Contents

• Introduction
• How Consumers Make Choices
• How Citizens Make Choices
• Conclusion
• Further Reading

INTRODUCTION

Each of us makes thousands of decisions every day: what to wear, what to eat, whom to see, what work to do. We understand that we can only make so many decisions by taking many of them on an instinctive nature based on past practice and established preferences (what the author of "Blink" Michael Gladwell has called "thin-slicing"), but we like to think that our more important decisions are the subject of a rational and considered process.

Classical economics suggests that as a consumer we make choices by weighing price and quality of the product or service as offered by competing retailers or providers. Most political campaigning assumes that voters choose a candidate based on his or her record of service and how the policies espoused would impact on our material wellbeing.

But a growing body of evidence from the various social sciences suggests that we take many decisions less on rational grounds that on emotional ones, less through a conscious process and more on an unconscious basis. Although much of this decision-making is strictly speaking irrational, we can anticipate the processes so often that the academic Dan Ariely has called it being "predictably irritational" and the writer David Brooks has described humans as "the social animal".

HOW CONSUMERS MAKE CHOICES

In the economic sphere, behavioural economics teaches us to identify the following sorts of influence or bias:

Location

Supermarkets and department stores especially put a lot of thought into positioning items where consumers are most likely to buy them.

Examples:

• The most expensive items with the highest profit margins are often located at eye level.
• So-called 'triangular marketing' works on the assumption that the shopper's eyes will go to the middle of a display so this is where the high-margin product will be placed.
• Major items are often placed in the middle of aisles so that the shopper has to walk the furthest and pass the most items to reach them.
• Essential items like bread and milk are often placed at the back so that shoppers have to walk all the way down an aisle to reach them.
• At the point of sale, you will often find magazines and sweets which are tempting as you and the children wait to pay for your selections.

Consumers are very attracted to brand goods even though there may well be options which are the same quality and even cheaper from other suppliers, partly because they are drawn to the familiar and partly because advertising has created some sort of subliminal image around the product.

Example:

• Most supermarkets offer a range of goods under their own brand which are located next to and priced cheaper than better-known branded goods but the more expensive goods are still purchased by many shoppers.

The purchasing decisions made by others often act as a recommendation of how a consumer will decide, even if the decisions of others are not themselves necessarily rational.

Examples:

• People often choose a mobile operator on the basis of choices of relatives and friends.
• Information on comparison web sites – although often anecdotal – can persuade someone either to book or not to book a particular holiday or hotel.
• When a group have a meal together in a restaurant, the orders of those members of the group ordering first can influence the choices made by those ordering later.

By taking a small amount off from a major pricing point, prices can appear lower than they actually are.

Example:

• Products are frequently priced at £4.99 or £10.95 because the brain tends to process only the number of pounds and not the number of pence, so effectively rounding down rather than rounding up (which would be much more rational).

Limited attention

Consumers can focus on certain aspects of pricing and ignore (or play down) other elements of pricing.

Examples:

• Ordering goods from a web site may be overly influenced by a low basic price while neglecting the high cost of package and posting.
• Booking a low cost airline can involve discounting the additional costs of luggage or on-board meals.

Anchoring

This involves persuading a consumer to think of one price in relation to another – the anchor – in ways which induce the consumer to opt for a particular price point.

Example:

• Bottles of wine at £15 each might be located next to bottles priced at £60 to make the first-mentioned brand look cheaper and especially desirable.

Framing

This involves placing information in a particular 'frame' that influences how the information is perceived.

Example:

• A consumer could be advised that a particular energy conservation decision will save £250 a year or that not adopting the conservation project will lose her £250 a year. It turns out that the latter way of framing the message is the more effective.

When offered something for 'free', many consumers are emotionally engaged.

Example:

• When offered 'three for the price of two', we are tempted to spend twice as much as we originally intended.

Most people are more upset at losing a particular sum of money than they are excited at gaining the same cash amount of money.

Examples:

• In one experiment, participants needed the prospect of winning twice the sum of money that they would bet before they would agree to accept a bet and suffer a particular loss.
• A cash fall in the value of a pension pot can lead to someone pulling out of the pension scheme even though such investments are long-term and can typically go up and down from one year to the next.
• Investors are quicker to sell shares or stock that are making money than to sell those that are declining in value because they do not like to admit their losses even to themselves.

Consumers do not always buy the product that is in their own self-interest but might consider the interests of others.

Examples:

• Someone might buy fair trade coffee or bananas even though the price is a little higher because they appreciate that the growers are being given a fairer deal.
• A shopper might buy free range eggs even though the price is a bit higher because she welcomes the kinder treatments of the hens.

We all tend to give more weight to present pleasure than future benefit or gain.

Examples:

• We inadequately insure our possessions or home because it is so much more tempting to have more money to spend now.
• We do not save enough for our retirement pension because 'old age' seems so distant and there are are so many other more pressing 'needs'.

Consumers often make the same choices as before rather than considering whether new information would suggest a new choice.

Examples:

• Shoppers in supermarkets often buy exactly the same products and brands week after week even down to the same flavour or size.
• Many consumers do not switch gas or electricity providers even though cheaper deals are on offer.

If a consumer is given a series of financial choices with no action being one of the options, many will choose to take no action.

Examples:

• Many people postpone energy conservation measures – even though those will soon repay the cost – because there is no compelling need to make a decision.
• Many investment or retirement plans provide choices as to how investments or savings are allocated, but most people stay with the initial choice or the default option.

HOW CITIZENS MAKE DECISIONS

In the non-economic sphere, the sort of non-rational factors that influence people include the following:

Priming

This involves consciously providing information which unconsciously influences subsequent behaviour in a particular, intended direction.

