Dan ArielyBack to OpinionDan Ariely

Sure, we’re thrifty now, but what about when the economy improves?

Work hours slashed. A spouse laid off. The family funds gone with Bernie Madoff.

For one reason or another, the recession has forced most of us to take a long, hard look at our budget and give our spending habits a good old overhaul. And that hasn’t been all bad. Surveys show that we’re saving more, “sleep shopping” less and are newly preoccupied with getting a bang for our buck.

But how long will these new habits last? Are they permanent, or will we go back to our old ways when the economy recovers?

The answer from behavioral economics is: while they may not be permanent, these changes are here for the long haul. As it turns out, we truly are creatures of habit. We pick a pattern of behavior and, without thinking too much about its wisdom, we stick to it. We go back and rethink this habit only when we have a very good reason to change our ways.

A recessionary blow to our cash flow is reason enough to examine and change our habits; a slow financial improvement (which is most likely how the financial recovery will look) isn’t. That’s why new consumer patterns have emerged since the housing market collapsed, and why they’ll remain long after we finally dig ourselves out of this recession.

Think back to the ups and downs of gas prices in recent years. Until not too long ago, we were accustomed to overvaluing pricey, mammoth gas-guzzlers. Even as gas prices rose over time – from $2.50 a gallon to $2.90 and to $3.80 – we continued to buy the same kinds of cars. But once gas prices hit the $4 mark, suddenly we cried out in outrage and began switching over to smaller autos and hybrids.

Though prices had been on a consistent increase, it took a nice round ominous number like $4 to scare us into rethinking our consumption. And what about later when the price of gas went down? Did we start purchasing large cars again? No! We stayed with our new habit of looking for smaller and more efficient cars (at least this is what my friends at Ford tell me).

Let me give you another example. Through a clever popcorn study, Brian Wansink (author of the wonderful book “Mindless Eating”) found that we’re so used to munching on popcorn in theaters that we’ll scarf down handfuls even if it’s stale. In his studies, moviegoers ate the same number of kernels, irrespective of whether the popcorn was fresh or two weeks old.

Why are we such creatures of habit?

Because it’s easy. Actually going through the process of making decisions, however minor, involves a labyrinth of complex computations. The decision to pop into Starbucks and get our usual is simple, but a step-by-step weighing of factors — like whether Starbucks coffee is worth the price (Or should I go with Dunkin’ Donuts? Or maybe get the free coffee in the office?), whether the cappuccino or the latte is a better value, and whether we’ll enjoy the brew as much as we think — is complicated.

Our minds aren’t adequately equipped for this kind of reasoning, so we tend to skip the struggle and opt for the simple approach of sticking to our habits. We think: “Well, I did this yesterday, and I was happy with the decision, so it must be a good idea.”

It’s only in times of crisis that we ask ourselves, “Wait a minute, what am I doing?” And then we pause, examine all the factors, and come up with a new method. This is just what consumers did following the burst of the financial bubble.

To look closer at this process of habit formation and stickiness, Drazen Prelec, George Loewenstein and I did a few experiments (described in much more detail in my first book, “Predictably Irrational”). We had MBA students write down the last two digits of their Social Security number (mine are 79) and then asked them whether they would pay that amount in dollars ($79 in my case) for, say, a 1998 bottle of Côtes du Rhône. We then asked them to write down the maximum amount they’d be willing to pay.

Our results? The mere mention of the last two digits of their Social Security number influenced how much they were willing to spend on the wine. Students with numbers ending in the upper 20 percent (from 80 to 99) placed bids that were 216 to 346 percent higher than bids from students with numbers in the lowest 20 percent (1 to 20). What’s more, this effect carried over to subsequent choices the participants made about related products.

In real life, people don’t think about the last two digits of their Social Security number but fixate instead on “anchors” that are the price tags: If you buy a sofa for $2,000, or seriously contemplate doing so, from then on, in future sofa shopping trips, you’ll start thinking about a value of sofas by comparing them to this $2,000 price range. Like a bungee cord, the original anchor will pull you back to your starting point. In other words, while an initial anchor is often arbitrary, once established in our minds, it consistently influences our future decisions.

So: Our habits are based on our past decisions. Our habits can be formed from a random or arbitrary starting point. And once we start on a habit path, we don’t readily change.  So, get used to your new Scrooge ways, and to the new habits of the people around you, because these habits are here to stay, at least for a while.

More of Dan Ariely’s writing can be found at Predictably Irrational.

 

Comments

  • Colin

    I hate to say it, but everything about this seems to be a bit of a white whine.

    While the study has some interest, the examples presented are alienating. I don’t find anything here I can relate with, and I’m probably one of the luckier people in this recession. If your worst problems are that you lost funds to Bernie Madoff (I hope that intro was supposed to be tongue-in-cheek) and can no longer casually spend nearly 100 dollars on wine or purchase a 2000 dollar sofa, I’m not sure that really qualifies as you as a person that is part of a population that is truly being hurt by the recession. With those concerns, you’re probably still in a top percentage of earners. I’m a little sad to see so many words here devoted to the luxury market.

  • DensityDuck

    I was watching “The Price Is Right” the other day, and it’s kind of funny to see everyone guess a number close to the first guess, even when the first guess is laughably and OBVIOUSLY wrong. No, a boat does not cost a thousand dollars, but the bids are $1000, $1100, $1300, and $1301…