Consumerism and Behavioural Economics: Analytical Essay

In this discussion I am going to explore how behavioural economics can explain some of the drivers of consumerism, I will apply different theories and ideas, assessing to what extent they affect the ever-increasing levels of consumerism. Whilst doing this I will give examples and explain my reasoning for the judgment I come to on each of the areas I have chosen to cover. Furthermore, I will link these drivers to the impacts of consumerism on consumers and Earth as a whole. During the research, I focused on three different ways in which a consumer's decision-making could be affected and thus lead them to contribute to consumerism, these are:

1. The effect of culture and social interactions on consumer behaviour.
2. The effect and cause of everyday irrational behaviour.
3. How firms take advantage of behavioural economics to increase consumption.
4. The effect and cause of everyday irrational behaviour

Irrational Behaviour

Humans are not only irrational but predictably irrational, or so Ariely 2008 says. Behavioural economics, unlike the field of classical economics where decision-making is completely based on cold-headed logic, allows for irrational behaviour and attempts to understand what causes this behaviour. Irrational behaviour is a term used for when consumers, producers and governments don't maximise utility, profit and social welfare respectively. In this discussion, the focus will be on consumers and how their decisions on a day-to-day bias cause consumerism and the overconsumption of goods. Before going in-depth into the different causes of irrational behaviour and their subsequent effects, it is important to understand the idea that an irrational decision is subjective as it ‘depends on what individuals’ value most' Pettinger 2007. For instance, non-profit maximising behaviour may give more satisfaction and therefore be completely rational.

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Cognitive Biases

Arguably the most common cause of irrational behaviour is cognitive bias, which is a flaw in consumer reasoning which leads them to misinterpret information which causes them to come to an inaccurate conclusion. This occurs because, over time, each of a consumer's life experiences is processed by the ‘complex cognitive machine’ Stanborough 2020 which scrutinizes information before making a decision. Over time a consumer's brain will learn to focus on different pieces of information more and thus develop different kinds of biases. I believe this can be applied as some of the 175 catalogued cognitive biases could cause consumers to buy too much of a good or a good unnecessarily. One such example is the ‘Endowment Effect’ where once people own something they irrationally overvalue it, regarding its objective value. I believe that it could cause consumers to purchase greater quantities of goods that they are already in possession of, as they believe the value is greater than what is being asked of by a producer. The ‘Wealth Effect’ on the other hand is where consumers have higher animal spirits as their assets have a large value. They don't necessarily have more money but they feel more inclined to spend as they have greater wealth. Both of these effects could cause a consumer to be more inclined to spend on things they don't need. This point accentuates one of the impacts of consumerism which is how consumerism tends to cause greater amounts of dept which is mentioned in Novotney 2008 when talking about America's consumerism. However, the evaluation to the Endowment and Wealth effect is that not all consumers do this, this argument is subjective as no one has had the same exact life experience and thus everyone has different cognitive biases. Overall, I believe that cognitive biases are a component of how behaviour economics explains why consumerism takes place.

Pressures and Decision Fatigue

Another cause of irritation in consumer behaviour worth mentioning is consumer pressure. This is the idea that consumers make very different decisions when under pressures like time, the consumer doesn't have the time to come to the best conclusion and thus could cause them to unnecessarily buy more than they need. Similarly, decision fatigue also causes consumers to think less and possibly buy more. The term was defined by Roy F Baumeister who describes it as the ‘deteriorating quality of decisions made by an individual after continuously making decisions’ Cummings 2016. The final of the four effects of decision fatigue that is explained in Agarwal 2017 is that is causes ‘Impaired self-regulation’ which is a consumer's ability for self-control against impulses decreases. For instance, research explained in Agarwal 2017 shows that decisions that Judges make are extremely influenced by how long in the day it has been since their last break. However, when linking this to consumerism and the increased quantity of goods consumed it is important to be aware that decision fatigue can also cause decision avoidance and thus reduce consumerism. I believe that both time and fatigue cause consumers to act irrationally by causing them to partake in more impulse purchasing thus adding to consumerism, although they are not the reason consumerism exists as these theories would have affected humans before the boom of consumerism in the 1920s.

