The Australian offices of Frontier Economics will be closed from 5pm Monday 24 December 2018 and will re-open at 9am on Wednesday 2 January 2019.
The Singapore office of Frontier Economics will be closed for the public holidays of Tuesday 25 December 2018 and Tuesday 1 January 2019.
We wish you all a Merry Christmas and hope you enjoy the festivities of the holiday season.
On Wednesday 7 November 2018, Frontier Economics is co-hosting a seminar with the Melbourne School of Government at the University of Melbourne. Gus O'Donnell, Chairman of Frontier Economics Ltd (our sister company headquartered in the UK) will be presenting a public seminar on "Changing Behaviour in the Public and Private Sectors".
This seminar looks at the challenges in applying behavioural insights to alter behaviour in both the public and private sectors.
Gus O'Donnell served three Prime Ministers as the UK’s Cabinet Secretary and head of the British Civil Service between 2005 and 2011. After stepping down as Cabinet Secretary, he was made a life peer of the House of Lords. He has held senior roles at the UK Treasury (including as Permanent Secretary of the Treasury between 2002 and 2005), the British Embassy in Washington, International Monetary Fund and the World Bank. Before joining the British Civil Service in 1979, Gus was a lecturer in economics at the University of Glasgow. He has written and spoken extensively on the use of behavioural economics in policymaking.
Date: Wednesday 7 November
Time: 1.00 - 2.15 pm, followed by light lunch
Venue: Terrace Lounge, Melbourne School of Government, Walter Boas Building
Enquiries: msog-events@unimelb.edu.au
The New South Wales Independent Pricing and Regulatory Tribunal (IPART) has released the results of its 2015 Household Survey. This was the seventh household survey since 1993 about energy and water consumption across 4,000 houses in New South Wales. The survey was undertaken by Roy Morgan Research in the Sydney, Gosford, Hunter, the Riverina, and the North Coast regions. It obtained information regarding each household’s demographics, appliance stock, how they used energy and water, and a number of other characteristics related to energy and water consumption. Roy Morgan also collected information from network providers on the household’s electricity, gas and water consumption.
IPART regulates aspects of the water and energy sector across NSW. For example, it determines the maximum prices that can be charged for bulk and retail water services provided by major water utilities across NSW and sets the maximum prices gas retailers can charge customers who have not signed a market contact. It also recommends a benchmark range for unsubsidised solar feed-in tariffs that retailers may voluntarily offer customers, and has a role in monitoring competition in the retail electricity market. A sound understanding of the nature of water and energy usage across different households helps to provide a context for its decisions.
Frontier (Asia-Pacific) was engaged by IPART to use the survey data to investigate the determinants of the levels and patterns of household energy and water consumption in NSW. Frontier used a range of analytical tools, including econometric regression analysis and behavioural insights, to investigate the drivers of energy and water consumption, as well as the underlying relationships between total energy consumption and a range of social and economic characteristics. Understanding these relationships is critical in informing energy decision-making.
Most people have bought products on an impulse that they did not need – the new gadgets in the kitchen cupboards, the exercise equipment in the garage or the unworn clothes in the wardrobe. Often it is easy to see why a product does not get used, but why do people buy these things in the first place? In this email we explore five ways in which the unconscious mind can trigger unwanted purchases.
The unconscious mind affects the behaviour of consumers: under the influence of basic evolutionary drives and the marketing tactics that play on them, it’s easy to feel compelled to buy something that later does not get used. People do not tend to remember their bad purchase decisions. Like a gambler who only remembers the wins, the feel-good buzz that comes from spontaneously buying something that turns out to be a great buy leaves a much greater impression in people’s memories than the product that was bought in the same way but never used.
So what’s going on inside consumers’ heads when they buy on impulse?
The simplest explanation is that some people just derive an enormous amount of pleasure – or utility – from acquiring something new. And since consumers not only pay for the product, but also for the pleasure they experience from the purchase, an economist could argue that it is still worth its price – even if it never gets used. But why do people value new things more highly in the first place? The explanation could be traced back to consumers’ childhoods. Children are often conditioned by their parents to feel good about something new being handed to them. Looking back a couple of generations ago makes clear why this was an understandable sentiment. But if consumers indulge themselves (or their children) too often, novelty becomes the goal and potentially more important than the actual value of the product.
If consumers indulge themselves (or their children) too often, novelty becomes the goal.
Buying a product on discount rather than for its full price makes obvious economic sense. However, discounts only save consumers money if they would have bought the product anyway.
