Behavioural economics upside-down: Unraveling the complexities

A few years ago, when Richard Thaler won the Nobel Prize in Economics, many were astonished. This was because the subject of Thaler's research was a fascinating and somewhat unconventional one in the field of economics. He delved into the realm of behavioral economics, and eventually, he was awarded the prestigious Nobel Prize for his contributions. His research topic was behavioural economics. Richard Thaler's research focused on how fluctuations in the price of a product in the market affects the behaviour of the consumer and controls his purchase demand. Economists were shaken after Richard Thaler won the Nobel Prize for his research on behavioural economics. Even those who previously did not feel the need to pay any attention to this matter began to think anew. The issue also sparked new thinking among Third World economists.

Behavioural economists mainly discuss how changes in market prices affect consumer behavior. When the price of a particular product suddenly increases in the market, consumers search for similar substitute products. He wants to get products that can be purchased within his budget. Or he tries to satisfy his demand by buying less quantity of the same product than before. Or, they may contract their demand due to budget constraints. In the context of product purchases, market prices play an exceedingly crucial role.

The natural inclination of a consumer is to always seek a comparatively advantageous price for a product of similar quality. When two shops in the market have similar products from the same brand side by side, the consumer will undoubtedly opt to purchase the product from the shop where it is available at a lower price. This is the typical behavior of consumers. Any exception to this norm is rare. Regardless of the social stratum from which the consumer comes, they will always prefer to acquire the product with a comparatively lower price. Product prices influence a consumer's psychological state and affect how they expedite the decision-making process. Behavioral economics works towards expediting this decision-making process.

Consumer surplus theory involves the concept that a consumer, before making a purchase decision in the market for a specific product or service, mentally prepares to expend a certain amount of money. To undertake this preparation he has to bear the cost of spending money. If he can buy the desired item in the market at a cost less than what he was mentally prepared to buy, then the emotional gratification or satisfaction he gets is consumer surplus. I think a person goes to the market with mental and financial preparation to buy a dozen or 12 eggs for Tk 150. However, upon reaching the market, he saw that a dozen eggs were being sold for Tk 100 and he would get some kind of mental relief. his relief is the relief of spending less money than expected. However, in the current market situation, there is no opportunity for consumer surplus. Rather, consumers are constantly suffering from consumer deficit. You have to buy the product at a much higher price than what you go to the market to buy the product at. Going to the market and purchasing a product at a price higher than expected can create a certain kind of pressure on the consumer. It may affect the consumer's mood negatively, leading to a potential deterioration in their demeanor. This negative mood might manifest externally through the consumer's behavior. If a consumer in the market can purchase a product at a price lower than his expected budget, then he may tend to buy more of the product. Therefore, it is said that consumer surplus gives emotional relief to the consumer. He gets a kind of emotional satisfaction and stimulation. This enthusiasm can encourage them to purchase the described product in larger quantities.

Many say, 'Money is the root of all evil', but this proverb is not true at all because the world is stagnant without money. Whoever has more money needs more money. Our lives do not function for even a single day without money. There is nothing in the world as powerful as money. The harder it is to earn money, the more difficult it is to spend it properly. One of the purposes of spending money is to ensure people's happiness and peace. Some find ways to earn more money by spending money. But the task is not very easy. There are many examples where many have become penniless while spending money or investing to earn more money.

Spending money can lead to entrepreneurship. But not everyone can be an entrepreneur. Being an entrepreneur requires certain qualities, which not everyone is born with. These qualities are acquired through education and training. Many can be workers but not all can be entrepreneurs. Making the decision to spend money wisely on the right path is a challenging task. A successful entrepreneur does not always follow the success of others. He always has to think about innovative ventures. To embark on something new, one must be willing to take risks. There is joy in making money and there is pain and struggle in spending it. Everyone wants to spend money to get the desired item at a comparatively lower price, striving to endure the hardship of spending. If all desired goods could be obtained without spending money, no one would wish to spend their hard-earned money.

It is a natural human tendency to try to retain as much money as possible without spending it. Marketers are well aware of this consumer attitude. That is why they try to price a product in such a way that the emotional distress of the consumer is reduced to some extent. They understand that by buying the product, consumers have gained something. This concept is at the core of Richard Thaler's research in behavioral economics. He observed how price reductions in the market affect consumers' decision-making processes, influencing them to be more inclined towards either buying less or buying more of a product. Richard Thaler said that his book did not create much of a stir among buyers when it came to the market. However, when a 25% discount is applied to the total price of the book, consumers become enthusiastic about buying it, creating a buzz. The discounted price acts as a psychological catalyst for consumers, instilling a sense of victory and satisfaction, leading them to decide in favor of purchasing the product.

Many times the person who does not need to buy the product also buys it to take advantage of the discount. In other words, it is helpful in creating alternative demand without price. Consumers think to themselves, how much he has benefited by buying the product at a discount. Sellers are aware of this mental state among consumers. They know this state of mind of the consumer. Knowing this, they tactfully entice consumers to buy the product. They spread the news of the discount in all directions. As the saying goes, there is no shortage of crows when you sprinkle rice. Likewise, if the price is discounted, there is no shortage of buyers. Sellers discount the price of the product in such a way that their profit remains intact. Again buyers can be attracted. Many times it has also been seen that the actual price of the product is Tk 100, the price of Tk 150 is written on the packaging of the product. The product is sold at Tk 100 with a discount of Tk 50. Consumers or buyers think that they have made a profit of 50 taka by purchasing a product of 150 taka for 100 taka. In fact they have been cheated here in the name of discount. The consumer is not the one benefiting; rather, it is the seller who has gained. The consumer has not benefited but the seller has benefited because he actually sold the product at the previous price. The increase in sales is merely due to the discount offered from the mid-price point. Often, items within a package are reduced in quantity while keeping the price the same. Consumers may not initially comprehend this tactic, and even if they eventually understand, they may not take any action. Some companies print on their product packages, "Weight one hundred and fifty grams when manufactured." The question arises: do I really need to know the weight of the product at the time of manufacturing? I want to know the weight when I am purchasing the product.

In 2018 and this year (2023), I visited Saudi Arabia to observe the sacred Hajj pilgrimage. During my stay in the city of Makkah, I noticed that before Hajj, most shops had fixed rates for each Jubba (traditional Islamic attire), set at 75 Riyals. This was the approximate selling price. However, after the formalities of Hajj concluded, many pilgrims headed to the city of Madinah. At this time, the shops reduced the price of each Jubba to 35 Riyals. Now the question arises, have they incurred a loss by selling the Jubbas at 35 Riyals? No, they haven't necessarily incurred a loss. Even though they sell the Jubbas at 35 Riyals, they still make some profit. So, when they sell each Jubba for 75 Riyals, they make a profit of at least 40 to 45 Riyals. However, in Islamic business practices, a businessperson is allowed to make a profit of up to a maximum of 20 percent. In this case, it seems they have not violated Islamic business principles. Globally, consumers are often at a disadvantage in terms of business strategies employed by traders.

The concept of a free market economy is often considered to empower consumers with supreme economic authority. In reality, this notion is not entirely accurate. Consumers are, in fact, constrained by the hands of producers and market-driven entities. In our country, the adoption of a free market economy has been in practice since 1991. However, the formal establishment of a free market economy has not been entirely successful until now. Although the market price of a commodity is supposed to be determined by supply and demand, this is not always the case. A powerful market syndicate is controlling the market. Here the consumer is like a helpless sculpture.

Author: Retired General Manager, Bangladesh Development Bank Limited, and Author on Economic Affairs