When we see a consumer item deeply discounted, we tend to react in one of two ways:
1. “What a bargain! I’ll take five.”
2. “I knew those things were no good.”
Sometimes we see a low price as an opportunity, and other times we see it as a sign of low quality. In their paper, Motivating Discounts: Price Motivated Reasoning, researchers On Amir and Erica Dawson sought to find out what determines which way we react. It turns out that our reactions are determined by what we thought of the product before seeing the discounted price.
If we’re already attracted to a product, then we see a discount as a bargain. If we’re neutral or negative about a product, we see the discount as a sign of low quality. A curious side effect of our behaviour is that deep discounts “discourage purchases by all except those who liked the product in the first place.” We’re less likely to buy a deeply discounted unfamiliar product than we are to buy it at the regular price.
We can see this happening among investors in individual stocks. When XYZ Corp. shares take a tumble, fans of XYZ are happy to buy more, but those who don’t like XYZ see the price drop as confirmation of their opinion that the company is failing.
If the Amir and Dawson results apply to stocks then we can expect investors looking at XYZ stock for the first time to be less likely to buy shares after the price falls than before the price falls, even if they know of no specific reason why the price dropped.