Were you shocked by the bill after that special you ordered? Did you know you were going to get charged SO much for a late payment? Such nasty surprises have a new name, “shrouding,” a term dreamed up by two Boston economists, Harvard’s David Laibson and MIT colleague Xavier Gabaix. “Today” financial editor Jean Chatzky was invited on the show to explain this new version of the old bait-and-switch — and how to avoid it.
Q: What is shrouding?
A: It's not as overt as hiding information. That would actually border on fraud. Shrouding is a little more subtle. It's where a corporation makes some information really obvious — the information they want you to latch onto — and other information, the information they don't want you to focus on, difficult to find.
Take an inkjet printer, for example. Go online and you'll find printers available at incredibly low prices: $50 or less. That sounds like a great deal. But what it causes you not to focus on, says Harvard's David Laibson, one of the co-authors of the paper, is the fact that you're likely to spend $30 a month (or $360 a year) on ink for that printer if you print a relatively modest 300 pages per month. Hold onto the printer for three years, and you'll spend $1,000 on ink. That's shrouding.
An informed consumer learns from research. For instance, though a laser printer is more expensive at the time of purchase (say $250), in the end it costs a lot less because it prints more economically.
Q: Where do you tend to encounter shrouding?
Anytime there's fine print, for one thing. Cell phone contracts that charge 35 cents per minute if you go over your monthly allotment. Credit-card contracts that charge you $35 for exceeding your credit limit or paying late.
Anytime you buy now and pay later. When you rent a car, for example, you're charged a lot per gallon if you return the car with less than a full tank.
Anytime the price isn't disclosed. In a restaurant, for example, you're rarely told the price of bottled water or specials off the menu even when they're heavily pushed.
Q: How can you avoid it?
A: You can't avoid it. You can learn to be a smarter, savvier consumer, however. Here's how:
Choose your sources wisely. "There are a lot of self-appointed advice givers in the world ... and they can often be problematic," says Laibson. Your first goal needs to be finding a source for the information that isn't trying to sell you something. That means a fee-only financial planner if you're looking at mutual funds, rather than a broker who stands to make a fee. Or Consumer Reports — which doesn't take advertising — if you're looking at buying a washing machine or a car. The advice these sources give you may not be perfect, but it's a decent place to start.
When the stakes are large, read the fine print. "Nobody these days has time to read the fine print all the time," Laibson acknowledges. "But when you're spending a considerable amount of money upfront — or when you'll be paying a more modest amount every month — it's in your best interest to make an effort."
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Look a gift horse in the mouth. Or as my father likes to say: There's no free lunch. In other words, when you see an offer that seems to good to be true — whether it's a bank offering you free checking or an iPod to bank online or a retailer hawking a printer for an unbelievably low price — you haven't done your due diligence unless you ask why? If you see a travel deal where the airfare is next to nothing, you can pretty much bet you'll be paying up for the hotel. If you see a brokerage firm offering you 10 free trades, you can bet on the fact that the firm has research that says if you make those 10 trades, you'll make 100. If you can't figure out what the hook is, find a salesperson who seems to be straight with you and ask: How do you guys make money?
Talk about price. One of the reasons we're so susceptible to shrouding is that we're still — even in 2005 — unwilling to open up about money. “We don't feel it's appropriate to say to our doctor, ‘How much is that medical service going to cost me?’ ” says Laibson. Likewise, we're reluctant to ask our server in a fine restaurant how much the night's special is when the price isn't volunteered. We put ourselves in a vulnerable position every time we hesitate to ask.
Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, www.JeanChatzky.com.