MSE’s Academy of Money
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MSE’s Academy of Money

3.3 Not evaluating the evidence properly when buying things

When buying household goods you might look very closely at the reviews of their performance, but how much do you factor this into your decision-making? Try this activity.

Activity 4 Which is the better washing machine deal?

Timing: Allow approximately 5 minutes for this activity

You are buying a new washing machine. The machine from shop A costs £600 and comes with a 5-year guarantee for replacement if it breaks down. Shop B sells the same machine for £500 but offers no guarantee.

Tests done by a consumer group show that this machine has a 25% chance of breaking down and needing replacement per year.

Assume you have the money to buy either deal and that you are only interested in the financial impact over the next 5 years. Which shop would you buy at?

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Answer

The better option is to buy the machine from shop A, as the probability is that your washing machine will break down and need replacement within 5 years.

The probability that the washing machine will be OK in year 1 is 75% (100% minus the 25% chance of a breakdown).

This probability applies in each subsequent year.

So, the probability that the machine does not break down over 5 years is:

  • 75% x 75% x 75% x 75% x 75% = 24%

So over 5 years it is likely that this particular brand of washing machine will need replacement. The chance of this is 76% (100% minus 24%). Therefore, the wiser choice given what you know is to pay more and go for the deal from shop A, as it will replace the washing machine without charge if it broke down before five years are out.

Though, if we are honest, it’d be better to find a different washing machine that’s a lot less likely to break down than the one in the example here! In fact, these days washing machines are generally much more reliable that the one in this activity.

We’re very good at not expecting ‘the unexpected’. In fact, we really don’t like unpredictability at all. Financial decision-making involves projecting ourselves into situations we don’t want to think about. So, we may be tempted not to make financial provisions for unexpected events – like major repairs to our cars, having to replace our boilers, or finding that the roof needs retiling. But, it’s always best to expect the unexpected – and plan for it!

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