The Enduring Recession

Slashed work hours, a laid-off spouse, Bernie Madoff scampering off with the family funds — for one reason or another, the recession has forced most consumers to take a long, hard look at their budget and give their spending habits a good ‘ole overhaul. And so we’ve seen such changes as higher savings rates, an end to “sleep shopping” and hyper preoccupation with getting more bang for one’s buck.

This, of course, has made it that much harder for marketers, as the advertising methods that worked on last year’s shoppers are no longer good enough. Which brings me to the million-dollar question: How long will current consumer behaviors last? Are they permanent or will the economy’s recovery (whenever that may be) reverse them?

The answer is not the one you want to hear (sorry).

A look at behavioral economics suggests that while not quite permanent, these changes are for the long haul. As it turns out, we truly are creatures of habit. We pick a pattern of behavior and without thinking too much about its wisdom we stick to it. We go back and rethink about this habit only when we have a very good reason to change our ways. A hard, recessionary hit to our cash flow is a reason to change; a slow financial change for the better isn’t. That’s why new consumer patterns have emerged since the housing market collapsed and why they’ll remain long after we dig ourselves out of this recession.

As an example, lets think about the ups and downs of gas prices in recent years. Not too long ago, we were accustomed to overvaluing pricey, mammoth gas-guzzlers. Even as gas prices rose over time — from $2.50 a gallon, to $2.90 and then to $3.30 — we continued to buy the same kinds of cars. But once gas prices hit the $4 mark, we cried out in outrage and began switching over to smaller autos and hybrids.

Though prices had been consistently increasing, it took a nice, round ominous number like 4 to scare us into rethinking our consumption. And later, when the price of gas went down, did we start purchasing large cars again? No! Many of us have stayed with our new habit of looking for smaller and more efficient cars. (One piece of evidence: many auto commercials still emphasize gas mileage.)

Let me give you another example. Through a clever popcorn study, Brian Wansink, author of Mindless Eating, found that we’re so used to munching on popcorn in theaters that we’ll scarf down handfuls even if it’s stale. Moviegoers indistinguishably ate popcorn, irrespective of whether it was fresh or two weeks old.

Why are we such creatures of habit?

Because it’s easy. The process of making decisions, however minor, involves a labyrinth of complex computations. The choice to pop into Starbucks again and get our usual is simple. On the other hand, a step-by-step weighing of factors, like whether Starbucks is worth the price (“Should I go with Dunkin’ Donuts instead?”), whether the cappuccino or the latte is a better value for us, and whether we’ll enjoy the brew as much as we think, is a very complex process.

It takes a crisis to get us to ask, “Wait, what am I doing?” Only then do we pause, examine all the factors and then come up with a new way of going about things — which is just what consumers did following the burst of the financial bubble.

In order to look into this process of habit formation and stickiness, Drazen Prelec, George Loewenstein and I did a few experiments. For our experimental set-up, we had MBA students write down the last two digits of their social security number (mine are 79) and then asked them whether they would pay that number in dollars ($79 in my case) for, say, a bottle of Cotes du Rhone 1998. We then asked them to write down the maximum amount they would to pay for the product for real.