The effect of culture and social interactions on consumer behaviour

Culture

During this section of the discussion, I will explore two influences of consumer behaviour; Culture and upbringing; Social Interactions. The first of which is Culture and upbringing. The ideas explored in Williams 2019 highlight how different cultural behaviours influence what is bought, in what quantity and who buys it. Factors such as household size and the role of women managing the household have huge impacts on what is bought on a day-to-day basis. For instance, Indian consumerism tends to be more family orientated than western ones. Whilst exploring this more I found there were too many factors that cause the differences in cultural behaviours from upbringing to economic stability, thus it is difficult to pinpoint which factors cause different behaviours. Additionally, the main issue with the argument, that culture changes decisions, is that human personalities vary between each person, this variety encompasses the extent to which each consumer takes on board the particular influences of their culture. Using the example stated before, just because Indian consumers tend to be more family orientated doesn't mean there aren't Indian consumers who make highly individualistic purchasing decisions or on the other-hand western ones that think collectively.

Changing Culture and Globalisation

Additionally, I believe that the rise in consumerism can be attributed to both changes in culture over time and globalisation. For instance, the role of women in the household has changed over the century significantly, I mention this as now both men and women are now more at risk from decision fatigue and time pressure as both genders work the same amount. As the world develops further and further people are faced with more decisions each day from during work to shopping after it. This could cause consumers to generally consume more as they are making more decisions collectively and therefore partaking in more impulse buying. In addition, globalisation also causes increased consumerism as it changed the culture of less developed places, making those people enter the consumer class. As highlighted in Mayell 2004 globalisation causes ‘Items that at one point in time were considered luxuries are now seen as necessities.' This shows how globalisation causes consumers in developing countries to have new ideologies which are more similar to western ones, causing them to partake in consumerism. This in itself wouldn’t be behavioural economics, but over time these people who are adopting different ideas and goods from across the world create new biases. They also will be faced with more decisions as different goods and services will become available due to globalisation, causing greater decision fatigue.

Conspicuous Consumer

A different kind of behaviour which could cause consumerism is the ‘Conspicuous Consumer’ which Thorstein Veblen describes as the practice by consumers of using goods of high quality or in greater quantity than might be considered necessary. This in itself isn't irrational as the purpose of buying the goods is to display status and prestige amongst the ‘Leisure Class’. However, this isn't just done in the Leisure Class but with people from different classes. It becomes irrational and therefore falls under behavioural economics when a consumer from a poorer background is a conspicuous consumer and thus this spending may not be in their best interest. I believe this would contribute heavily to consumerism it is commonplace and is part of the culture of wealthy countries.

Social Interactions

Social interactions form the basis of everyday life, these different interactions cause consumers to act in a way they wouldn't have without the interaction. For example, the idea of social proof is widely mentioned in the literature surrounding irrational behaviour. Cialdini 1984 has a chapter that talks about social proof detailing how consumers use the behaviour of people around them to determine how to behave. Though, this book concentrates on how to influence consumers and therefore is mostly not applicable to this section of the research. An interesting study explained by Zimmerman 2015 shows how social proof can cause increased consumption without the interference of those selling it. Pedro M Gardete's study explored social effect, which is when a consumer's behaviour is influenced by the behaviour of others around them. He focused on the sale of goods on aeroplanes, finding that when you see someone near you make a purchase you are 30% more likely to buy something yourself. ‘Even though they’ve already bought something to eat or watched the movie, they remain extremely open to social influence, more so than someone who has bought only from social influence in the first place,' Gaudete says. This research can be applied to all facet's consumption, making people go into stores or buy goods just because they see someone else doing so. Using this, I reached the conclusion that social proof explains the second cause of consumerism which is mentioned in Reichert 2017 which is Social causes.

Social Media

The final factor which is imperative to this section is social media, I personally believe a large amount of the points previously mentioned are exaggerated by it. The digital revolution in the 2000s meant that people were able to share their beliefs and what they do to a greater number of other people. The Digital Age 2018 explains how an individual's decisions can be impacted by another person through either a message or a post about a product or firm online. Social media allows social proof to happen online, it is so influential as before the digital revolution a consumer would have to see the consumption or purchase of a good in the moment it happened to be influenced. But with social media, the social proof is preserved in time and thus affects a greater amount of people. Likewise, another important way in which social media can cause consumerism is when consumers using social media get a glimpse into other consumers' consumption-filled lifestyles, causing them to believe that this is the social norm and therefore partake in excessive consumption themselves, even if they are not in the situation where it is rational. Arguably social media has become part of the culture in a great number of developed countries, which could explain the rise in consumerism as more people are now affected by the social effect. The only issue with this argument is that not all consumers have social media or are affected by it, however, the number of people that are affected is ever-increasing. Taking all this into account, I have come to the conclusion that culture and social interactions are two of the main drivers for the world's rising levels of consumerism.

