These deals require you to sign up for top-end data, text and calling plans that offer far more than you'll use or need. I did the maths on this in a previous article, which can be read at tinyurl.com/phoneoverspend.
The frame is: "A free phone. What a great deal." The trouble is that with a free phone you have to sign up for a package costing between $49 and $139 a month. I'm paying $16 a month for Skinny's most popular package. Anything more would be throwing money away. Canstar found that 43 per cent of smartphone owners like me use less than 500 megabytes of data a month.
A trick to minimise data use is to ensure that you "restrict background data" on an Android phone and "turn off background app refresh" on your iPhone. This stops them quietly consuming data for non-urgent updates that could be done automatically and for free when the phone is connected to Wi-Fi.
With a "free" phone I wouldn't use any more data or calls but I'd have to pay $33 to $133 a month extra, which makes it a mighty expensive free phone. I worked out that on the $139 a month package at Spark to get a free Galaxy S6, the phone would have cost $2952 by the time my 24-month contract was up. Spark has much better deals if you buy your own phone. On the Vodafone Red + Essentials plan, I would have paid $1892 for my phone, but would have had to trade in my old phone instead of selling it. Second-hand S5s are selling for up to $500 on Trade Me at the moment, and the S4 for about $400.
As for the $20 a month for a new phone at Vodafone, that's over and above the unnecessary plan price. The $240 per year extra is effectively a trade-in fee. I have to give it to Vodafone, however. This is pretty clever marketing playing on the free phone frame.
Marketing pitches are great for creating a myopic frame. We see the narrow facts and figures placed before us. Real estate agents are very good at this. "It's really common to see properties advertised by real estate agents as being 'ideal property investment/rental property' when anybody who knows anything about property investment looking at the property would instantly realise that it is nothing of the sort," says Liz Koh, financial adviser at Moneymax.
Framing affects other investment decisions. An oft-quoted example involves investors buying a share portfolio. If the frame is 20-year returns, the investor will probably buy. Show the same investor one-year returns and he or she may not, even though it's the same investment.
Carey Church, a financial adviser at Moneyworks, had a client who was being lured away by a rival. The client wanted to know her portfolio return, which Church was happy to provide. But the other company framed the pitch with different dates from the comparison information requested.
"I've had people show me a return to December 31 and try to compare it to a March 31 return, which is meaningless," says Church.
University of Canterbury lecturer Warwick Anderson researched the impact of framing effects on the risks taxpayers take when filing income tax returns in New Zealand. He found, among other things, that the same person was willing to take more risks if they owed the Inland Revenue Department money than they would if they were due a tax refund.
Likewise they would take greater risks for the same financial return when it came to their tax than they would with a medical insurance claim. Their frame for the IRD debt enabled them to take greater risk.
I've fallen into the framing trap when comparing insurance premiums. I phoned YOUI, an experience that resulted in this article: tinyurl.com/youiarticle. The price for the contents policy appeared cheap.
What I'd done without realising was set up the frame that said all contents insurance policies are created equal - even though I know better. When I read YOUI's wording later I discovered that the policy being offered wasn't in the same league as the AMI policy the salesperson knew that I had.
My AMI policy covered "sudden unforeseen losses", meaning "all risks" in insurance parlance. This is pretty standard in New Zealand. My frame initially stopped me from seeing I was being offered a policy that covered named risks such as theft, fire, earthquake, explosion, riot and so on, not all risks.
My AMI policy covered me for accidental damage. The YOUI policy didn't. What's more the quote from YOUI didn't cover me for my belongings when they were away from home, jewellery at home and mobile phones - cover that I would expect as standard. I'm sure plenty of other people would have the same frame that I had and think,"that's a good deal". The reality is it was an apples and oranges comparison.
Financial planner Jordi Garcia of New Zealand Financial Planning cites the example of conservative investors who invested in finance companies in the past decade. "Many seemed to not be able - or willing - to see the difference between a bank and finance company and regarded them both as much the same. 'So why invest with the bank when I can do better with a finance company - don't they do the same thing'?" The investors saw 11 per cent or higher returns from finance companies when the banks were paying single digits. The outcome of those decisions is history.
On the subject of banks and framing, Koh says the frame that by "investing" in a bank deposit you won't lose money is common. "The reality is that the effect of inflation and tax is to reduce the purchasing power of money over time. This is a common problem for retirees who might put their funds in the bank and live off the interest. They might start with a decent sum, say $200,000. But if they live off the interest for 20 years, at the end of that period their $200,000 will have significantly less purchasing power than when it was first invested."
Framing can be overcome. Being aware of the fact we do this is the first step. Widen your frame by adding other variables, reflect on the decision and be honest with yourself. And seek professional advice.
