Despite what you might think, you don't get what you pay for

ABOUT SIX months ago I walked into a shop in St John’s Wood in London and came out with the most expensive present I’ve ever bought myself.

It was a brown suede Gucci handbag that originally cost £1,380 (€1,755) but had been marked down to “only” £550.

I bore it home on a victorious, if slightly sheepish, high and pranced around the kitchen with it. My youngest child glanced at the bag and then seized on the receipt, which I had carelessly let fall. “Omigod!” he said. “You spent £550 on that?”

I tried to explain that it was 60 per cent off and that the bag was beautifully made. If I used it every day for three years, it would end up costing less than 50p per wear.

He shook his head. “You’re mad.”

How right he was. Within a week the bag had started to mark, and after 150 wears the suede had rubbed away on one side, leaving shiny bald patches. Last weekend I took it back to the shop, where the woman behind the counter eyed me with evident disapproval and declared I must have worn it against the wrong sort of coat.

In a way, she was right to send me packing. The dud bag and I deserve each other. In buying it I made the elementary error of thinking I was paying for a useful thing in which to carry stuff. In fact, what I was buying was the idea that I would become like Princess Caroline of Monaco’s gorgeous daughter, who appears looking sultry in Gucci ads. Luxury bags, as I should have remembered from studying economics, are positional goods. The more expensive they are, the more people want them.

There is a second, more important, thing that the bag teaches me. It is that more expensive does not mean better. This lesson is vital and to ensure I learn it, I have resolved to use the bag for the next three years anyway, and every time I look at its bald patches to say out loud: you don’t get what you pay for.

The best knife I ever got came from Ikea and cost about £7. I’ve got a drawer full of expensive Sabatier knives that are all useless. Sainsbury’s Basics chocolate-chip cookies cost 40p for about 30 biscuits. They are rather good – much nicer than the sickly Taste the Difference range, which cost about 40p each.

Cheap clothes can be rubbish, or they can be good. Ditto with expensive ones. The same is true with cars and wine and restaurants. Some things – like tumble dryers – are actually better when cheap as there is less that can go wrong with them.

The lack of any relationship between price and quality is even more obvious in the job market. Being better paid than your colleague does not mean you are better at your job. It probably just means you shout louder.

There are many economic studies that bear this out. My favourite was by two French economists who did painstaking research into 32 Cuban cigars only to conclude that being good and being expensive were quite unrelated.

Yet despite all this evidence, we still go on assuming that we get what we pay for, and this belief has a distorting effect. The market price might equate supply and demand, but that does not make it remotely efficient, as demand is based on ignorance and prejudice.

Oddly, the large number of customer reviews on the internet for every product ever made does not really help. You can spend hours reading restaurant reviews online and still get a dud meal. You can pore over consumer tests and yet end up with a fridge freezer that is both ugly and horribly noisy.

What we need instead are rules of thumb to help us decide what to buy.

Last week, when flipping through an oddly readable report from the Artemis Income Fund, I came upon this: “As Peter Mayle, author and resident of Provence, notes: ‘In France there is a rough rule of thumb when you dine out that if you go for the third wine down, it is usually very good value.’ Much the same, in our view, can be said of shares.”

Going for the third cheapest is an excellent idea. I’ve long used something similar with wine in restaurants and will now, with one eye on my bald Gucci handbag, do the same with everything.

I’ve just tried it with face cream and am exultant at the result. The third most expensive face cream is La Prairie. It costs $3,000 (€2,450) for a tiny jar and involves smearing caviar on your face. The third cheapest is much more appealing. It is Sudocrem at £3.50 for a big jar. It might be meant for nappy rash, but Cheryl Cole swears by it. And so, as it happens, do I. – (Copyright The Financial Times Limited 2012)