision is a battle between pain and pleasure. That is, if you believe that the pleasure you derive from using a product is more than the pain of paying for it, you will most likely buy the product.
You know that an extended warranty is expensive. In most cases, it costs approximately 10 per cent of the product price. But you have bought the TV. That means your brain has already fielded the battle between pain and pleasure. Now, adding the extended warranty to the total cost does not significantly increase this pain. You rationalise that a 10 per cent additional cost is a small price to pay to “protect” your new possession. The fact that the price of the extended warranty is typically higher if purchased later makes your decision to buy it now easier.
Of course, your willingness to buy the warranty also depends on your level of happiness. If you get an unexpected discount on the HD TV, you may want to use the money “saved” to acquire an extended warranty. Moreover, studies in behavioural psychology show that you are more likely to buy an extended warranty for pleasurable goods than for utilities. In other words, you are more likely to buy an extended warranty on your HD TV than on your washing machine, though your washing machine is more likely to fail. Why? One reason is that you may be feeling guilty about splurging on an HD TV. This guilt will turn into regret if your TV breaks down and you have to incur large costs to fix it. An extended warranty helps you moderate this feeling of regret.
Finally, cold logic tells you should purchase a warranty only if you believe that the cost of repairing your electronic device is likely to be higher than the warranty cost. Will it? Now, it is not practically possible for you to measure the probability of your computer crashing or your HD TV breaking down just when you are watching your favourite show. But if you have had such previous experiences, you are more likely to believe that the event will happen again. Forget the cost-benefit analysis, buying the extended warranty would then be logical, an emotional insurance, really!
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