Lisbet BergNational Institute for Consumer Research - SIFO, P.O. Box 4682 Nydalen, N-0405 Oslo, Norway
a r t i c l e i n f o
Article history:Received 10 October 2012Received in revised form 27 March 2014Accepted 27 May 2014Available online 20 June 2014
Keywords:Consumer choiceConsumer marketsSociologyBehavioural economicsTrustDecision theory
a b s t r a c t
Interpreted by a sociologist, this paper intends to sketch and discuss themain ideas behindbehavioural economics, asking who will ultimately benefit from this field of knowledge;the consumers through authorities’ implementation of supportive measures; or marketingpeople taking advantage of this knowledge? While sociologists try to understand how in-dividual choices are affected, restricted or determined by structures, traditions and norms;behavioural economists point to cognitive mechanisms within individuals to explain non-rational choices. This article claims that behavioural economics would improve by incor-porating sociological knowledge and approaches.
Our interpretations and understandings of consumers and societies depend heavily on themethods and theories that weapply. After the 2008 financial crisis –whichwashard to predict by traditional economic theory – the field named behaviouraleconomics has gained attention from both policy makers and social scientists. Behavioural economics’ main objective is toexplain choices. Contrary to rational choice theory, behavioural economics demonstrate and explain why free choices oftenappear not to be in the chooser’s own interests.
I think behavioural economics is a pragmatic field wishing to solve real problems in the real world. Accordingly, ifsuitable and useable, the field does not hesitate to borrow insights and approaches from neighbouring disciplines. Manyof their favourite mechanisms relate to central sociological phenomena, like the importance of contexts, traditions, normsand significant others. A sociologist, however, will often miss standard sociological references in their literature. This paperdiscusses this new field, claiming that a turn towards sociology would improve this field, a lot. Finally asking who willultimately benefit from this new knowledge, the consumer-citizens or the producers and providers?
1.1. Fighting the omniscient, calculating rational actor
Over the years, Adam Smith’s classical rational choice approach has been challenged from rival social science approachesas well as from fellow economists. Several Nobel laureates in economics, like Herbert A. Simon in 1978, Amartya Sen in 1998and Joseph Stiglitz in 2001, have questioned the traditional rationalman andhis rationality assumptions.1 Manywould agreethat the one who has contributed the most to the development of the economic field is Herbert Simon (1916–2001) who
E-mail address: [email protected] My anonymous referee adds that anomalies have been discussed bymany economists. Important ancestors to behavioural economics are e.g. Kantona,
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coined the terms bounded rationality2 and satisficing3 (Simon, 1957, 1982). Amartya Sen’s capability-concept4 (Sen, 2009)and Joseph Stiglitz’ information paradigm5 (Stiglitz, 2002) are other important contributions to the development of renewedeconomic theory. The social scientist Jon Elster has provided important contributions on how phenomena like norms andtrust, people’s tendency to yield to temptation, and inconsistent time preferences, all challenge the explanatory power ofneoclassical economic theory (Elster, 1979, 1989a,b, 1990, 1998).
Sociologists, including thosewho in their work are inspired by economic theory and the clarity of economicmodels, havebeen at the forefront of criticism of traditional rational choice theory and its omniscient, instrumental, rational actor. Theclassical economic model of society, grounded on the idea of a rational man, has been described as beautiful, but withoutroots in reality. According to Aage B. Sørensen (1941–2001);
neoclassical economy generates very powerful hypotheses, but for a non-existing world. Sociologists, he claimed: have avery important role to fill, namely to empirically observe and explain what is going on (Sørensen, 1990).
Richard Swedberg once asked James Coleman (1927–1995) if he expected that sociology would end up as a subdiscipline ofeconomics. Coleman then forecasted that: the economists have shown certain kinds of fundamental narrowness and blindness,and [that] it will rather turn out that economics will become a kind of subdiscipline of sociology in the future (Interview withColeman in Swedberg (1990)). At the present stage of development of economics the high profile of behavioural economicsindicates that instead of sociology, it was cognitive psychology – helped by the financial crisis in 2008 – that first succeededin considerably dislocating the power of the rational man.
The sociologists referred to above can all be said to belong to the branch of sociology named analytical sociology (see;Hedstrøm and Swedberg, 1998, Hedstrøm and Bearman, 2009, Tufte, 2009, Manzo, 2010). This sociological field is rathersimilar to behavioural economics in their critics and distance-markings to rational choice theory. Both fields urge theirscholars to open up the so called black box in search for better explanations. While behavioural economists give importanceto the decision process and try to increase the explanatory power by providing the black boxwithmore realistic psychologicalfoundations, analytical sociologists have a wider project. They search for the mechanisms6 that explain how and why thingshappen, and how these mechanisms at the individual level affect and promote changes at the societal level.
2. Behavioural economics
The development of the field behavioural economics accelerated when The Russell Sage Foundation offered a grantdesigned to bring the fields of economics and psychology together to study decision-making processes. The first grant wasreceived by the economist Richard Thaler, who spent one year (1984–1985) with the psychologist Daniel Kahneman at theUniversity of British Columbia in Vancouver (Kahneman, 2002). While Kahneman later received the Nobel prize, RichardThaler of the University of Chicago Business School (not the Economics Department of the University of Chicago) madebehavioural economics applicable and policy relevant when he together with Cass Sunstein wrote the frequently referencedbook Nudge.
To a sociologist, the term behavioural economics gives associations to non-reflected behaviour (contrary to intentional,rational and reflected action). But behavioural economics do not reject intentional rationality. They agree that humanssometimes reflect and make rational choices, nevertheless reject the one-dimensional, insensitive, omniscient, ever-calculating rational man. Central in their choice theory is the separation between more or less automatic choices basedon intuition on the one hand, and active choices based on reflection and reasoning on the other. Still they keep referring tobehaviour. It is easy to agree with Sage President Erik Wanner – one of the promoters of this field – who now claims thatthe field is misnamed and that it would be more appropriate to name it cognitive economics (Wanner referred in Lambert(2006)).
