The Watergate scandal is much in the news these days. We won’t focus on politics but rather draw instructive lessons on how to save money — our favorite topic. Watergate and saving money? You gotta be kidding. No, seriously. Sit back and enjoy this one.

The Contrast Principle

The contrast principle is a well-known principle that says, in effect, that our judgments of things are often biased by similar things we have seen immediately before. See a very good looking person first and then person A and you are likely to find A to be less attractive. By contrast, see an average looking person first and then the same person A; now you are likely to perceive A as more attractive.

This contrast principle applies in lots of situations: perception of attractiveness, of risk, of cost, etc. Realtors and car salesman exploit this all the time. So do others who do their best to get you to say “yes” to their offers.

The Watergate Story

The Watergate Hotel Complex — The Site of the Infamous Burglary (Source: Carol M. Highsmith Archive at Library of Congress)

Much has been written about Watergate. Great movies have been made. The scandal brought down President Nixon and sent numerous of his aides to prison. A question that often comes up is this: How did sane and smart people get involved and why did they not say ‘No’ as the underlying crime (the “Watergate” break-in at the Democratic National Committee headquarters) was being hatched? See Bob Cialdini’s Pyschology of Persuasion for an excellent blow-by-blow description.

The idea was hatched by G. Gordon Liddy. Liddy was the main guy behind what was then called the “White House Plumbers Unit” — a special unit set up by President Nixon to prevent leaks (the Pentagon Papers had leaked and Nixon was determined to prevent further leaks; as an aside, the historic leak of these papers now forms the basis of “The Post” an excellent Steven Spielberg movie).

Liddy’s idea was to break-in to the Democratic National Committee’s offices to bug those offices and steal any information that may be damaging to the Democratic nominee for the Presidential election to follow later in 1972. His proposed scheme would cost $250,000 and require the discretion of several people. It was approved in a meeting in March 1972 by John Mitchell (then head of the Committee to Re-elect the President), Jeb Magruder and Fred LaRue. This approval was granted despite Liddy’s rather iffy bonafides. Only Fred LaRue expressed reservations.

How did Liddy — of dubious reputation — get his hare-brained scheme approved? Put differently, why did the approvers not sense the risk (never mind, the obvious criminality)? Well, it turns out this was not Liddy’s first proposal.

His first proposal cost $1,000,000 and involved a “chase plane,” mugging & kidnapping, “high-class call girls” — almost like a James Bond 007 movie. This proposal was reviewed by Mitchell, Magruder and John Dean, and rejected.

Liddy returned with a scaled-back second proposal that cost only $500,000. It removed some of the more dangerous and dramatic elements. This too was rejected by Mitchell, Magruder and Dean.

Liddy then came back with his third proposal costing $250,000. The third time was truly a charm (without Dean but Fred LaRue sitting in) — it got approved.

The Contrast Principle in Watergate Diminished Risk Perception

We now have the answer as to how the third proposal got approved — by the contrast principle, it did not appear to the Mitchell et al that it was that risky. In other words, the first two proposals were so outlandish that the third proposal looked reasonable by comparison. It is telling that the only dissenter in that fateful meeting that approved the mission was Fred LaRue. Why did Fred LaRue dissent? Well, he did not attend the first two meetings at which Liddy’s earlier proposals were discussed and discarded. So for Fred LaRue hearing Proposal 3 set off all the alarms because it was the first one he had heard. Sadly (for him, Nixon and the nation) he was over-ruled.

The Contrast Principle in Shopping

We are all victims of the “contrast principle” when we go shopping. A few examples:

  • When you go to buy a car and think you’ve gotten a great deal, the salesman hits you with add-ons. Each of the add-ons is expensive but feels inexpensive when compared with the price of the car!  It is also the reason that the clever sales person sells you one add-on at a time!  
  • You buy an expensive suit or dress. Accessories (belts, purses, shoes, socks) that you buy later all feel more inexpensive by comparison.

Tip: Exploit the Contrast Principle When You Shop

When you go shopping buy the cheaper items first! Buy the more expensive items later! This has two benefits:

  • First, you do not overpay for the cheaper items.
  • Second, the contrast principle now works in your favor: The more expensive later purchases look really expensive by comparison hopefully nudging you toward less expensive alternatives.

Which brings us to this pithy conclusion for you to remember the next time you go shopping:


  • Sridhar Ramakrishnan


    Arnexa, Inc.

    Sridhar is the Founder/CEO of Arnexa, Inc.  which is focused on providing innovative tech solutions to help user prosper financially. From secure messaging tools that eliminate phishing to better retirement and savings tools. Prior to Arnexa, Sridhar founded two other start-ups, and worked at Hewlett-Packard in various engineering and management roles. More information is at