In this document, I have made an extensive summary of the consumer and economic psychology articles that we are/were exam material for the 2020/2021 academic year. All articles from week 1 - week 6 are included (week 7 does not have any articles to read). I hope this summary helps you all.
Reading 1: Introduction to economic psychology; the science of economic mental life and
behaviour
Characteristics of economic psychology
- Study of how individuals affect the economy and how the economy affects
individuals.
- The science of economic mental life and behaviour
- Economic psychology has an important contribution to provide economics with a
realistic and insightful understanding of human rationality in the economic domain.
This extends to other psychological factors that may play a role in financial crises:
Our emotional tendencies: fears in the face of financial risk, for instance
Our social nature: including our tendency to compare ourselves with and to
follow others.
Origins of economic psychology
- Greek philosophers
- 17th century: Adam Smith is seen by others as the starting point for economic
psychology.
Importance of self-love and being able to take others’ roles, as the social
interactions necessary for trading
- 18 and 19th century: other economists wrote about psychological aspects of
th
economic phenomena
John Stuart Mill: homo economicus: a rational individual who makes rational
decisions that maximise utility, is self-interested, capable of learning from
experience, and with stable, consistent preferences.
- Herbert Simon criticised the behavioural assumptions of mainstream economic
theory, based on the homo economicus.
They were only just assumptions.
He found that businesspeople did not seek to maximise their profits, as would be
expected from standard economic theory. Rather, they set target levels above
which they would be satisfied that their business would be more than viable.
- Another major development in economic decision theory concerns choices between
alternative courses of action whose outcomes are distributed over time.
Intertemporal choices = for example, either spending now or saving for a
pension; or at the societal level, continuing to burn fossil fuels or developing
energy sources less harmful to the planet in the long term.
Behavioural economics = the branch of economics that uses psychological concepts and
theories to better understand economic behaviour.
- Endowment effect: assumes that (1) economic outcomes are evaluated as gains or
losses relative to a reference point, and (2) people are loss averse.
, - People frame the evaluation of the good from a different reference point than non-
owners
Similarities between behavioural economics and economic psychology
- Both acknowledge many of the same historical roots, with both identifying Herbert
Simon as a founding parent.
- Both disciplines are essentially empirical sciences, placing a premium on the validity
of theories tested against behavioural evidence.
- Both are applied sciences motivated to develop effective support for individuals and
society in the economic domain.
Differences between behavioural economics and economic psychology
- Economic psychology draws broadly on contemporary psychology, which includes the
primary goal of modelling mental life. On the other hand, behavioural economics is
dominated by the approach to the psychology of judgement and decision-making.
- Economic psychology is prepared to employ a more eclectic range of research
methods, including the study of behaviour in realistic, hypothetical scenarios and a
range of methods to elicit self-reports. On the other hand, behavioural economics
deems a narrower range of methods to be scientific and requires data to be either
from the real economic world or to be motivated by meaningful incentives.
- Ethics: economic psychology allows the deception of research participants, while this
is not acceptable according to behavioural economics research ethics.
- Behavioural economics adopts a distinctive political position concerning the role of
interventions to affect behavioural change, libertarian paternalism.
Applying this philosophy, those in power use behavioural economic research
findings to change the decision environment so that people are more likely to
make the decisions that those in power deem to be in the people’s best interest.
Research methods: quantitative research methods have dominated economic psychology,
although qualitative methods have made important contributions.
The credit definition = money is a scale of economic value used across society to monitor
and record balances of credit and debt that are transferable to third parties.
- Role of money as a tool to facilitate the practicalities of trade, and in economic
theory it is seen as an interchangeable tool usable in any economic transaction.
- However, not completely interchangeable, since the way people use money depends
on how they mentally categorise it.
Other aspects of money:
- The process of evaluating specific prices: judging whether a given price is low or
expensive is a fundamental process underlying consumer behaviour.
- Perceptions and expectations of price inflation: inflation expectations affect
individual and household economic behaviour, and surveys of inflation expectations
are used to inform monetary policy.
,Financial behaviour and economic activity
- The quality of decisions to spend, save or borrow is central to the financial well-being
of individuals and households.