2.1. Guiding ideas
The field combines ideas from economics and cognitive psychology. Behavioural economics is the study of howindividuals behave and how thinking and emotions affect individual – mostly economic – decisions (Thaler et al., 2008). The
2 The concept bounded rationality means that decision-makers have to work under three unavoidable constraints: (i) only limited, often unreliable,information is available regarding possible alternatives and their consequences, (ii) the human mind has only limited capacity to evaluate and process theinformation that is available, and (iii) only a limited amount of time is available to make a decision. Therefor even individuals who intend to make rationalchoices are bound to make satisficing (rather than maximising or optimising) choices in complex situations. These limits (bounds) of rationality also makeit nearly impossible to draw up contracts that cover every contingency, and accordingly we have to rely on heuristics. (www.business.dictionary.com).3 Satisficing means that instead of searching for the best alternative (which is unrealistic) the first satisfactory alternative is chosen.4 Stressing that ‘free choices’ are restricted by a persons’ capabilities.5 Information is unevenly distributed. Customers are more strategically intricate than the neoclassical economists’ view took into account, and market
actors can create information imperfections in their attempt to exploit market power.6 A mechanism is the explanation, or the reason why ‘a’ (often) causes ‘b’. Contrary to physical laws, we cannot predict when a mechanism will be at
work and when it will not. In real life, several mechanisms pulling in different directions can be at work simultaneously; like ‘opposite attract’ and ‘birdsof a feather flock together’. ‘When we have identified a mechanismwhereby p leads to q, knowledge has progressed because we have added a new item toour repertoire of ways in which things happen’ (Elster, 1989a, 10).
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core idea is to show that limited cognitive capacity, humanweaknesses and the framing of optionsmatter more than peoplelike to think. As opposed to classical economic theory’s presumption of the omniscient homo economicus, behaviouraleconomists’ first task was to replace unrealistic Econswith more credible Humans (Thaler and Sunstein, 2008).
While the rational man is a selfish, utility seeking actor with full information about different alternatives andconsequences of his choices, his successor created by behavioural economists is more humanlike, characterised by twovery different ways of thinking, i.e. emotional intuition (thinking fast) and rational reasoning (thinking slow) (Kahneman,2011). And while intuition is spontaneous and effortless, reasoning is deliberate and effortful. In most cases reasoning ismore likely to guarantee better choices. Nevertheless, intuitive thinking resting on experiences and former practices canalso be powerful and accurate. The reason why we use intuition7 is that the overall capacity for mental effort is limited.
The basic idea is that the way intuition works is similar to visual perception. Misunderstandings and mistakes can thusbe understood as visual misperceptions. In his Nobel lecture, later published in The American Economic Review, Kahnemanwrites:
The guiding ideas are (i) thatmost judgements andmost choices aremade intuitively; (ii) that the rules that govern intuitionare generally similar to the rules of perception. Accordingly, the discussion of the rules of intuitive judgements and choiceswill rely extensively on visual analogies (Kahneman, 2003).
A situation can bemisinterpreted in the sameway as the well-knownMüller-Lyer illusion, that demonstrates how two lineswith arrow-ends pointing in different directions are wrongly perceived to be of different lengths.
The field has both theoretical and applied contributions. In his Nobel lecture, Kahneman (2002) differentiates betweenthree main theoretical contributions; (i) exploring heuristics and the biases to which they are prone, (ii) the study of riskychoices and prospect theory, and (iii) framing effects. This young discipline also gives examples of how knowledge frombehavioural economics can be applied to counterbalance human behavioural biases, e.g. by choice architecture that ‘nudge’people to make choices more in accordance with their own and/or societies’ best interests (Thaler and Sunstein, 2008).
3. Theoretical contributions
In this section behavioural economics theory is approachedwith sociological glasses. Are there sociological contributionsthat could advance the field of behavioural economics?
3.1. Internal versus external influences
Sociology is verymuch about how social structures and norms affect people’s practices and social interactions. Norms areunderstood as sets of expectations from the significant others. According to Elster (1989b) norms – contrary to instrumentalrationality – make people stick to prescribed behaviour even if new and apparently better options become available. Theimportance of norms has partly been adopted by behavioural economists, but by norms they refer to normality or ‘normalevents’ (Kahneman, 2011). Thaler and Sunstein claim that the most effective way to ‘nudge’ people is via social influence.And the reason why social influence works, they claim, is because humans like to conform. While Econs communicate withothers only to gain something from the encounter, Humanswant to be accepted by the group (Thaler and Sunstein, 2008).
Compared to a sociological perspective, behavioural economics explain non-rational practices by mechanisms within aperson, while sociologists would try to relate such mechanisms to the societal level, e.g. to societal norms and structures. Intheir classical work The social construction of reality Berger and Luckman (1966) explain convincingly how institutionalisedbehaviour release people from a series of choices confronting them inmodern societies. Through socialisation newmembersof societies are taught – and internalise – norms on how to behave and how to understand the world. Habits and traditionsbecome automatic behaviour – institutionalised – more or less in accordance with the norms of prior generations – andform the new social constructions of reality, which again are passed over to the next generations.
