Your contract-signing self is a little too optimistic

“This time I will go every week,” you think, and you start paying a monthly gym fee. Before long you are going a few times a month. It is a common story. Two studies put numbers on how far our expectations can drift when we sign up for something.

What we know

1. Paying not to go to the gym

Stefano DellaVigna and Ulrike Malmendier examined three years of attendance records for 7,752 members at three US gyms.

• Members on flat monthly fees of more than 70 dollars went only 4.3 times a month on average.
• That works out to more than 17 dollars per visit. A 10-visit pass at the same gyms came to about 10 dollars per visit.
• Over the course of their memberships, members paid on average about 600 dollars more than they needed to.

People who chose the flat fee most likely expected to go more often than they did.

2. Phone plans and misjudged usage

Michael Grubb and Matthew Osborne analyzed US mobile phone billing data. Customers paid little attention to how much they had used in the past and underestimated how much their future usage would vary, a form of overconfidence. The study estimated the cost of this overconfidence at 76 dollars a year, in 2002 to 2004 prices.

How to read it

• The gym study is correlational, based on behavior records. It is not a randomized trial.
• The phone study is an estimate from fitting a model to observational data. The 76 dollars depends on the model’s assumptions.
• Both use US data from more than twenty years ago. Pricing has changed since then. We have not found a comparable study in Japan.
• Neither study measured savings from reviewing contracts. What they show is that expectations at signing tend to be off, not the effect of reviewing them.

Still, once you sign a flat-fee contract, it renews automatically every month until you cancel it. Automatic renewal is an ally for saving, as the automatic enrollment research shows, but it works the other way for contracts you do not use. Checking your signing-day optimism against what you actually used makes sense.

A small step today

For the app habit “Reviewed one fixed cost”, one item at a time is enough.

• Pick one thing that is charged every month: a subscription, a membership, a phone plan.
• Write down how many times you actually used it in the past month.
• Divide the monthly price by the number of uses to get a cost per use.
• Ask whether another plan fits your use better, or whether you would miss it if you stopped. Deciding to keep it is a perfectly good review too.

Why one at a time? Reviewing every contract at once is tiring and easy to keep putting off, which is the same trap that keeps unused contracts running. One small review a month is easier to actually do.

Once you have looked at one today, log it in the app. Next month, pick a different one.

Sources

• [D14] DellaVigna & Malmendier (2006) Paying Not to Go to the Gym. American Economic Review.
• [D13] Grubb & Osborne (2015) Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock. American Economic Review.