Experimental psychologists are fond of pointing to examples of economic irrationality in every day life – for example, people respond in very different ways if an article is priced at $9.99 and if it’s priced at $10. Through detailed examination of my own and my wife’s behaviour, I think I’ve identified another such example – the “Netflix fallacy.” Netflix, for those of you who aren’t familiar with it, is a subscription service where you pay a set amount each month to rent movies. You can have three DVDs out at any one time – when you are finished with one, you send it back, and receive a new DVD from your list of picks by return post. In theory, it’s an ideal way to make sure that you have the movies you want, when you want, and an excellent deal if you rent more than 3-4 DVDs a month.
In practice, it’s different – at least in my experience. Movies that we’ve rented sometimes sit there for two or three months before we watch them, or eventually, reluctantly, decide to send them back without seeing them. To my shame, this happens most often with the interesting, difficult films with sub-titles. I suspect that this is because we’re accustomed to thinking of DVDs as stocks rather than flows. Because we have physical possession of the DVD, we’re disinclined to give it back until we’ve actually watched it. Of course, this means that we face substantial costs – we may very easily end up paying more money to rent the damn movie than we would have to pay to buy it and keep it forever. Meanwhile, Netflix is laughing all the way to the bank. It’s much smarter to think of the rental service as a flow – you’re likely to be happier if you keep the movies coming along in a steady stream, even if you don’t watch them (the latter may be useful information about your actual preferences, as opposed to the preferences that you would like to have). I suspect that virtually any reasonable decision rule along the lines of ‘send the movie back if you haven’t watched it within two weeks’ is likely to produce better results than our current policy of watching the movies whenever we get around to it. Or, more typically, don’t get around to it.