Thaler and Sunstein use the collective suicide in Jonestown to exemplify how powerful social influences can be (Thalerand Sunstein, 2008). But they only refer to internal mechanisms that allow such norms to work, like people’s wishes tobe accepted and conform. The sociologist Bråten (1981), who also refers to the collective suicide in Jonestown, is closer tograsp the norm itself. He actually explains the emergence of such indoctrinated norms. By use of emotions like love-bombingand punishment, isolation from the outside world, and commitment through binding acts, Pastor Jones manipulated 913followers –whites and blacks, children and adults – to follow him in collective suicide. Some, however,managed tomaintaintheir independence and escaped the massacre, and could tell the world outside that before the massacre the people ofJonestown several times were forced to practice collective suicide by swallowing poison that was not real (Conway andSiegelman, 1978 referred in Bråten, 1981). So, according to sociological literature, Jonestown is first of all a story of how onemad man managed to indoctrinate a whole community by implementing structures and norms through manipulation andfear, and not so much an example of how humans want to conform.
7 I believe behavioural economics include what sociologists would categorise as institutionalised behaviour and routines, as intuitive behaviour.
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3.2. Framing effects
Already in 1959 the sociologist Erving Goffman (1922–1982) emphasised and theorised – by his dramaturgical approach– that contexts matter. His concepts back-stage and front-stage represent different types of contexts that affect face-to-face interactions. To be taken seriously we act differently in different settings, e.g. at home and at work (Goffman, 1959).Similarly, using the picture as an analogy, different frames (structures holding together and defining the context) providedifferent meanings to same actions and experiences (Goffman, 1974).
Behavioural economists emphasise that people often misinterpret the contexts. A particularly unrealistic assumption ofthe rational-agent model, Kahneman states in his Nobel lecture, is that the agents make their choices in a comprehensivelyinclusive context, which incorporates all the relevant details of the present situation, as well as expectations about all futureopportunities and risks. Much evidence supports the contrasting claim that people’s views of decisions and outcomes arenormally characterised by ‘narrow framing’ (Kahneman, 2003).
Behavioural economics experiments have proven that the way a phenomenon, a choice or a judgement is framed,has great effects on people’s decisions. The way a problem is presented evokes different associations—hence differentevaluations, judgements, decisions and choices. One reason why manipulation of contexts can have such huge effectson people’s choices can be explained by cognitive biases. Behavioural economists have mapped several predictableirrationalities caused by cognitive biases, like people’s tendency to be loss-averse, as well as unrealistic optimistic,overconfident, status quo-oriented, conformity-oriented, resistance-averse, myopia, inconsistent time preferences (Thaler andSunstein, 2008; Kahneman, 2003). In everyday life, however, many of thesemechanisms could easily balance each other out.
One kind of framing effect; the default option, has received a lot of attention from behavioural economists. It appearsthat the option designated as the default has a huge advantage, even in choiceswith considerable consequences. Perhaps themost cited example is Johnson and Goldstein’s (2003) organ donor program study: In Denmark, where citizens who wantedto join the program had to opt in, only 4% consented to join. In Sweden, on the contrary, the default option was to join theprogram, and those who did not want to, needed to opt out. The differences are astonishing, in Sweden 86% consented. Thesame effects are found in all eleven European countries investigated. This is perhaps the most compelling example showinghow strong an impact the application of such choice architecture can have on public policy matters.
3.3. Heuristics
In a complex world, with endless series of choices, very few choices can be given full attention and accurate calculations(Simon, 1971; Berg and Gornitzka, 2012; Mehta and Sugden, 2013; Waddams Price, 2013). Instead, we develop heuristics:
. . .people rely on a limited number of heuristic principles which reduce the complex tasks of assessing probabilities andpredicting values to simpler judgemental operations. In general, these heuristics are quite useful, but sometimes they leadto severe and systematic errors (Tversky and Kahneman, 1974, 1124).
Heuristics describe how we make judgements and decisions based on approximate rules of thumb when strict logics aretoo time-demanding or not possible at all. Heuristics require less effort than a rational, information based, calculatedchoice, and it follows that heuristics are much less accurate, they can indeed be quite wrong. Still, it is more rational touse heuristics, than to make random choices. The agent with the better heuristics makes ‘more rational’ choices. The morerelevant associations that come into mind when a judgement or choice has to be made, the better or more rational thejudgement appears.
Heuristics are not only restricted for judgement under uncertainty. It is also used to simplify complex tasks:
‘This is the essence of intuitive heuristics: when facedwith a difficult question, we often answer an easier one instead, usuallywithout noticing the substitution’ (Kahneman, 2011).
Three different kinds of heuristics were presented in Tversky and Kahneman’s original work: anchoring,8 availability9 andrepresentativeness.10 The main idea is that some times anchoring-, availability- and representativeness heuristics workwell, other times they do not. However, the Adaptive Behavior and Cognition Group in Berlin, who are studying the interplaybetween heuristics and the environment (ecological heuristics), argues that heuristics can sometimes bemore accurate thancomplex arithmetical calculus. ‘Less can bemore’, they argue (Gigerenzer et al., 2011). To a sociologist thismakes sense, since‘everything relates to everything’, and because the future is uncertain, approximate answers based on heuristics may give amore robust and correct estimate than sophisticated methods including many uncertain figures, excluding others.
8 When an answer or judgement is given based on pure guessing, which is often the case in everyday life, anchoring is more accurate than to pick arandom answer. As an example: if questioned about the unknown population size of a city (target attribute), it is helpful to anchor the answer in anothercity’s known population size (heuristic attribute), and judge the size according to their expected relative sizes. Not very surprisingly however, it appearsthat the size of the heuristic-attribute-city affects heavily the guessed population size. (Tversky and Kahneman, 1974).9 Availability heuristics relate to the perceived probability that a situation or phenomenon will happen. As an example: people who know someone who
has experienced water damage are more likely to buy water damage insurance for themselves, regardless of the real risk.10 Representativeness heuristics refer to the use of stereotypes in decision-making situations, which might prove to be more or less effective. We expectthat a small girl would prefer a pink bicycle and not a dark blue one.