How do Firms use behavioural economics to their advantage?

Applying Social Proof

The final area under consideration is how firms use these different causes of irrational behaviour to increase the consumption of their goods, contributing to consumerism. Cialdini 1984 believed that there are various psychological tactics which are used by different types of compliance practitioners, one of which is the previously mentioned social proof. An example of a firm using social proof to encourage the purchase of goods is when auction houses plan for people in the crowd of auctions to bid on items to encourage others to also do so, although this itself isn't consumerism it gives a good example of how consumers are manipulated by firms. However, even though Cialdini 1984 gives a lot of different examples of social proof being used by sales practitioners, a lot of them are very niche scenarios and not many of them link to the idea of consumerism and that more is better. This could be because the book was released in 1984 and doesn't encompass new methods of increasing consumption which are now utilised by firms now. One example of how modern firms use social proof mentioned in Digital Age 2018 is paying influencers to promote their goods. When these influential people promote these goods, their followers think that as this influencer is promoting it, they should purchase it. Thus, exploiting consumers by using the social proof of the people they look up to, would have an increased affect as the ‘social effect’ study in Zimmerman 2015 is done with strangers, not people they have connections with.

Nudge and Sludge

The next point is based off Thaler 2008, Thaler describes a nudge as a small action you can use to better your day-to-day life, inversely a ‘Sludge’ is used to increase consumer spending. Edwin 2018 describes a ‘Sludge’ as where firms use ‘Nudging’ to unnecessarily increase consumer spending, a prime example of this is when either junk food or more unnecessary goods are placed near checkouts to drive impulse buying and increase consumption. Furthermore, limited-time offers could be used to create urgency as consumers do not want to miss out of the offer, causing them buy it. This is further demonstrated by Sit 2020 who uses the example of sales shopping and how even if the sale doesn't change the actual price of the good, consumers believe they are getting a bargain due to the ‘sale’ making them more likely to buy it. Going back to the changing culture in recent years, the ever-increasing number of online sales annually means more goods are being bought and shipped but also returned, in the US returns produce around 2.27 million tonnes of landfill waste a year. Furthermore, as the average room size is shrinking but the amount of goods we consume is increasing, consequently the amount we throw away therefore also increases. This has a huge impact on the environment as landfill sites are increasing in size at a greater rate every year. In conclusion nudge and different types of sales, such as BOGOFs (buy one get one free), can cause an increase in the amount consumers buy greatly, contributing to consumerism.

Advertising

Another way that firms can further increase consumption is through advertising, Higgs 2021 explained how both radio and TV adverts where both extremely influential in causing consumerism. 'Goods that were portrayed to be fashionable which cause more people to want them, even if they didn't need it' Higgs 2021. This point links to the idea that globalisation turns wants to needs as advertising does just that. In order to sell their mass-produced goods, firms use advertising to lure buyers into seeing the necessity of the product, ‘The game is to make them (goods) the necessities of all the classes’ said Vance Packard in Higgs 2021. Furthermore, the greater issue with advertising is that it positively projects products, causing information failure as the consumer overvalues the product as they only know about the positives, making them more likely to buy it. Finally, the link with behaviour economics, advertising uses psychology to influence consumers' behaviour, the constant bombardment of advertising affects consumers in ways we are not yet aware of. ‘Advertisers insinuate themselves by exploiting basic human desires like friendship, happiness and success.'- Greenpeace, fashion at the Crossroads. Overall, I believe that advertising is the greatest cause of consumerism among the researched material. It brings together all of the previously mentioned ideas and theories, acting like a catalyst for the worlds ever-increasing levels of consumers, and with that, the ever-growing detrimental impacts to the environment and our idea of society as we know it.