Alternative Views of Consumer Behaviour

Neo-classical economics, which has dominated thinking by economists and policy making by governments for most of the last 100 years, is based on the belief that consumers are_ rational_, which essentially means that they always act to maximise their economic self interest_._

This belief underpins the case for the free market economy, with minimal interference by government. In a market, consumers can use all the information available to assess the merits of competing goods and services, and then choose the best option for themselves.

A more recent school of thought in economics called behavioural economics represents a serious challenge to this view, and is increasingly influencing economic policy making by governments. In 2017 Richard Thaler, a behavioural economist, was awarded the Nobel Prize for Economics.

Behavioural economists look at the psychological, emotional and cultural factors that shape people’s economic decisions. Social norms (values and ways of behaving that are accepted within social groups), for instance can result in people making choices to help them ‘fit in’ with their peers. For example, as a non-drinker you might decide to drink an alcohol free beer at a party rather than fruit juice, so you appear to be ‘in the party spirit’.

Behaviouralists also challenge the idea that we factor in all the information available before making choices. Businesses can exploit our unwillingness or inability to do this. Insurance companies, for instance, routinely put up premiums when they come up for renewal, in the safe knowledge that many consumers will not shop around for a better deal. Supermarkets put the higher priced options in the more prominent positions, so that bargain hunters have to look a bit harder. Most people are bamboozled by the complicated alternative contracts offered by mobile phone companies, and have little idea how much they are really paying for the high end phone that is apparently ‘free’ with the contract.

Behaviouralists use the term __inertia __to describe our unwillingness to gather and assess all the information needed to make the best economic choice and then act on it.

We are also likely to make economic decisions based on short term criteria, rather than our long term self interest, which may be harmful in the long run. This concern partly lies behind ‘Obama Care’ in the Unites States, which forces US citizens to take out medical insurance or pay a fine (there is no national health service in America). To make it easier for people to buy health insurance the government set up online exchanges (markets) for consumers to find appropriate health cover for their needs.

The UK government set up the ‘Behavioural Insights Team’ in 2010, known as the ‘Nudge Unit’. A __nudge __is a policy that gives people an incentive to change their behaviour in ways that have better economic outcomes.

One example of this is the recent change in UK law that requires employees to be automatically enrolled in company pension schemes unless they specifically choose to opt out. Research has shown that this results in a higher level of enrolment than when employees have to choose to opt in.

The Nudge Unit also looked at the low take up of loft insulation grants that help to reduce fuel bills. It found that the reason was people didn’t want the hassle of clearing out their loft. The scheme was changed so that the insulation companies were paid to clear out people’s lofts as part of the deal. The grant to households was correspondingly lower to cover the cost, but the take up rate of the grant increased.