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3.4. The study of risky choices
The sociologist James Coleman states that a rational actor would choose to place a bet if the proportion between theprobability of winning and losing is larger than the proportion between the potential volumes of loss and gain (Coleman,1990). Tversky and Kahneman (1974) however, showed by experiments that most people will reject a gamble with evenchances towin and lose, unless the possiblewin is at least twice the size of the possible loss. This does notmean that Colemanis wrong, but rather that most people are not rational players. They are risk averse. Tversky and Kahneman (1974) showedhow people in their risk calculations tend to underestimate uncertain outcomes compared to outcomes that are obtainedwith certainty. This tendency contributes to risk aversion. People’s risk aversion, however, prove to be stronger for lossesthan for gains. In other words, it is twice as hard to lose an item, than not to win the same item (Kahneman, 2011). Peoplealso tend to overweight low probabilities, something that might contribute to the attractiveness of gambling and insurances(Kahneman and Tversky, 1979).
3.5. Trust and reflexivity
Risk is related to trust. The dyad trust/distrust can be understood as an individual subjective – more or less reflective– response to an objective – but still often non-calculable – risk situation. While some sociologists reserve trust for activeand reflected considerations or calculations related to consciously perceived risks (e.g. Coleman, 1990, Nooteboom, 2002),AnthonyGiddens claims that: Familiarity is the keynote of trust (Giddens, 1994). Elster accepts both reflective andunreflectivetrust, he thinks that to show trust is to abstain from taking precautionswhen the possibility of being disappointed is present,but that trust can also be unthinking and unreflective, as in the blind trust of a child (Elster, 2000). The sociologist Luhmann(1988) grasps these different levels of consciousness by distinguishing between ‘trust’, ‘confidence’ and ‘familiarity’, wherethe degree of acknowledged risk is successively decreasing. Normally trust and familiarity relate to persons,while confidencenormally relates to institutions.
One of Luhmann’s main contributions is the introduction of trust/distrust as a complexity reducing mechanism. In acomplex world people apply trust/distrust to simplify their lives through narrowing down their options, i.e. by onlyconsidering the trusted alternatives (Luhmann, 1979). The economist and philosopher Nooteboom (2002) would add thattrust is a rational evaluation of the evidence for trustworthiness. According to William Freudenburg modern people dependmore and more on trust. Referring to the grand sociologist MaxWeber’s classical theory of the division of labour—he drawsattention to the fact that more andmore of citizen’s well-being and everyday lives depend on how other people and societalinstitutions solve their duties, and how trustworthy they are (Freudenburg, 1993). So, in a complex world it can be rational– but risky – to search for trustworthy people and follow their decisions, hoping that these decisions are well informed.
The behavioural economists Stadelmann and Torgler (2013) treat trust as a heuristic. Theywanted to investigatewhethercomplexity lead voters to rely on trusted representatives as a heuristic. Their large quasi-natural experiment, using historicaldata on voters’ decisions in elections during as much as 160 years in Switzerland, showed that when more referenda whereheld on the same day—i.e. increased complexity—constituents were more likely to follow the recommendations of theparliament—i.e. vote by trust. According to Luhmann, as referred to above, this pattern was to be expected. However, tofollow the recommendations of the parliament can be a positive thing or a negative one depending on the quality of theparliament.11
Heuristics, like trust, can be interpreted as complexity reducing mechanisms. Probably, similar to the varying natures oftrust (trust/confidence/familiarity), heuristics can also bemore or less based on reflective reasoning.While e.g. representativeheuristics seem to depend more on automatic intuition (thinking very fast), anchoring heuristics seem to involve more ofreflective reasoning (thinking a bit slower). Numerical understanding per se—or the ability to quickly acknowledge if anumber is reasonable or completely wrong, is probably the ability to use sets of heuristics—more or less consciously—thatcapture and reduce complex mathematical models and calculations to manageable cognitive processes.
3.6. Time preferences and prospect theory
People in general do not act on uncertainty and risks in a rational calculated manner, as presupposed in economic utilitytheory. A strong argument against the foundation of classical economic theory is Tversky and Kahneman’s rejection ofBernoulli’s theorem (dated 1738, referred in Kahneman (2003)), i.e. that decision-makers evaluate outcomes by the utilityof final asset position. Instead Tversky and Kahneman showed that the choices people make are affectedmore by the changeof wealth (or utility), and not the final state of wealth. One of their examples is that; a person who is told that her wealthwent from 4 millions to 3 millions should be more content with her financial situation than a person who is told that herwealth went from 1 million to 1.1 million. Still, there is a reason to believe that the second person is happier immediatelyafter these changes. The reason why Bernoulli’s theoremwas kept for almost 300 years, Kahneman explains, is that to equalconceived utility and final wealth is consistent with the rational man, who is expected to make long-term, and cold, utility
11 Thanks to my anonymous referee for making this point.
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calculations. Contrary to traditional rational choice theory, which is concerned with the long-term utility function, prospecttheory is concerned with short-term outcomes. Because, as Kahneman states:
long-term is not where life is lived. Utility cannot be divorced from emotions, and emotions are triggered by changes(Kahneman, 2003).
This view is coherent with Elster’s work on temporary change of preferences (Elster, 1989a,b). The widespread humantendency to overestimate the value of an imminent event to future larger and more valuable events, can explain lots ofregrets. But people can learn from their mistakes. Elster explains how people, with the ability to foresee how preferencesand the strength of temptations change according to their distance in time to the present, can make private protectionsagainst such time-inconsistency-mechanism. The story about how Ulysses binds himself to the mast before his ship passesthe wonderful song of the Sirens, is a brilliant illustration (Elster, 1979).
4. Applied behavioural economics
Proponents of applied behavioural economics want to use knowledge from this field in the interests of the citizensand communities, e.g. by unveiling, and making known, mechanisms contributing to choices that are not in consumersor communities own interests (Thaler and Sunstein, 2008). Nevertheless, it is pertinent to ask who will ultimately benefitthe most from this applicable knowledge?
