How the Global Economic Jitters Affect Consumer Spending

Marco Werman talks with Dan Ariely, Professor of Behavioral Economics at Duke University, about how global economic uncertainty affects consumer spending habits.

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Marco Werman: Spaniards are not the only ones spending this holiday season, in spite of an economic crisis — so are many Americans. It’s no surprise that people who still have jobs and disposable income can be enticed to spend their money this time of year, but this has not been any ordinary year. The Eurozone crisis, repeated calls for austerity in Europe, slow job growth in the US, even the Chinese economy has started to slow down. Dan Ariely is a Professor of Behavioral Economics at Duke University. Dan, how does an economic climate like the one we’re in right now affect the way that people spend their hard-earned cash?

Dan Ariely: So I think we need to separate short-term effects and long terms effects on behavior. And when the financial crisis started in 2008 people basically stopped spending any money, but as this crisis is going longer and longer, this initially fear is just hard to hold onto. So let’s first of all think about what happened initially, and I think the best model to describe our initial reaction to the crisis is what’s called learned helplessness. Imagine you have a dog that there’s a bell, and after each ring of the bell there’s an electrical shock. And there’s another dog that doesn’t hear the bell and just gets an electrical shock from time to time. The first dog basically learned how to react to the shocks and he’s perfectly happy; you know, not as happy as he without the shocks, but he’s perfectly fine. The second dog gets depressed, they lay down in the cage, they have all kinds of things. And they’re finding is that the moment we don’t understand the relationship between cause and effect, we get depressed. We think the world is unpredictable and we just curl up and stop behaving in any possible way. And I think that was the initial reaction to the stock market. We kind of lost hope and people stopped spending. And if you look at 2008 that was actually what happened. Now the question is how long can people sustain this sense of fear? And I think what we’re seeing now is kind of a rebound reaction in the opposite direction, where people are just not thinking about the dyer economic situation we’re actually in, just because we have no more energy to think about it.

Werman: So do you call this rational behavior or irrational behavior?

Ariely: Oh, I think it’s very irrational.

Werman: Irrational.

Ariely: I think the reality is things are not really looking up, particularly not looking up in Europe, but at the same time how long can you keep being depressed? One of the theories for shopping is that by shopping we actually exert some control on the world around us.

Werman: And does it take away the depression?

Ariely: It takes away some of the feeling of lack of control. Think about shopping as kind of a magical thing you can do. You go to a store and you see something else that’s somebody else’s. And you give them a little plastic card and all of the sudden it’s yours. You’ve just kind of created a huge change in ownership in the world based on an action that you as a shopper created. And one of the theories that this is a sense of gaining control back, which by the way is very healthy psychologically, but not so healthy financially.

Werman: Dan, when you study the psychology of spending behavior do you find that it varies according to the season? I’m wondering if the shock of 2008 has now receded or whether people just feel you know, it’s the time of the season, we’ve gotta give gifts.

Ariely: So there’s definitely a question of the time of the year, but this doesn’t explain what’s happened with 2008. Because in 2008 the gift season was much, much slower. So I think two things are happening — there is a seasonality, but there is also an inability to continue feeling depressed since 2008. Now one of the things people find is what is called shopping momentum. And there’s a couple of nice papers about this showing that once you start spending it’s easy to spend on the next gift, and the next gift and the next purchase. And this is one of the things about holiday season. There’s another interesting version of this, which is called depletion. And depletion is the idea that we face a lot of temptation, ranging from writing nasty emails to our bosses, to buying things, to checking Facebook, to eating donuts, all these keep on tempting us. And with shopping of course, you go to a mall and every window is tempting in some way or another. And the reason depletion has shown that as we resist temptation more and more, our ability to resist temptation goes down, and down and down. And therefore, if you see just one store and are tempted just a little bit, you might be able to resist it. But if you see the same store after resisting temptation for the last 45 minutes it might be harder to resist temptation. So from that effect you could think about the holiday season as the season for temptation. We’re just being tempted all over by all kinds of deals and proposals and offers, and as those offers keep on coming, and coming and coming, our ability to resist temptation goes down, and down and down until at some point we just fail and succumb to temptation.

Werman: Dan Ariely, Professor of Behavioral Economics at Duke University, thank you very much.

Ariely: My pleasure, take care.

Werman: Are you spending despite all the economic gloom? What tempts you to open your wallet these days? Share your story at theworld.org.

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Are you spending despite all the economic gloom?

What tempts you to open your wallet these days?

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