Retailers have learned that consumers are very susceptible to the loss aversion switch – the innate concern to avoid feeling bad in the future. A discount that won’t last forever switches the unconscious focus to the fear of missing out on a deal. It may feel like saving money but consumers often fail to see that the discount was the reason that made them buy the product in the first place
Consumers do not have the time or means to make their purchase decisions in an economically rational way. They would need to cross-reference every product with every other product available in the market on price, product composition, reviews and maybe even the quality of customer service supporting it. Even if all the information was available in comparable formats it would take hours to buy even a cup of coffee.
People use heuristics – unconsciously held rules of thumb – that help make quick decisions.
So instead people use heuristics – unconsciously held rules of thumb – that help make quick decisions that generally work out well. Consumers may have learned that bigger packages are generally better value than smaller ones – and trust this heuristic rather than compare prices. Retailers can play on these heuristics by packaging up products as bulk buys, or including ‘free’ extras. Heuristics tell the consumer that these deals must be good value, and so they go with their feeling rather than researching any further.
A susceptibility to ‘value’ and apparent discounts isn’t just down to the loss aversion switch; many people have an innate desire to save. Marketing messages often focus on how much money consumers could save by buying and using a product. Thousands of years ago, knowing that it was important to store up food and wood for the winter would be the difference between life and death. These days, most people in this part of the world no longer need to worry about their day-to-day survival, but the evolutionary drive remains.
While saving can be the economically rational thing to do if the discounted future value of money or time is higher than today’s value, the strong psychological drive to save can cause consumers to react to the idea of saving even if it is not beneficial to them.
Finally, we have a psychological bias towards optimism. Most people believe themselves to be better than average looking, better than average drivers, better than average parents… Clearly, they can’t all be right.
... they may think they will start to exercise if they buy that new Ab-Toner.
Rather than look back and evaluate past actions, people tend to look to the future with an idealised view of what it might be like. They may think they will start to exercise if they buy that new Ab-Toner and start cooking grand dinners if they buy the latest kitchen gadget. In reality, they are likely to be deluding themselves.
Ultimately, there is little doubt that retailers can take advantage of the role the unconscious mind plays in shaping our behaviour. However, if consumers come to learn that they are being taken advantage of in an unfair way, the risk is that a new heuristic is formed… “Don’t trust retailer X”.
It’s easier to think of economists as the prophets of trading doom than as Santa’s little helpers – too busy telling everybody what’s happening to productivity, energy demand and like-for-like sales to provide any insights into the annual exchange of goodwill and good-or-ill gifts to family and friends. So Frontier Economics has been scouring the academic literature of behavioural economics for tips to make that last struggle with your present list a little easier…
With so much, for retailers, hanging on their Christmas trade, it’s not surprising that economists have been attempting to analyse present-giving for years. Most of the research, however, has a narrow, distinctly Scrooge-like tone to it (maybe too much of it was conducted by analysts soured by their annual quota of socks). So what follows is an attempt to elicit slightly more seasonal cheer – and even a little buyers’ guidance – from the available stock of behavioural economics and consumer psychology.
Present buying isn’t easy. Ideally, we would give something whose value to the recipient is greater than its cost, having found something original and beautiful that surprises and delights. But the risk is that the value to the recipient is actually lower than the cost: it’s just not something he or she wanted. Joel Waldfogel, an academic who has researched this “deadweight loss”, estimates that at least 10% and maybe over 30% of the total value of present exchanges is wasted. Of course being given something is nice, but (except for the weird and wonderful offerings from our children) we don’t really think “it’s the thought that counts”.
So as you compile your present list, how should you deal with deadweight risk? Take it as part of the friction costs of Christmas, like traffic queues and indigestion? Or be a bit more disciplined? You could, for example, decide that:
So far, so (relatively) simple. But behavioural economics offers some more sophisticated insights into giving strategies. Here are a few examples:
So how much of this have you already got right this year? Research tells us that women tend to plan and buy their presents earlier than men and that parents tend to buy earlier than those without children. Married, middle-aged, men are the worst planners. The chart below illustrates something everyone except such men seems to know: buying early can reduce both congestion costs and risks.
The sleigh curve Christmas risk relationship
So why do the laggards wait? Late shoppers often claim they simply misjudged how much time it would take to compile their present lists, but it’s hard to square that with the repeat nature of Christmas. More likely explanations provided by behavioural economics are that late shoppers fail to remember how poor some of their choices were last year (the so-called rosy retrospection effect) or simply loathe shopping and suffer from the “ostrich effect”. Not, of course, to be confused with the turkey effect that comes only days – or even hours – later…
Game theory, one of the great advances in economics over the past 30 years, also offers some tips for a successful Christmas. Watch out for:
Like – we hope – this bulletin. A Happy Christmas, giving and receiving, and a peaceful and prosperous New Year to our friends, clients and collaborators from all of us at Frontier Economics.DOWNLOAD FULL PUBLICATION