4.1. Consumer markets
According to classical economic theory (Smith, 1776) and the competition paradigm, the main policy was to further faircompetition on the supply side, often restricted to avoiding monopolies, price fixing and cartels. Until recently this has beenthe main approach to consumer market policy.
One important contribution from behavioural economics is that also consumers’ conditions are given more attentionby policy makers. More precisely, the consumer side of the market forces are given more weight when the functioningof markets is investigated. Behavioural economics has provided knowledge that undoubtedly has stimulated to a closerconnection between competition authorities and consumer authorities. One example is the European Commission’sConference: Competition and Consumers in the 21st Century in 2009, bringing competition policy and consumer policytogether. Another example is the fact that the competition authorities and the consumer authorities in Denmark mergedinto Konkurrence og Forbrugerstyrelsen in August 2010. And in the UK the Office of Fair Trading, Consumer Focus and otherconsumer organisations merged in 2012.
Public authorities are attracted to behavioural economics because it offers both insights and solutions to problems.Director-general for health and consumers Paola Testori Coggi confirms that the European Commission already in 2008started to apply behavioural economics knowledge in consumer policy to protect their consumer-citizens. One recentexample is the new consumer-rights directive, which will ensure 500 million European consumers better protection againsttheir own default biases. This directive prohibits e.g. solutions like included breakfasts, or included insurances, as the defaultoption when booking hotels online (Testori Coggi, 2012). The consumer unit in DG-Sanco acknowledges that to take humanbiases into account when designing consumer policy may be effective, and is continuously conducting large cross nationalbehavioural economics inspired studies to investigate consumers’ conditions. As an example, in a study on consumers’decision-making in retail investment services, they showed that simpler and standardised product information significantlyimproves individual investors’ decisions (European Commission, 2014).
4.2. Marketing
Knowledge about human cognitive biases has long been utilised by marketing people when framing their products tostimulate consumers to buy their goods or services: The reason why magazines, book clubs etc. offer free subscriptionperiods to new customers, is of course because the sellers are aware of the status quo inertia, producing a lot of new payingcustomers after the free period has expired (Thaler and Sunstein, 2008). The same is true for retailers who operate with onemonth free return on all purchases, because very few will actually do that. Because of overconfidence, far too many bankcustomers do not check and compare their bank conditions. Instead they remain with their expensive banks, losing moneyevery year (Berg, 2008). The use of credit cards and expensive consumer loans build on consumers’ tendency to preferthe present to the future. And because of loss-aversion people buy expensive extended warranties offered by insurancecompanies for small appliances like cell phones (Thaler and Sunstein, 2008).
Behavioural economics demonstrates how consumer choices are influenced by sales promoting strategies. Price is acentral parameter when consumers are comparing products in markets. One technique used by some firms, is to frame thepresentation of prices in away thatmisleads and impedes consumers’ intentions to compare prices and qualities of differentproducts, e.g. airfare tickets, in a rational way. One recent framing that by its extensiveness seems to be quite profitable, isto sell three products for the price of two. This makes consumers buy lots of products they did not plan to buy and may notneed. The UK Office of Fair Trading warns against different pricing frames whereby the true price is covered and provided
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in a complex non-transparent way (Office of Fair Trading, 2010). Such framing misguides and manipulates consumers, andhinder those who want to compare products in an economic rational way before choosing.
4.3. Choice architecture
Choice architecture is themain tool of applied behavioural economics. Thaler and Sunstein’smain projectwith their book‘nudge’ is to make policy makers conscious about the strong framing effects, so that these can be utilised in policy to nudgecitizens tomake better choices. Choice architecture – or nudging by choice architecture – is (i) to apply the knowledge abouthow humans (not econs) make their decisions, and (ii) frame the choice situation in such a way that most people will makethe ‘right choices’.
Thaler and Sunstein (2008) do not advocate manipulation of people’s choices per se. Rather they stress the fact thatchoice architecture is always present, meaning that choices are always affected by their context in one way or another. And,as demonstrated by many behavioural economics experiments, people’s use of heuristics combined with human cognitivebiases and misperceptions, results in predictable, non-intended mistakes and fallacies. Such choices are neither beneficialfor individuals nor societies, hence consumers, citizens and people should be ‘nudged’ in more desirable ways.
Thaler and Sunstein (2008) give several convincing examples on howmandatory free choices (with non-conscious choicearchitecture) can result in unwanted results, like the example from public pension saving plans in Sweden: to financepart of their future public pensions, every participant who was then in the Swedish workforce (spring 2000) was told toform their own pension plan portfolios by selecting funds from a list. Participants were actively encouraged to choose theirown portfolios via an extensive advertising campaign. Firstly, it appeared that as many as two-thirds constructed their ownportfolios, only one third choose the default portfolio option. In 2006, however, when the newcomers on the labourmarketswere asked to choose their pension plan portfolios, there was no campaign. Then it was only 8% who constructed their ownportfolios by choosing funds from the approved list. Secondly, it appeared that the active choosers on average didworse thanthose sticking with the default option public pension plan constructed by public officials. Advocating freedom of choice, butneglecting that people are not econs, results in lots and lots of random and not reasonable choices. Still, Thaler and Sunstein(2008) do not recommend a pension fund where participants are given no choice at all. Rather they advocate saving planswhere participants who are not ready to make their own choices are ‘nudged’ by default options. This is consistent withtheir main idea of libertarian paternalism.
