The textbook consumer is a calculating, hyper-rational type, always ready to strike a bargain that will maximise his or her wellbeing. But we all know the reality can be very different. We’re bamboozled by choice, we follow our emotions and we make purchases on a whim.
I canvassed some prominent Australian economists to find out what they consider are the biggest differences between those rational optimisers of traditional economics and the real-life behaviour of Australians. If these experts could shift one aspect of consumer behaviour to make us all better off, what would it be?
Don't settle for the status quo
Danielle Wood, an economist at the Grattan Institute, nominated our tendency to accept the way things are, a trait the experts call “status quo bias”.
This bias is especially strong with products that are difficult to compare like banks, utility providers and superannuation.
But our reluctance to switch means consumers “leave money on the table” every day, says Wood.
What’s more, providers take advantage of status quo bias by charging much higher prices to long-term customers and making products needlessly complex so switching seems hard and risky.
“I’m a big believer in competitive markets to produce better outcomes for consumers - lower prices and better and more innovative products,” says Wood. “But it’s clear that status quo bias - the reluctance of people to make changes - means sometimes competition doesn’t produce the best outcomes.”
Wood reckons we’d all be better off without status quo bias - it would make providers work a lot harder for their money. “Remember doing nothing is also a decision,” she says.
Traditional economic models assume buyers and sellers have “perfect knowledge” but for modern consumers, acquiring valuable, trustworthy information can be difficult.
Gigi Foster, an economist at the University of NSW, reckons consumers will be happier if they control the “mental effort” they devote to acquiring good information and guard against useless distractions. This is especially important when making big decisions or major purchases.
“If you are interested in buying a new house ... don’t get distracted by unrelated stuff you don’t really need,” says Forster. “Try to be more directed in how you acquire good information.”
While our mental attention is scarce, warns Foster, the stream of information coming from social media, television and newspapers makes it easy to get distracted by things that don’t add to our wellbeing.
“Treat your mental attention as a precious resource,” she says. “Don’t let it be washed over by all sorts of information that’s not really going to make you any happier.”
Time, money and happiness
Dean Pearson, National Australia Bank’s head of behavioural economics, thinks busy families need more time and should pay for it if necessary.
His research has shown feelings of time-pressure are a major drag on the wellbeing of Australians.
“In a busier and busier world the question is how do we claw back more time for the stuff we really want to do?” he said. Families would be happier if they spent more of their money to free-up time – maybe by outsourcing domestic work - and less money on purchasing things.
“You don’t have to be rich to do this,” says Pearson. “But money can buy happiness, provided you spend it on things that really make you happy.”
Another economist, Jim Stanford from the Australia Institute’s Centre for Future Work, drew attention to our tendency to undervalue time. Despite all the talk about people being “time-poor” we’re often willing to give a lot of time away for free.
This trait crops up in many ways from a willingness to drive long distances to save a few dollars at the petrol pump to spending precious leisure hours assembling furniture purchased in a flat-pack.
Valuing our time is likely to become an even bigger challenge as new technologies and forms of employment blur the boundaries between leisure time, voluntary work and paid work.
Stanford warns the less astute we are at valuing our time, the easier it will be for employers and even governments to “steal it”.
Think about the long-term
Andrew Leigh, an economics professor turned federal Labor MP, singled out the tendency for people to put off making healthy choices.
He cites an experiment in which people were asked to choose between a chocolate bar and a piece of fruit, to be collected in a week’s time. Half the participants chose fruit at the outset but two-thirds of them switched to junk food when it came time to pick up the food.
This trade-off - known by behavioural economists as “hyperbolic discounting” - suggests government policies which constrain our choices can make us much better off over a lifetime, health being a prime example. Preventive health is largely about making decisions today whose effects come much later,” he says.
Another economist, Saul Eslake, says this kind of “short-termism” also undermines financial wellbeing. A prime example is the costly but widespread practice of paying only the “minimum repayment” each month on credit card debt.
Beware our housing blind spot
Veteran business economist Chris Richardson is struck by Australia’s obsession with housing and the belief that it will deliver endless capital gains.
“There is a lack of rationality around those expectations,” he said. “It’s been something of a magic pudding view of wealth creation and I don’t think it's one that does Australia any favours.”
Australia’s property fixation has encouraged politicians to adopt some questionable policies. Richardson is especially critical of first home buyer grants. While he acknowledges residential property has often been a good investment in the past, Richardson fears we will have to “learn the hard way” that housing is not always a wealth elevator.