We have to deal with economic decisions on an everyday basis without knowing it. Here’s a few example of what I have been dealing with the last two days. From buying a pair of sneakers to using the iPad.
I discovered a little animal trapped inside bottom of my chimney since a few days ago, it finally climbed down to the fireplace just yesterday, and it was a little squirrel. The front of the fireplace was covered with a screen luckily so I didn’t end up chasing it around the house. After a short while it climbed back up to the bottom of the chimney. So we could I do?
If I call up the wild life people, it will cost me $300 to dis-invite the little animal. If we leave it up there, it will eventually starve to death. If I let it out, I would risk it running around hiding in the house instead out heading out the door. It is not an easy task to find a small animal in a 6,000 sq feet home with lots of little hiding places. I definitely won’t be spending $300 every time one of them decides to pay us a visit.
So I ended up borrowing a trap from my neighbor. It was left inside the fireplace for the night and I stocked it up with peanut butter bagel, a slice of apple and some peanuts. Next morning, I got it trapped. I fed it with water, more food and did a little lecture why he should never come back, then took it to the park. He didn’t say goodbye and ran up a tree, rude. What would you do? Would you spend $300 to have someone remove it or leave it to die up there? We are dealing with economic decisions like this all the time.
Here is another one. I was looking for a pair of sneakers and couldn’t find my favorite blue Adidas Gazelle. Almost given up but then I saw a pair of Converse, nice gray color. I am not a Converse fan and for whatever reason, today I bought my first pair of Converse. The sales person told me I could get the second pair for 50% off. So do I need another pair? No, I’ve enough shoes to last for 3-4 years.
But I did eventually buy another pair the same color but a high cut design. So their marketing tactics worked. They got me buying more than I need, although they made less margin on the second pair. That's a bad consumer decision, buying things I don't need at all just because there is a discount.
Another common one is reusable shopping bag. A lot of people still have not developed the habit of bringing their shopping bags including myself. We know we should, but we always forget. Do we end up buying more additional reusable bags? No, we go back to single-use bags. When people think that they have already paid for being green but they forget next time, they’re not willing to invest more in their behavior. Another bad consumer decision.
What about the iPad, I love that device but I really have no need for it. I bought one for myself, sometimes carrying it around the house but have no idea why. No idea why spending $700 buying it in the first place and why I am carrying it around in the house like I am a waiter taking orders in a restaurant. Can someone explain this behavior? Do I want it? Do I need it? Do I like it? Do I even use it? Worse, I've actually spent another $50 on useless widgets.
There are a lot of holes in the field of behavioral economics. Behavioral economists are sticking to a few simple theories. We know that people value changes from reference points (but know little about what points of reference are, and how multiple gains and losses from reference points are integrated), that expressed preferences are constructed much as people heuristically approximate solutions to different problems, that categories of wealth are not added up when people make spending decisions, but we know little about the detailed cognitive structure of their “mental accounting” of "wealth categories."
Let’s imagine we have a diagnostic tool, to measure when present people with images of new products and asked them to choose which they like most (measuring “wanting”). Then we separately measure how much they actually like using that product (“liking”). If wanting and liking brain activation are different, a consumer could be judged as incompetent. I think as consumers, many of us are simply incompetent. My iPad one is a perfect example.