4.4. Libertarian paternalism
Some would say that the many results from behavioural economics experiments lead towards a strong need for marketsurveillance, simplification, standardisation and regulation. The field certainly challenges the conservative view that peopleare smart and able to make their own choices, hence need not, and should not, be regulated. Somewhat paradoxically then,we notice that conservative politicians embrace behavioural economics contributions. The reason for this odd coalitionis behavioural economics’ choice architecture solutions, which in many cases can substitute for sturdy governmentalregulation: according to Camerer et al. (2003), governmental application of choice architecture can be considered asasymmetrical paternalism, or soft regulation, that can be approved by conservatives. Public strategic choice architecture– with public preferred defaults options – will help consumers and citizens with bounded rationality to make choices inthe communities-, and/or their own, best interest, without preventing capable, informed consumers to make their own freeand reflected choices. One example of asymmetrical paternalistic regulation is information duty, e.g. to force firms to clearlystate the true cost of purchasing an item (Camerer et al., 2003).
Thaler and Sunstein’s (2008) term libertarian paternalism appears somewhat contradictory and even unappealing tomany. They argue that, if properly understood, the two terms are far more attractive together than alone. The libertarianaspect of the concept, they write, is that;
in general, people should be free to do what they like—and to opt out of undesirable arrangements if they want to do so.And they categorise a policy as paternalistic if; it tries to influence choices in a way that will make choosers better off, asjudged by themselves (Thaler and Sunstein, 2008, 5).
Libertarian paternalism can be understood as a policy that is likely to be accepted by both the promoters of free choice, aswell as the promoters of public regulations. The tool is consciously constructed choice architecture that nudges – but notforces – citizens to make the ‘right’ choices. Implicitly – considering the strength of choice architecture – this is a movetowards stronger political guidelines and community solutions.
5. Methods
It is often quite impressive how behavioural economists translate assumptions about humans’ cognitive perceptionsand choices into rather imaginary experimental set ups. The Invisible Gorilla experiment (Chabris and Simons referred inKahneman (2011)) shows – almost like a magic trick – how easily we are distracted. It is demonstrated that our limited
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attention budget implies that we often do not capture the whole picture – like missing a gorilla passing between basketballplayers – if we are distracted by counting how many times the ball passes between the players dressed in white.12
Many results are astonishing and convincing. Still, a sociological critique is that the experiments typically do not considerthat cognitive perceptions, judgements and decision makings are probably often affected by culture, class, gender and age,a.o. In the abovementioned gorilla-experiment, all participants did notmiss the passing gorilla. Interesting questions wouldbe: why did someone see the gorilla while others did not—and are there differences between demographic groups?
While a behavioural economist would try to disclose cognitive mechanisms affecting choices, a sociologist would try toobserve and explain how different choice patterns relate to societal phenomena and varies between groups. This differenceis manifested in different preferred methods:
Statistical generalisation Quantitative(iii) surveys(iv) register data analyses
Kvale (2006) distinguishes between analytical and statistical generalisations. While behavioural economics experimentsand sociological qualitative interviews make analytical generalisations based on few observations, quantitative surveysbased on large samples canmake quantitative generalisations, i.e. map or test the existence of a phenomenon ormechanism.While behavioural economics’ methodological focus is foremost at the individual level, the preferred approach in sociologyis to alternate between methods at individual and aggregate levels. A new field should be approached by the open mindedquestion:what is going on? Followed by a search for possiblemechanisms at the individual level, i.e. to generate hypotheses.Next step is to bring findings from the individual level to the societal level, i.e. generalise findings, searching for demographicpatterns and testing hypotheses by quantitative surveys or register data. Results from quantitative studies at aggregate levelcan also require further qualitative in-depth studies, i.e. return to the individual level.
It is somewhat problematic that results frombehavioural economics experiments are too often, too easily generalised andinterpreted as general human attributes. Students – that are frequently paid participants in the experiments – are probablynot always representative, hence such results should not be generalised to the whole population. Many experiments alsocount far too few participants. Small sample sizes also worry Kahneman himself, who – after experimenting with his fellowexpert colleagues – admits that it is not uncommon among psychologists to overestimate the reliability and validity ofresults based on small samples (Kahneman, 2011).
Another, often put forward, criticism is that the laboratory situation is artificial and that participants who know thatthey are under study might perform differently from what they would have done in real life situations. To such andrelated weaknesses regarding lack of representativeness, the field experiment is an answer. The field experiment bringsthe experiment from the laboratory out to the real world, where the participants are not aware that they take part in anexperiment. Gneezy and List (2006) wanted to test the labour market gift exchange hypothesis13 outside the laboratory, andin two different field experiments, students were hired to (a) computerise the holdings of a small library at the university,and (b) to take part in a door-to door fundraising drive to support a research centre. In both experiments the gift-treatmentgroup only performed better than the nongift-treatment group for a few hours. Therefore, foremost their higher salariesonly contributed to higher expenses for the employer.
The behavioural economists Sendhil Mullainathan and Eldar Shafir’s book Scarcity—Why having too little means so much(Mullainathan and Shafir, 2013) gives examples of creatively and meticulously designed field experiments based on realevents and real choices in the real world. One of their many observations and conclusions is that we are not econs, but poorpeople are more economic rational than others—because they need to (Mullainathan and Shafir, 2013). Another importantobservation is that scarcity (on money, time or friends) lead to ‘tunneling’, that lead to lower mental capability, that lead tounwise decisions.
So, if you want to understand the poor, imagine yourself with your mind elsewhere (Mullainathan and Shafir, 2013).
5.1. Methodological contributions
To sociologists, one important methodological contribution is that behavioural economics demonstrates quiteclearly probable fallacies in questionnaire- and interview-constructions. Cognitive biases can result in predictable (also
12 Several thousands have seen the video, and about each second did not notice the gorilla.13 Workers are assumed to respond to high wage levels by increasing their effort (positive reciprocity) and to low wage levels by decreasing their effort(negative reciprocity).
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intentionally) irregularities. Awareness of priming effects, anchoring etc., not to forget the fact that choice architecture isalways present, will help improve reliability and validity in questionnaire designs.
