"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Tuesday, March 11, 2014

Rational Consumer Behavior–No Such Thing

Classical economics was built on ‘rational consumer theory’ – the idea that people will select those products and services which are the best for them – high quality at low cost.  However Derek Thompson, writing in The Atlantic, suggests that this theory has had its day:

The once-popular belief that we all possess every relevant piece of information to make choices about buying fridges, TVs, or whatever, has since given way to a less commendable, but more accurate, description of buyers, which is that we basically have no freaking clue what we're doing most of the time. Prices, marketing, discounts, even the layout of store and shelves: They're all hazards strewn about the obstacle course of decision-making, tripping us up, blocking our path, and nudging us toward choices that are anything but rational.

Instead of one group of ‘rational’ consumers all trying to make their way through the tangle of overblown claims, sketchy information, and counter-offers, there may in fact be two groups – maximizers and satisficers – those who insist on maximum value for every purchase and those who are willing to settle for less. Maximizers, according to recent research reported in The Journal of Personality and Social Psychology, are less happy, more prone to depression, and less happy with themselves than satisficers who have an easy, laissez-faire acceptance of our complex world. 

Of course people who are driven to perfection go off the rails.  For each consumer product there are thousands of different brands, makes, and models; and for each there is a different price.  Just when you think you have finally tied down an elusive choice, it wriggles free. Something cheaper has come on the market; but now you have to assess Japanese technology, German workmanship, and Bangladeshi assembly. You deal easily with price point and reliability, but what about the ethical considerations of the sweat shops in which it was actually built?

Herb Parsons was a maximizer of the first degree. He was convinced that he could tame the market, make informed, perfectly rational decisions, and buy the best at the cheapest price.  Opportunity cost had no relevance for him.  He could have made thousands of dollars a day on consulting fees his wife reminded him, and then just buy any old leaf-blower.  “So what if it breaks down after a few years?”, she said.  He would have plenty of money to buy another.

This was not the point, of course.  There was something innately wrong with ‘throwing your money away’, knowingly paying more for a product than it was ‘worth’.  As a result, Herb researched every purchase.  Whether leaf-blowers or nails, screws, and washers, Herb subjected them to the same rigorous cost comparison.  Rash, impulsive decisions were signs of weakness, lassitude, and lack of moral fiber. 

To further complicate matters, Herb felt that buying anything new was an even more unforgiveable act of waste and moral profligacy.  Everything could be fixed. Timing belts, windshields, brakes, and transmissions could be replaced. Dishwasher motors, door hinges, and dish racks were all available second-hand, and with a little ingenuity, they could be taped and rewired to add life and efficiency. Nothing in his house had ever been bought new.  The sofas had all come from garage and rummage sales and re-upholstered by his wife.  The beds, chairs, and dishes had all been culled from church bazaars, charity auctions, and estate sales.

Since everything in the house had already seen a lifetime of service, even with Herb’s assiduous attention, breakdowns were daily occurrences. Dining room chairs which looked solid enough at the garage sale finally began to show telltale signs of years of punishment, and their joints were cracked and wobbly.  The blades on 30 year-old lawnmowers were so pitted and chipped and the metal so fatigued that they required filing or replacing every summer. The wiring on lamps that had lighted rooms at the local orphanage for decades was frayed and blackened and had to be replaced before using.

Herb never calculated the value of the labor he invested in the constant repair of his household of cheaply-purchased, used goods.  His economic calculations were as irrational as his maniacal pursuit of the perfect purchase.  Rather than calculate the real cost of used products as a function of the very high-value consulting work he could have been doing  instead of wiring old chandeliers, Herb measured his DIY work against an incalculable moral standard. 

Herb was a child of the Depression and to make matters worse grew up on a ranch.  Not only was there no money to throw around on new farm equipment, the Western ethos was to fix and repair, cannibalize and replace.  The old stereotype of the Montana ranch littered with old rusted tractors, plows, and tillers was accurate.  You never knew when you might need a 3/4” bolt from a McCormick hitch.  Worse yet was his ascetic Methodist upbringing. “Waste not, want not” was a Sunday prayer, an order of personal and economic life. Waste meant indolence, lack of spine and individual enterprise, laziness and flaccid belief.