Examples:

• When Asian American women were reminded of their ethnicity before a mathematics test, they did better; when they were reminded of their gender, they did worse.
• When some students in a group were asked to write down the first three digits of their telephone numbers and all the students were then asked to guess the year of Genghis Khan's death, the students who wrote down the digits were more likely to guess that he died in the first millennium with a three-digit year of death.

Framing

This involves placing information in a particular 'frame' that influences how the information is perceived.

Example:

• A surgeon could tell a patient that a particular operation has a 15% failure rate or – equally accurately – he might advise that it has an 85% success rate. A patient is more likely to opt for the procedure if the information is framed in terms of success.

The mind contains all sorts of models or paradigms of what it expects to happen in certain circumstances which colour its expectations of what is actually happening.

Example:

• If a pill is given to relieve pain, it will probably ease the pain even if it is a placebo because people expect pills to 'work'.
• If a patient is told that one pill is more expensive than another, it will probably even be more effective in easing the pain, even though both are identical chemically and even if both are placebos.

Influence of others

If we know – or think we know – what choices others are going to make, we can easily be influenced, usually in the direction of making the same choice.

Examples:

• If sufficient members of the same work group or company donate blood or make charitable donations, others are more likely to do the same.
• Some undecided voters are likely to vote for the party they think will win either to be on the winning side or to avoid what they would see as a wasted vote (which is why some countries ban political polls close to the actual election date).

Group think

There is a powerful tendency to agree with others in the group. This is most strongly the case if you are a member of a close-knit group of people where there is a strong sense of loyalty to the group, deference to an authority figure within the group, and a demonised view of those outside the group.

Examples:

• A trivial one – people having a meal together in a restaurant often change their intended menu choice when they order after others in ways which more align their choice with those of others at the table.
• A very serious one - the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) identified group think as a major factor in its official report on why the IMF did not forsee the coming international financial crisis of 2007-2008.
• An even more serious one - many believe that a version of group think among the advisers to President George W Bush led to the deeply flawed decision to invade Iraq in 2003.

We like what we know and tend to opt for the familiar and comfortable.

Examples:

• We take the same routes to locations as we have always done even though there may be a quicker or more interesting option.
• Even with friendships and partners, we tend to choose people who look and sound and behave rather like us.

Recent experience

If we have had a recent experience – or a friend has - or even if the experience was not one close at hand but prominent in the media, we are likely to give extra (and unreasonable) weight to that experience, especially if it is negative.

Examples:

• If we have been burgled or mugged in the last few weeks or months, we are in danger of exaggerating the risks of such an incident reoccuring and behaving more cautiously than is warranted.
• If an aircraft crash has been in the news recently, we might have an unreasonable assessment of the risks of air travel, even though road travel is far riskier but the toll less obvious.

People can be unrealistically optimistic even when the risks are high.

Examples:

• A less serious one – people often think that they stand a better chance of winning in a lottery or a gamble than the statistical odds make clear.
• A more serious one – the overwhelming majority of couples marrying believe that the marriage will succeed even though statistically (at least in the UK and the USA) there is a high chance that it will not work out.
• An even more serious one - a smoker will delude himself into thinking that the risks of lung cancer are smaller than they are.

People think differently depending on their state of mind, so a whole range of emotions – anger, fear, jealousy, happiness, sexual arousal - can influence their choice or decision.

Examples:

• In a brawl at a football match or a riot in a deprived area, people can behave in ways which they would regard as 'out of character'.
• A jealous lover can intimidate or abuse his partner in ways that even his family and friends would believe unthinkable.

Altruism

Citizens do not always make decisions in their own self-interest but might consider the interests of others.

Examples:

• Donation of blood does not benefit the donor (at least in the UK) except in a psychological sense.
• People who volunteer are doing 'work' but for free and enjoying it.
• A high tax payer may vote for a political party proposing higher taxes because he believes that such a policy would advance social equity.

Discounting of the future

We all tend to give more weight to present pleasure than future benefit or gain.

Examples:

• We eat unhealthily because weight gain and other consequences will not occur for some time.
• We smoke or drink too much alcohol because ill-health seems so far in the future.
• We do not take regular exercoise becasue the benefits in terms of a healthier and/or longer life appear to be so distant.

There is a tendency to make the same decisions as we made before in the same circumstances.

Examples:

• A less serious one – students tend to sit in the same seats in classes.
• A much more serious one - a woman who has experienced an abusive relationship may choose a similar partner in the future.

Inertia

If a credible option is to do nothing and the other options involve time or difficulty, it is so tempting to hesitate or procrastinate.

Examples:

• Why clean the house? It will only need cleaning again a little later.
• Why complete that form? It probabaly isn't important.

CONCLUSION

It is important that we understand the processes and biases involved in making choices or decisions.

• As consumers, if we are aware of these influences, we can avoid being over-influenced by marketing and selling techniques deployed by commercial interests and instead make choices which better serve our interests rather than those of the manufacturer or retailer.
• As citizens, if we are conscious of these factors, we can be more empowered and perhaps make better or at least more considered decisions.
• Retailers who understand behavioural economics can increase sales, revenues and profits.
• Policymakers who appreciate how decisions are made in the real world can 'nudge' citizens to take certain choices which might be better for them or for society or both, such as to smoke less, eat more healthily or save more towards their pension.

FURTHER READING

• "Blink" by Malcolm Gladwell (2005) [for my review click here]
• "Predictably Irrational" by Dan Ariely ( 2008) [for my review click here]
• "Nudge" by Richard H Thaler & Cass R Sunstein (2008) [for my review click here]
• "The Social Animal" by David Brooks ( 2011) [for my review click here]
• "How To Make Decisions" click here

ROGER DARLINGTON

Last modified on 19 August 2011

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