Behavioural economics experiments demonstrate that it is quite easy to influence choices bymanipulatingwhat is on thechooser’s mindwhen given the options. By offering simple cues, it is possible to ‘prime’ people into certain tracks of thinkingand behaving (Thaler and Sunstein, 2008). As an example, in an experimental survey among students, the correlationbetween the two questions: ‘How happy are you?’ and ‘How often are you dating?’ were 0.11 if asked in this order, but if thedating-question comes before the happy-question, the respondents tended to anchor and judge their feelings of happinessaccording to their success at the dating market and the correlation increased strongly to 0.62, (Strack, Martin and Schwartz1988, referred in Thaler and Sunstein (2008)).
In sociological methodological literature on questionnaire techniques, such ‘priming’ is called the ‘ordering effect’(Kornhauser and Sheatsley, 1959; Perreault, 1975). On one hand, it iswidely acknowledged that the ordering of the questionsin a questionnaire affects the answers. One solution to this problem has been to alternate randomly the succession ofquestions that are expected to influence each other, e.g. in question batteries. On the other hand, to get reflected answersit is also common to ask questions that will help the respondents reflect consciously about a topic before they get the corequestion. According to behavioural economics no questions escape the ordering effect. The challenge is tomake the orderingeffect increase validity and reliability by tuning the minds of the respondents to a reflective, but neutral stage. It is crucialto be conscious about the choice architecture when questionnaires are designed. Awareness of the choice architecture canalso help us in the study of institutions and how they work.
6. Discussion
For decades sociologists have tried to dethrone the rational man. From a sociological point of view the most importantcontribution from behavioural economists must therefore be their systematic and meticulous work contradicting the oldeconomic paradigm by disproving several presumptions of the rational, insensitive, long-term economic calculating man.However, even Kahneman (2011) recognises that the rational agent model and utility theory is still the most importantsocial science theory of today.
The successful diffusion of applied behavioural economics should also be given credits. Their contribution to a policychange from primarily focusing on market agents’ competition conditions to more emphasis on the consumer-citizensand their limitations will affect millions of consumers’ situations. One worrisome concern, however, is who will ultimatelybenefit the most from this new field of research. There is a danger that new knowledge from this field will be utilised morestrategically by professional marketing people, than by policy makers, communities and consumers.
6.1. Marketing by choice architecture
Today consumers across Europe are surrounded by promotional choice architectures from morning till bedtime. Weare constantly being nudged, tempted and influenced to buy more and more of products that we neither need nor want.One cannot open the newspapers, watch television, surf the web or use social media without being invaded by temptingcommercials offering products and services of all kinds. And more and more movies and television series are implementedwith hidden product ads. The shops are carefully designed according to behavioural economics experiments that provewhere consumers place their eyes, where they walk and where they pick their products, what attracts their attention, whatkind of smell, colours, music and text make them buy more. Consumers who do not have financials to pay for what they arenudged and tempted to buy, are offered consumer loans and credits at high, but hidden, interests. And a substantial numberof people – especially young adults – buy more than they can afford, with severe consequences (Brusdal and Berg, 2011).
Compared to earlier times, foods, clothes, furniture, technological devices and more, have been much cheaper. As anexample, in Norway in the fifties, one household spent about 40% of its income on foods. Today this percentage has decreasedto approximately 11% (Statistics Norway, 2012). It is a good thing that most European citizens can afford to choose whatthey need on the markets. However, if we admit that consumption has a problematic environmental side, it is relevant toargue that consumer goods today are too cheap. Too cheap consumer goods, combined with sophisticated marketing, makeus buy much more than we need—and sometimes more than we can afford of consumer goods and services.
The UK Office of Fair Trading (OFT) recognises that the old understanding on how markets work is challenged bybehavioural economics (OFT 2010). They also recognise that not only politicians, but firms and the supply side in general,can draw on this new insight. In other words, it is recognised that such knowledge itself – about how consumers make theirchoices – can reinforce firms’ efforts to manipulate consumer choices: [B]ehavioural economics has established the existenceof consumer biases, and added to our understanding of how these can be exacerbated by firms (OFT 2010).
6.2. Market complexity as a consumer problem
Thaler and Sunstein (2008) advocate freedom of choice, but they warn against maximising the number of choices: Themore choices you give people, the more help with decision making you need to provide (Thaler and Sunstein, 2008). Behavioural
230 L. Berg / Economic Analysis and Policy 44 (2014) 221–232
economics has demonstrated that choices are frequently based on emotional ‘fast thinking’ and influenced by behaviouralbiases. Today ‘human’ consumerswith their limited capacities are confrontedwith the complexity ofmodernmarkets,whichmake it easier for firms with the relevant knowledge to exploit and exacerbate consumes.
The Centre for Competition Policy in Norwich has been studying ways in which firms can exploit consumer behaviouralbiases, as well as questioning if policy interventions in the markets are recommendable or not (Mehta, 2013). Onemain problem confronting consumers today is modern markets’ complexity. Mehta and Sugden (2013) address ‘spuriouscomplexity’, meaning that firms sometimes can e.g. price their products, or present information about their prices, inunnecessarily complex ways. Instead of facilitating consumer choices, firms may find it profitable to obscure information,hide information in small print or provide too much irrelevant information, and by that impede comparison betweenproducts (Fatas and Lyons, 2013). Another fact is that new technology and internet commerce makes it easier for firmsto use complex pricing schemes. Today it is possible e.g. to vary the prices of seats on individual flights minute by minute,to charge passengers extra for seat-reservations, luggage and services, as well as to change fuel-prices several times a day(Mehta and Sugden, 2013).
