It is in human nature to feel in control of the choices we make in our own lives, such as going to the right university, marrying the ideal partner or even deciding which bike would suit us best. According to standard economic theory, consumers, given their personal preferences, try to maximize their own utility within the limits of their budgets, that is, they seek to find the particular combination which offers them the highest amount of utils per unit of currency spent ratio. However, theory often differs from practice, and human rationality is not an exception.
Behavioral economists are mainly concerned with the same topics as economists, but the approach taken by the two groups slightly differs: while economists assume rationality in most of their models and draw conclusions based on this assumption, behavioral economists start with no prior beliefs, that is, they take the raw human behavior and analyse it as it is.
If you think about that for a second, human behavior is all but rational. Why, then, do most of us begin our descent into the world of Economics by studying something that is quite far from reality? It’s mainly because had it not been for the assumption of rationality, analyzing the simplest economic models would have become too cumbersome to draw any concrete conclusions from them.
Nevertheless, as it turns out from various experiments, humans are not only far from the assumption of rationality that many economic models propose, but are predictably irrational, systematically making the same poor decisions over and over again, as Dan Ariely puts it. Thus, Behavioral Economics is able to explain a great deal of settings where Standard Economics fails.
Let us consider supermarkets. One would assume that his or her strong preferences are the guiding force behind most of their decisions. Far from it.
The average person may acknowledge that consumers are somewhat influenced by product layout, prices, promotions and so on, but does one really sense the extent to which this is happening? Highly unlikely. Imagine it’s a Saturday morning, you just woke up and realized there’s not a slightest trail of food in the house, thus the decision to go to your nearest supermarket to do the weekly grocery shopping (fun fact: people who are hungry and decide to go to the supermarket spend increasingly more than people who ate before going there).
Once there, on an empty stomach and with a dreamy mind, you mindlessly grab your shopping cart and begin your adventure. Immediately after you enter, you have 2 simple choices: to either go left or right (most supermarkets only offer the possibility of going straight). By choosing the former, you encounter fresh fruits and vegetables, salads, organic drinks and others of this kind. On the contrary, if you adopted the latter option you get…well, the cash registers and some “unimportant items for the moment”, as you might be inclined to label them, such as toilet paper or cleaning products. “But I’m here for the food”, you say to yourself, and thus automatically reject the idea of turning right, knowing that your immediate desires will not be satisfied by choosing this path, that is, if you don’t fancy eating toothpaste and razors for lunch (fun fact 2: research has shown that people spend increasingly more money when they adopt the first shopping path rather than the second; coincidence? I think not).
You proceed through the groceries section, admiring the fresh products placed in picturesque-looking crates, as if they were brought into the supermarket straight from the farmers’ fields. Although you do not buy any fruits or vegetables, your mind perceives the place you’re in as a healthy, enjoyable environment. Not only that, you are also more likely to regard other items that have nothing to do with produce as fresh or natural, and thus the increased probability of adding them to the shopping cart.
While you’re passing by, you can’t help but notice that “bio” tomatoes are considerably more expensive than normal tomatoes. Is this because they are really more expensive to produce or is the price difference just a carefully laid trap in order to screen those who are willing to pay a lot for “healthy” products from those who don’t? Unfortunately, a great deal of consumers desperate to stay healthy are led to believe the former, despite the latter seeming like a much more credible explanation.
This wouldn’t be a problem if we knew for sure that “bio” tomatoes are really healthier and produced in better conditions. However, I theorize that the cost of growing bio tomatoes is not too different from the cost of growing normal tomatoes, even if the average consumer is led to believe that by noticing the considerable price difference between the 2, among other factors. Normally, if the additional utility the bio tomatoes provide to consumers is higher than the incremental cost, they should buy them. Nevertheless, what if the increased utility that consumers derived from consuming the bio tomatoes is just a placebo, as a consequence of the tomatoes being similar? Should they still buy them? The answer is most probably yes: as long as their mind regards this illusionary boost in satisfaction as a real one, they will have administered part of their limited budget in the best possible way, as perceived by them, such that in the end they are even better off than by buying normal tomatoes!
The bakery products and pastries usually come next, and since you’re quite hungry and they smell and look so well, you foolishly fill your cart with unnecessary cakes and croissants. Would you have bought them if you only noticed them at the end of your shopping session when the cart was full of other items and your psychological feeling of hungriness is somewhat alleviated? Maybe. But since you’re starving yet the cart is as empty as your stomach, your mind overestimates the quantity of food that would satisfy your edacious desires and thus determines you to impulsively fill your cart as soon as possible, just in case.
As you crawl your way to the back of the supermarket, you finally find that bottle of milk you’ve been seeking from day 0. What’s the catch here? Items that one almost always buys, such as milk, butter, yoghurt, or even eggs in some cases are placed all the way to the back of the supermarket, such that consumers have to walk through all the aisles to reach them. Obviously, they will most likely thoughtlessly throw in other items on their way to the destination, just in case they need them, this being the main reasoning behind the placement of those products.
