For the first time in my life, I need to do my own grocery shopping. So at least once a week you'll find me (along with my wife) at Aldi or Schnuck's, getting groceries for the week. The both of us being students we try and maintain some kind of budget, which has lead to me being more aware of how much we pay for some of our items.
Namely, what I've noticed is that many items cost twice as much at Schnuck's, then at Aldi, and yet - I still shop at Schnuck's, even if it does cost more. But I comforted myself, saying "Jake, the only reason you would pay twice as much would be if it's twice as good". This left me content after a while, but eventually, I found myself wondering - why do I buy what I buy?
At one point, economists thought that we bought what we did because it was the most rational decision, but the emerging science of Behavioral Economics has changed all that.
It seems that part of our decision is based on our budget. In essence, what we buy will fill how much money we've decided to use for buying something. Confusing? Let me try and explain, if my milk budget is $10 a month, then I have no problem spending all $10, even if I could get away with only spending $5 a month if I shopped at Aldi's.
Shopping at Aldi's would be the smarter choice, I would have an extra $5 to spend on cookies or something, but my spending on milk has expanded to fill all $10 a month, leaving me without any extra cookie-buying money.
This idea was demonstrated by Richard Thaler, who just recently won the Nobel prize in Economics, or as it's technically called "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" (the reason for the weird name is a story for another day).
He, along with other behavioral economists, has been reshaping how we see consumer behavior, even down to why I spend more than I should on milk and cookies. Thaler's work is surprisingly easy to read. He likes to use easily repeatable demonstrations, and his work is worth looking into. If you want to read something he wrote, here's a New York Times article he wrote.
One popular demonstration of his he often did with his students while he was a professor at Cornell. He would pick a student and tell them they would remain anonymous, and that he would pick another student, and the two of them would split $100, student 1 would decide how much each would get. Now think to yourself, how much would you share with the other person? Would you want all of it, they would have no idea you took all their potential money, you're anynomous. Or would you split it 50-50? Thaler found most people want to split it 50-50. Surprised? Most economists were too, "fairness" isn't rational. Here Thaler showed that we use more than just rationality to decide how to use our money.
He later expanded this experiment where the second student could reject the amount offered to them, but if they did reject it then no one would receive any money. Traditional economists would say that as long as they received some money anyone would accept, but the less they were offered the more likely they were to refect the money. Think about that, even though they would get a free $20, they turned it down because someone else would (unfairly) receive $80.
What do you think of this? Are people too irrational? Or would you reject $49 because of your sense of justice? If you want to read more about his work here is a Vox article I looked to for writing this post.
it's worth looking into why you've decided to buy what you buy, I know in at least my life it's meant some extra spending money for cookies along with my milk.