Consumer irrationality creates great opportunities for producers.
MOST people are aware of their faults and foibles, and understand they are shared by others. They may also understand how these foibles may have significant effects, such as the marshmallow test (kids who resist temptation achieve more later in life) or loss aversion (people sell their winning stocks but hang on to their losers).
These findings have made a bit of a dent in orthodox economics, hence the acceptance of “nudge” approaches which aim to influence consumer behaviour by framing their choices in particular ways. Auto-enrolment into pension schemes (requiring workers to opt out, rather than opt in) is the best example. In broad terms, however, I don’t think behavioural insights have changed the way that people think about economics. A free market is one in which producers compete to sell goods to consumers on the basis of price, or quality. Competition works to the benefit of consumers, leading to innovation and the elimination of shoddy goods; a restaurant that serves disgusting food, or has terrible service, will soon go out of business.
However, while we can all think of markets that do work like that (smartphones, for example), we can also think of plenty that don’t. In their new book, “Phishing for Phools: The Economics of Manipulation and Deception”, Robert Shiller and George Akerlof look at markets where customers are enticed to buy imperfect goods or to make choices that are not good for their long-term welfare (smoking, for example). Our review of the bookwas rather lukewarm and it certainly has flaws; the evidence is very anecdotal, many of the examples seem familiar and the replacement of “f” with “ph” (as in phishing) gets tiresome.