This unholy trifecta would have forced even the best of men off the rails, but Herb stood his ground and spent hours in his office sorting through the promotions, product catalogues, and spec sheets for every product under the sun.  He not only researched things he needed, but that he might need.  His office was impassable and impenetrable, so piled was it with magazines, catalogues, and reference material.  When he wasn’t in his office he was either at Home Depot or Lowe’s or combing the bins at local hardware stores or fixing the clothes dryers, air conditioners, exhaust fans, and ceiling lights that broke down every day.

Eventually he started to unravel as badly as the lampshades and old electrical cords in the basement as the Internet took hold on the consumer culture.  Now he had to deal with the world’s products, not just America’s or those in corner stores in Northern Virginia.  He could buy anything online direct from the manufacturer and, more to his taste, buy them used on e-Bay, Craig’s list, or any number of electronic community markets.  He found that one could even by used screwdrivers, wrenches,and pliers on Craig’s list!

However, what he thought was a bonanza turned out to be a nightmare.  He became tormented and at times paralyzed by the overwhelming number of choices available to him.  He began to panic.  How could he possibly make the best choice? Given his background, there was an angst deep in his innards.

Each day he spent more and more time in his office, poring over online offerings and the reams of promotional material he requested.  He ate less, rarely came down for dinner, and talked only of sales, prices, and purchases. 

One morning his wife found him at his desk, tears rolling down his cheeks, shaking his head disconsolately.  Around him was the confetti of a night’s ripping, tearing and shredding.  He had snapped. An ambulance was called, and he spent two months in the psychiatric ward of Inova Hospital in Fairfax.  I lost track of him after that, but assumed that with the pharmacopeia of psycho-active drugs available on the market, he was on something which would even him out.  At least I hoped so.

Most of the rest of us muddle through our purchases as satisficers.  We are concerned with what we can afford at the time of purchase, not whether we will have to spend again in five years. We would rather play golf on a sunny afternoon and not comparison-shopping for vacuum cleaners.  We easily spend two-hundred dollars at Delfina or on a great Opus One wine, so finding the lowest price for the highest rated food processor is of very little concern. In other words, we have constructed a personalized, affordable, consumer reality.  Everything is relative, and nothing is absolute.  Poor Herb went to his grave believing in an absolute, perfect price point, but few of the rest of us have had to resort to Xanax over buying anything.

Human beings are divided in many fundamental ways – those with children and those without; gay couples and straight couples; rich and poor; urban and rural, spiritual or atheist – but perhaps the most fundamental difference is the way we value things. Some of us fall close to Herb Parsons on the valuation scale.  While we may not be as obsessive about maximizing value, we feel it is indeed a waste to take longer than the shortest route to a destination, to pay $3.50 for gas when across the street the price is $3.29, or to drive when the subway is faster. 

Others say that these abstemious clerks miss the point.  A longer, but easier route allows for the mind to wander pleasurably.  The extra few cents saved on gas is worth the nasty U-turn chanced on Mass Ave.  The subway is usually a hot, crowded, and nasty affair.

There are those who value a Friday night out because the liveliness, Happy Hour drinks, and hip crowd takes the sting out of a long, tedious workweek. There are others who feel that Chipotle, noise, and over-salted food are never worth the price. Herb Parsons, long before his train started rattling and wobbling on the rails, went out to dinner with his wife; but stopped because it was ‘a waste of money’.  A restaurant was a food delivery vehicle, and if they couldn’t serve up a good steak or Spaghetti Milanese, no amount of atmosphere, spirit, or bright service could compensate.

The car of choice in Northwest Washington is the Volvo – solid, roadworthy, safe, and dependable.  In Beaufort, South Carolina there are more Chrysler 300s on the road than any other make – big, showy, and not break-the-bank expensive, ideal for people who have just moved up in a region finally showing some economic life.  Every race, ethnicity, social and economic group, and region has its own particular consumer preferences.  Retail choice is a matter of cultural conditioning but also valuation.  There is no telling about either.

So, rather than divide the world into maximizers and satisficers as some economists currently do, I would suggest a multi-graded valuation continuum.  No two people value anything the same way, and if we Americans are ‘diverse’, we are most varied in our approach to value.

No comments:

Post a Comment