One of the wider debates about the economy questions whether the severe recession will alter consumption patterns. The classical economics perspective might suggest that the answer is "yes." Consumers, businesses, and financial institutions will have learned from the experience and return to a more balanced, cautious approach to consumption, borrowing, and lending. The traditional view—markets consist of parties that act rationally and in their own best interest—suggests that we will learn from the experience and practice better self-control.
On the other hand, behavioral economics suggests that we largely may revert to the same consumption patterns that led to the crisis. Behavioral economics holds that many of the decision-making processes we use are not rational, and that we often make decisions that are not in our best long-term interest.
Economics and the battle against losing weight
Weight loss has been an interesting field of study related to this branch of economics, with some good analogies between losing weight and trying to manage money more responsibly. Despite the billions Americans spend each year on dieting, the introduction of hundreds of "healthy" foods each year, and the constant drumbeat of how to lead a healthier lifestyle by government, health advocates, and news organizations, obesity rates continue to climb. Similarly, despite a great deal of advice about financial planning and the benefits of long-term saving, the rate of savings had continued to decline steadily until the recent downturn.
One powerful behavioral economics insight looks at the mechanisms that people use to make a choice over time. Dieting and exercise have long-term benefits that most people recognize. Yet, when presented with a choice—let's say, watching a favorite show now or going to the gym now—we tend to take the choice that offers instant gratification. We get an immediate and tangible benefit from watching our program (or eating a piece of chocolate cake) and a deferred benefit from eating an apple or hitting the gym. The gym option may be embraced enthusiastically, but it is more often valued as a choice that can be deferred to the future.
Similarly, researchers have learned that emotions usually trump rationality in the choices we make. The sight, smell, and taste of chocolate evoke an emotional response that can win out over the desire to diet. The same types of emotional responses accompany any desirable object, and we are thus prone to buying dream houses or luxury cars, even though its cost exceeds our budget.
There is also plenty of evidence to suggest that a significant minority of people who have made a considered choice will abandon it in light of a compelling emotional option. For example, in experiments where people have preselected a meal from a menu of healthy choices, up to half will end up actually choosing unhealthy items when presented with an assortment of items that includes both health and unhealthy foods.
Making healthy consumer choices
As companies and governments begin to react to a recovering economy, they need to make careful choices to reward the right behaviors. For example, banks have come under considerable criticism for raising fees for such activities as overdraft protection. It is an easy target for legislators, and many banks do not help matters by making it difficult for consumers to understand the costs of poor behavior.
However, such fees may serve a useful purpose if we want consumers to become better stewards of their own finances. After all, they impose an immediate penalty for being overdrawn. While positive messages about responsibility may be useful, behavioral economics suggest that these alone are unlikely to change behavior.
For marketers, understanding these dynamics is important. The current restructuring has created an opportunity for companies to be more open with their customers and to engage them through programs that clearly explain benefits and risks—setting an example that customers will appreciate and remember. For example, what if banks offered to alert customers when their checking account fell below some level set by the customer, but also clearly explained the fees that would be charged if the customer goes into overdraft? Or what if customers were offered two options: a monthly fee of $15, which would cover one overdraft, or a penalty of $25 per overdraft?
Not all consumers are likely to respond to such efforts, but we do learn from experience. The recent economic pain should prod us to engage with customers in new ways that can benefit both companies and customers.
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About the Author: David King is chief executive officer of Fulcrum.