Berg and Gornitzka (2012) have investigated one mechanism related to markets’ complexity coined as CADS (consumerattention deficit syndrome). Consumers do not have sufficient attention capacity to keep informed about all the marketsthey need to visit in their everyday lives. Since the nature of markets differ substantially consumers tend to specialise on afew consumer areas of similar nature, i.e. consumer areas that require similar consumer abilities and competences. Basedon survey data from three different years, it appears that most consumers in Norway suffer from CADS. Some master thefinancial markets, while suffering from CADS on the everyday markets, the technology markets as well as neglecting theethical markets. Others master the everyday markets, while suffering from CADS on many of the other markets. Differentkinds of CADS are overrepresented in different demographic groups, but there is no evidence that some groups are morevulnerable to the total amount of CADS than other groups. In other words, all consumers seem to be vulnerable, but ondifferent consumer areas.
6.3. Consumer practices as a market problem
CADS, of course, also affects the functioning of themarkets. And according to the results from the abovementioned study,all markets seem to be affected, but some more than others (Berg and Gornitzka, 2012). As an example, policymakers inseveral European countries have been concerned about the low levels of switching activity in the energymarkets.WaddamsPrice (2013) has shown in her studies that even among those who changed supplier in order to save money, many actuallyended up paying more. One policy solution mentioned byWaddams Price was to prevent complex pricing. However, earlierregulatory intervention in the UK resulted in reduced available switching gains for the consumers and the switching activitywent further down. Seen from a competition policy point of view, low switching is a problem for the functioning of thatmarket.
Fletcher (2013) argues that firms may want to soften competition to their own advantage, and one way is to increaseproduct and price complexity.When comparisons between products aremade difficult, consumerswill search less for betterproducts. She also explains how competition might result in not only low prices, but also – unintendedly – in low qualityproducts: experiments indicate that in complex choice situations it is easier for consumers to compare prices than qualities,and accordingly people tend to place more weight on price than on quality in their choices, eventually resulting in marketswith very low prices combined with sub-optimal quality, unfavourable for both consumers and firms (Fletcher, 2013).
Hviid (2013) addresses the paradox or dilemma between protecting versus informing consumers. While protection canresult in less active consumers, informing might not reach the attention of the consumers. The problem with marketswhere only some are willing to engage fully, is that intervention aimed at helping one group of consumers can have adetrimental effect on another group. A central question, Hviid states, is whether or not active consumers benefit thosewho are inactive, and if not, if it is possible to make interventions that support the vulnerable group without imposing anynegative externalities on the active consumers.
The existence of free competition is not always enough to guarantee an efficientmarket. Andneither do regulatorymarketinterventions. Fatas and Lyons (2013) explain how interventions not only change the behaviour of consumers, also firms’strategies change according to interventions aimed at protecting or empowering consumers. One shall not underestimatethe danger of the unintended consequences (Merton, 1936) of interventions. Harker and Mehta (2013) claim that theadvantage of public regulators’ intervention is increasingly difficult to prove. And they warn us that also regulators are‘human’ with their own biases, and may be manipulated by industries’ or their own private interests.
Still, it is sometimes difficult to see the advantages of ‘nudging’ by choice architecture compared to regulation. Forinstance; why construct public pension plans that require/allow people in the work force to choose between funds, whenapparently very few are sufficiently interested in, and capable of, doing so (Schjøll and Alfnes, 2013)? Why not make thedefault optionmandatory and save a lot of administration? In their book Thaler and Sunstein criticise the American financialsystem, e.g. how banks have slyly increased their profit from credit cards by reducing the period between the time one getsthe bill and the day the payment is due (Thaler and Sunstein, 2008).Whynot prohibit such choice architectures? Later in theirbook—after describing how increased complexity in the financial sector has contributed to the financial crisis, Thaler andSunstein do recommend some stricter regulation of the financial sector. Their main tool, however, is increased transparency
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and information combined with default options. They explicitly state that:
A potential response to complexity would be to require simplicity. . . but:.. to eliminate complexity is to stifle innovation. Abetter approach is to improve transparency and disclosure (Thaler and Sunstein, 2008, 259).
I do wonder if these behavioural economists still overestimate the ‘econ’-potentials in regular ‘humans’ whose attention,interests and practices are often directed far away from the economy.
7. Concluding remarks
How to influence consumer choices has been known by marketing people for many years. Private marketing agenciesstudy consumers’ behaviour to improve their own competitive advantages, and the results have often been keptwithin firms.Producers and providers of goods and services have used such knowledge for decades tomake consumers buy their products.The group calling themselves behavioural economists should be given the honour of making such knowledge availableto others than the supply side of the market forces. They deserve credit for presenting their theories, experiments, andexamples of applications to policy makers, social scientists and people in general, in compelling and popular presentationsand books (e.g. Thaler and Sunstein, 2008, Kahneman, 2011,Mullainathan and Shafir, 2013). The popularity of these theorieshas contributed to large interests within scientific communities, hence producing increasingly more knowledge about theweakness of human rationality.
Logically, the results of the advancements and growth in behavioural economics’ texts and knowledge can be twofold.On one hand policy makers can now take advantage of such knowledge, e.g. by ‘nudging’ citizens to desired and deserveddecisions in the best interests of the consumer, or by prohibiting known manipulative choice architectures in marketing.On the other hand it is reasonable to believe that producers and suppliers and their marketing departments will follow thedevelopment in this field closely, and perhaps be more keen and quick in applying such knowledge to ‘nudge’ consumers tochoose their products.
The main critique from this sociologist’s perspective is that the majority of behavioural economists do not ask themost interesting question: how are different groups of people affected by the choice mechanisms revealed by behaviouraleconomics? A natural follow-up from the new insights provided by behavioural economics is to distinguish and explain howdifferentmechanisms affect different demographic groups: whowill benefit andwhowill loose if we apply – or do not apply– different kinds of choice architectures? Will behavioural economics’ knowledge result in more exploitation of vulnerableconsumer groups? Or will vulnerable groups be ‘nudged’ towards ‘better choices’?
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