The Clock, The Consumer and The Consumer’s Folly

The cornerstone to the foundation of economics is the assumption that consumers are rational individuals and make pragmatic decisions. But, therein lie some core behaviour traits of humans, who remain irrational consumers, which urge them to act in ways vastly contradictory to logical expectations. A well-known example of consumer irrationality is the Zero Price effect or, the ‘Cost of Zero Cost’. When a particular product or service is priced at Rs.0, people derive greater utility from its consumption. This effect is so strong for some people that, sometimes they end up paying more for one commodity just to achieve the satisfaction of consuming another good at the cost of Rs.0.

This effect acts up more often among consumers while engaging in E-Commerce purchases. Who doesn’t like free shipping? For instance, Amazon Prime offers zero shipping charges for purchases above Rs. 499. So, every time I order a book that costs less than this minimum price, I usually end up buying another book (which I rarely read) just to get that free shipping. Following such an illogical decision I vow to never fall prey to the lure of free shipping ever again but, believe it or not, one month later I find myself repeating this process. Maybe it’s the prospect of loss aversion. Maybe it’s just something about free things. Who knows?

Another well discussed irrational behaviour worth mentioning is the difference between actions guided by social norms versus those guided by market norms. Consider this scenario, your neighbour comes to you and asks for some spare tomatoes. They offer to pay Rs.20 in exchange for them. Most people will be livid and probably won’t take up this offer. Economically speaking, said tomatoes are spare, meaning you probably don’t have any immediate utility for them, so selling them off to your neighbour makes sense; but most people don’t do this. Here, we are confusing market norms with social norms.

Social norms dictate that we ought to be helpful to our neighbours. You would rather give those tomatoes to your neighbours free of cost and avail the social appreciation that comes with being a helpful neighbour. On the other hand, say the price of the tomatoes is Rs.30 and you really are not all that interested in being a good neighbour. In that case, market norms would expect you to make the purchase at least at the initial price of Rs.30. In other words, you would be willing to give those tomatoes to your neighbour either at Rs.0 (and get the attached social appreciation) or at Rs. 30 (the going market price).

Cartoonist: Prishi Jain

This puts forth that there are 2 distinct worlds that co-exist, one governed by social norms and another where market norms are the law. While economics claims that individuals work to benefit themselves (usually in monetary terms), the very existence and overlapping of two such distinct worlds proves the contrary i.e. money is not the sole motivator for people’s actions.

These are some of the most concrete evidences to everyday occurrences that show the consumer’s folly. Another lesser known area wherein this becomes an issue is climate change. Have you ever wondered why, despite repeated warnings about the dangers of climate change from multiple credible sources, we somehow seem to ignore the issue? We have a clock counting down from approximately 7 years to remind us that prompt action is needed before conditions worsen irreversibly and yet, 7 years seem so far away that we can never seem to take any solid measures against this. Now a purely rational person (think Spock) will say, although this problem lies in the future, we need to start acting on it from the present time if we wish to cause any consequential effect later. Most of us may be concerned about this but not to the extent we should be.

Here, I would like to bring to the reader’s notice a study conducted at MIT by Dan Ariely. The study divided 99 professionals into 2 groups. Group 1 was the ‘free-choice’ group (i.e. treatment group) and Group 2 was the ‘no choice’ group (i.e. control group). Each of these groups had to submit 3 short assignments. Students in the ‘no choice’ group were given fixed, evenly spaced deadlines for each of these assignments. On the other hand, students in the ‘free choice’ group were asked to set their own deadlines with the constraints that the students had to submit the papers on the last day of the semester and that these deadlines, once declared by the student would not be altered in any way. The ‘free-choice’ group was further informed that a 1% penalty would be placed on the final grade for late submissions and no grade advantages would be given for early birds. Now, the results are rather extensive but put simply, the class with the ‘no choice’ deadline performed much better than the other one. Quoting the same from Ariely, “The overall effect (on performance) of self-imposing deadlines is due primarily to the timing of the deadlines.”

With this information under our belts, let’s look at the clock that’s counting down from 7 years. This deadline is so far into the future! There are no immediate deadlines other than your college assignments so, naturally those take up first priority. If we truly wish to put a halter on the increasingly ruinous effects of climate change, we ought to cut up the idea of “bringing about change before 7 years are up” into smaller pieces. These smaller pieces should then have a deadline imposed. Further, this is a self-imposed deadline, so we must ensure that these deadlines span over more or less equal intervals because that would be the only way to achieve the best possible results.

Dan Ariely’s idea of beating procrastination was to impose costly punishments. In tandem with this idea, one might suggest the implementation of Green taxes or Carbon taxes as a measure of achieving environmental betterment over the years. This would be a perfectly sound proposal given that it would serve as an incentive for producers (especially oil and gas companies) to be wary regarding the greenhouse gases emitted from their production processes. But within this plan lies a great flaw.

Imposition of the Carbon taxes could potentially trigger the Green Paradox if the tax rate starts slow and increases fast over time, which in turn would further aggravate the current situation. This situation was first proposed by a German Economist Hans-Werner Sinn. His claim was that in such a scenario, the carbon tax would be equivalent to imposing an additional tax every year. This would create incentives to extract more limited reserves immediately each year rather than in the later years when the tax would actually be higher.

             There is such attractive simplicity to the idea of rational decision making, yet we hold within us certain biases which make us act undesirably and these are particularly difficult to overcome. However, these biases, which are a function of our irrational minds, need not be looked at with disdain. After all, despite our best attempts, we cannot be Spock. Instead of accepting irrationality as a wayward piece of human cognizance, we can take this chance to study it. Learn the limits to our irrationality and its advantages. The arena of human behaviour remains a dynamic one but, getting a better rein of it is also of importance if one wishes to put a check on the ticking clock.

– Krisha Gandhi (Writer, Econ Declassified)

References:

  1. https://ecotalker.wordpress.com/2018/10/26/the-green-paradox-consequences-of-naive-climate-policy/#:~:text=A%20carbon%20tax%20that%20is,rather%20than%20in%20later%20years.
  2. https://academic.oup.com/reep/article/9/2/246/1626618#29410823
  3. https://erationality.media.mit.edu/papers/dan/eRational/Dynamic%20preferences/deadlines.pdf
  4. https://www.youtube.com/watch?v=-8qIpRRi4cU
  5. https://www.safalniveshak.com/latticework-mental-models-zero-price-effect/
  6. https://secretldn.com/climate-clock-new-york/

To subscribe to our monthly e-newsletter and updates related to Economics Declassified, click here.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s