- Understanding individual and household saving and borrowing is important to
economists, since on the aggregate level such behaviour affects the macro-economy;
“we need to know how individuals affect the economy as well as vice versa”
Saving is related to income, but also to psychological factors such as time
orientation, materialistic values and less active money management.
- Taxpaying is another aspect of economic behaviour that has broader implications,
since if people evade or avoid their taxes, this has a serious negative impact on the
economy and society.
Effective policies to minimise avoidance and evasion require that tax authorities
use their powers wisely and foster a climate of trust with taxpayers.
- Both profit and non-profit organisations face similar problems of incentivising
(motivating) workers.
Both important for the economy
Life-span perspectives
- Economic psychology of couples’ joint financial decision-making
How joint purchase decisions depend on a couple’s relationship quality, their
previous decision histories and on each partner’s use of social influence
strategies.
- Money management in households
Intra household money management systems affect each partner’s access to
monetary resources, with women tending to be disadvantaged.
Social norms such as fairness, and stereotypic expectations such as entitlements
to earned income, are important psychological determinants of household -
financial behaviour.
- Age-related changes across adulthood impact the quality of decision processes.
Decreases in fluid cognitive abilities, such as information processing speed, result
in older adults having greater difficulties as the complexity of decisions increase.
Economic psychology and society
- Adam Smith (1756) believed that helping others is a fundamental human motivation,
and recent research has elaborated this.
Act of giving a sum to a charitable cause gives people more pleasure than merely
knowing that the same amount of tax they pay goes to that cause.
Certain cognitive biases in charitable giving, such as the singularity effect: the
finding that donations are greater when the target of help is an identifiable
individual, rather than a group.
- Poverty has a negative impact on subjective well-being.
Preoccupation with the problems of everyday life in poverty can impair economic
decision processes.
- Psychological dispositions such as pro-environmental attitudes and concern for
future consequences are associated with pro-environmental behaviour, and that
certain cognitive biases, such as preference for the status quo, and
misunderstandings of effectiveness, can be barriers to pro-environmental actions.
, Reading 2: Psychology; what it is and how it emerged
Consumer psychology = about understanding why and how individuals and groups engage in
consumer activities, as well as how they are affected by them.
- Largely focused on the cognitive processes and behaviour involved when people
purchase and use products and services.
- Some of the more commonly researched areas include decision-making, consumer
judgement, perception and attention, information processing, influences of
advertising upon consumer responses, etc.
Linked to how marketers and advertisers can attempt to influence consumer
decisions to purchase a particular brand or product.
However, not all are related to the increase of sales of products (impact of
consumption on children for instance)
We are living in a consumer-driven society:
- Almost all behaviours that humans engage in are directly or indirectly linked to
consumption
- Advertising, traveling on a train, grocery shopping, listening to music, reading a book.
How consumption affects people’s lives:
- Consumption is an integral part of people’s lives.
Consumer activities can impact upon people’s identities and how individuals
convey their social status through the use of certain products and services.
- ‘Beauty is only skin deep’ has never been more inappropriate.
Consumer society we live in is pushing consumers in the direction where physical
beauty is more important than a person’s intellectual or emotional qualities.
Media constantly subjects us to images of ideal beauty, which makes people
spend money on beauty products.
- Children are significantly influenced by mainstream media.
They can become more aggressive if exposed to aggressive media images.
- People’s opinions, values and beliefs about others are often influenced by the media.
- Media also influences how consumers view particular products and services and
whether or not they will purchase them.
There is now a good understanding of what captures consumers’ attention, how
it is possible to make consumers consciously think about what they have seen
advertised, and when it is most suitable to show commercials on television.
History of consumer psychology
- Culture of consumption in Europe started before the Industrial Revolution.
- Between mid-seventeenth and throughout eighteenth century, an increase in
consumption was significant.
- Due to Industrial Revolution, people in multiple countries started consuming much
more than they previously had.
Increase in food supplies and raw materials and increased overall production
levels of many products.
- In parallel with the consumption growth, scientists knew the importance of
understanding how the consumer society affects individuals.
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