Supermarkets also like to trick consumers on issues regarding product placement on shelves. While it may be well known that the most attractive brands pay in order to have their products on the middle shelves, where the majority of consumers focuses their attention and where their eyes naturally fall, there are some other strategies that are not as straight forward.
For instance, they place very cheap and very expensive products on the top and bottom shelves. Why is that? It’s because customers who have very strong “preferences” towards these particular products will seek and buy them anyways, regardless of their placement, while the hesitant consumers who are also open to other possibilities will more likely choose items that are placed on the middle shelves and are neither too expensive nor too cheap (there is a tendency of humans in general to be “in the middle” and to not substantially deviate from this trajectory).
Secondly, supermarkets tend to place very expensive items next to very cheap items (usually store brands). The thought process behind such placement is the following: because most consumers are quality averse, that is, they obtain negative utility from acquiring low quality products, marketeers try to indirectly emphasize how bad low-quality products are when compared to quality items. The fact that a $4 chocolate sits next to a $1 chocolate which also has a grotesque label makes consumers think about the provenience of the inexpensive chocolate. They imagine it being fabricated with the worst types of raw materials and in questionable conditions, while the expensive chocolate is suddenly a great choice that they will probably greatly enjoy.
It is not the price of the expensive chocolate that matters here, but the price of the cheap one, which determines consumers to perceive a big quality gap between the 2 products (although it need not necessarily be a big difference). The discrepancy between them might even be amplified by the placebo effect, according to which consumers are very likely to enjoy expensive items much more than cheap ones, especially if they are reminded of the price paid before consuming it. Funny as it may be, we wouldn’t ever think of buying a $4 chocolate if it wasn’t for the cheap one, which serves as an inferior benchmark.
Furthermore, the cheap chocolate would deteriorate our own view about ourselves if we made even the slightest attempt of buying it. Thus, in order to prove ourselves that we are not cheap by any means, we try to compensate the fact that we ever thought or looked at the inexpensive chocolate by ruling out the possibility of buying it. What better way there is to accomplish that than by buying the expensive one? Problem solved. Now we feel good about ourselves. We just got deceived, but at least we’re not cheap!
What is quite surprising is that it need not be a noticeable difference between the actual chocolates in order to put this tactic into practice. Research shows that it is enough to give the exact same chocolates to consumers, but with different prices and labels, in order for them to appreciate the two in vastly opposite ways. Again, are such prices really justified, that is, are the expensive chocolates really tastier and considerably more expensive to produce than the cheap ones, or are we just the unwilling prisoners of marketeers? In this case, it is likely a little bit of both, although I incline to say that the latter holds a more considerable weight.
Another widely used tactic which some highly dislike is bundling. Instead of selling products separately, firms combine them into a discounted package, from which consumers “benefit”. A common type of bundling is buying 2 products and getting 1 for free, for example. The thing is that had it not been for such “sensational” deals, you would have only bought 1 item instead of several and you wouldn’t even consider the possibility of buying the second.
Now that bundling is involved, you are presented with a new opportunity: getting a (considerable) discount on buying the second piece. Despite not really needing the second piece of the same product, it seems that the psychological feeling of not taking the discount is huge for a great deal of consumers, such that in the end, it is easier for them to bear the disutility that the additional product causes, rather than the “loss” of not taking the discount.
The main reason of concern for corporations is that eventually and hopefully, at some point in the near future, consumers will realise they are mainly being harmed rather than helped when taking up such opportunities (although highly unlikely, judging how the behaviour of most consumers evolves, or rather how it regresses). In short, by consuming high quantities of the same product, the utility one derives from consuming an additional unit of good X will at one point become lower than the cost paid for that unit.
Moreover, companies should theoretically be worried about consumers’ perception of fairness (but should they really?). Ideally, consumers should be somewhat aware that by falling prey to such tactics, their surplus significantly diminishes and is translated into even higher corporate profits. Because of that, they have a moral responsibility of promoting companies (by buying from them, for instance) that don’t just gain alarmingly high profits by ripping off consumers.
In reality, however, while most corporations tend to disrupt the last bits of consumer trust that is left, rather than preserving it and acting as if it was a quintessential asset without which their activity would not take place, consumers tend to completely ignore such unimportant aspects of their existence, and tend to focus on important matters, such as consuming and taking more debt than ever before (take the incredible use of credit cards in the US, for instance).
If that is the direction we, as a society, want to take, that is, allow corporations to obtain increasingly bigger profits at the expense of unsuspicious consumers, whose only goal is to consume, rather than take real action, it means that there’s not much hope left. René Descartes said the following words some 400 years ago: “cogito ergo sum” (I think therefore I am). But what if we reached a point where we don’t really think at all? What if we reached a point where we don’t take any decisions by ourselves and where even our preferences are not what they seem? Does that mean that we stop existing? Not really, but we’re not far from this outcome either, both literally and figuratively.
We are meticulously and unscrupulously guided through a maze full of pitfalls, which funnily enough we take pride being part of. The supermarket is just one of many such instances. This should make us all think about our goals as a society. However, in the end we shall always remember that without ethics, Economics is just another social science.