Consumer and Economic Psychology
Lecture 1: Introduction
What is consumer & economic psychology?
When we talk about consumer and economic psychology, we talk about two slightly more specific
branches of what we call: applied (social) psychology.
Applied social psychology is a scientific psychology, that focuses on solving the more practical
problems of humans (but also animals or animal behaviour and experiences). Practical issues means
things that happen in reality; things you see in society.
Consumer and economic aspects both happen in daily life. Many behaviours people engage in are
linked to consumption. We live in a consumption society: the things we do and the decisions we make
are all related to the products we buy or choose, which refer to consumption.
The international association of applied psychology is the big, overarching organization for applied
psychology (one of the oldest psychological organizations). Economic psychology is also a specific
range of this organization; they have a smaller community of this, within the larger community. The
definition they give for economic psychology also overlaps with the definition for consumer
psychology. They organize a lot of things around these themes.
Consumer and economic psychology mainly focuses on interactions:
• Consumer psychology focuses on the interaction between people and products (how people
and products influence each other) → how people feel about products, why they buy them,
and how products adapt themselves to the wishes and preferences of people.
• Economic psychology focuses on the interaction between people and economy (on a larger
basis) → so in which all the things mentioned above happen together: how it influences how
we use money, how it influences the larger society and the economy in which we function,
and how these things make us feel.
So consumer and economic psychology really focuses on the interactions between people on the
one hand, and products and the economy on the other hand.
Consumer Psychology
“Consumer Psychology employs theoretical psychological approaches to understanding consumers”.
So, understanding what consumers do, the activities they undertake and how they interact with
different goods. So the focus is on how people participate in this consumer society → how they buy
products and why they buy products; what kind of reason is behind these kind of things; what kind of
decisions they make.
Consumer Psychology focuses for example on:
• Product adoption
o The field of consumer psychology started to exist when people could produce more
and more products. It became a competition between different products; people
needed to sell their products, and therefore they wanted to know: why do people buy
products.
o Advertising: If you have many different competing, similar products, you also want to
know how to convince people to buy your own product: what kind of decisions do
, they make, what are these things based on, how could you use these that they adopt
or use your product.
o If you have many different products, and important part is also to assist consumers
or users in the decisions they make → how can you help people with making the right
decision, something that fits their interest, something that fits what they want.
o Past researches specifically focused on several topics: attention, memory and
sentiments. A part of this originated more from the experimental research: Wundt
was one of the pioneers within consumer psychology, that specifically did
experimental research about attention. Researchers after that focused for example
on memory (e.g., when we present an advertisement what kind of aspects will people
remember and how will it influence people’s behaviours) or emotional sentiments
(how something makes us feel).
o At the start is was a very scientific discipline, focusing on experimental research in
controlled environments. Later application became more and more important. E.g.,
Kurt Lewin studied this during the WWII to make sure that people behave in a certain
way → that people would use food products of which was relatively plenty, that the
chances of starvation would be smaller.
• Impacts on products have on people
o James (1890): “who you are” → products can define who you are, so how you see
yourself, your self-concept. Your self-identity depends on many different things, and
these things are also the products/possessions that you have. William James says that
all the products you own, says something about who you are.
o Part of consumer psychology is also how the products that you sell influence the lives
of people, in a physical/health related way but also in an emotional way (does it make
you feel good or bad etc.). E.g. the advertisement of Marlboro Man: smoking has
consequences for your health.
o Coca cola → prominent study because there was a lawsuit against Coca Cola, because
there was caffeine in the product. This started the idea about how products can
influence people, and how you should think about these things.
• How products are used
o More effective use
o More sustainable use
o Example: face mask → whether people use it in a correct or incorrect way. There are
many different other examples in which you could use a product in the right way or
in the wrong way. In the sustainable environment sector they see this a lot as well →
people that install sustainable products into their houses, but not always use them in
the correct way. So the fact that people buy these products because they want to help
the environment, might not always lead to the achievement of their goals as they do
not use the products correctly.
o It’s not only about promoting certain products and making sure that people use and
buy your products, but it’s also about reducing people’s intentions to buy or to
consume in order to benefit the environment.
Economic Psychology
“Economic Psychology promotes and discusses research, as well as policy making, on the interface of
psychology and economics”. Specifically studies of mechanisms of people’s judgments and decision
making as well as their behaviour in different economic situations. How people are influenced by the
larger economic context they are living in (e.g., difference in context and the influence of it between
,Western countries and countries where there is less money to spend → how does this influence
decisions and how you feel about certain things).
Focuses for example on:
• People’s cognitions about money and the economy → their ideas and how they think about
money and the economy.
o (Ir)rational → it was often assumed in the past that people were homo economicus,
that they were very rational in their decisions (mainly out of self-interest). However,
many researches show that people are often not that rational, there are many
different things like emotions, (gut)feelings; these processes that also guide our
behaviour and how we think about money and make decisions about money and how
they operate within an economy.
o Impacts on actions
o Example: loans you might take → so how do you feel about that, where do you base
your decisions on. How much do you want to get as study financing from the
government in order to pay your studies.
o Example: mortgage on a house → is a big decision: whether you want money from a
bank or not, etc. What cognition influences these kind of decisions.
• How this makes people feel
o Wellbeing → money does something with you and your feelings.
o E.g., his daughter playing monopoly → shows that getting money really makes us
happy.
o E.g., stock market during a crisis also has a lot of influence on what people can do and
how they feel (also many contextual factors influence this)
• How this affects the economy (at large)
o So what kind of decisions people make, whether people save or spend money, all have
a big influence on how the economy functions.
o All these kind of processes are very important for the economy at large.
What is the focus of this course?
Course focuses mostly on the similarities between consumer and economic psychology, so mostly the
people aspect: how people make choices, how people are influenced, what emotions people have. So
these are relevant for both consumer and economic psychology, the underlying processes.
,Lecture 2: Cognition
After this session you will be able to:
- Understand how people make economic judgements
- Identify heuristics
- Spot the use of techniques based on heuristics and economic judgements
Central question: How do people process information and make economic judgements?
How do we make economic judgements?
• Most people will say that we do that by using reason and applying logic:
o Maximizing the utility
o Systematic thinking
o Understanding inferences
o Applying logic rules (if this… then that…)
• This would mean that we are calculators: we have some simple inputs, process the information
quickly, and we expel some simple output.
• → reason and logic is not a good model to understand how we make economic judgements
How do we actually make decisions?
• Loss aversion
o Asymmetry between perceptions of gains or losses
o We like gaining things, we dislike losing things
o But we dislike losing more than we like gaining
o The power of losing is around 2.25 times stronger than the power than gaining.
• In the example of picking one of the following options:
1. Toss a coin. If heads, I give you €100. If tails you give me €100. (equal chances)
2. Prefer not to play (most people will pick this one)
▪ The options have the same chances: if you keep playing you will end with 0 as well,
because there is equal chance for gaining or losing €100. Therefore, it has the same
outcome as not playing.
▪ Losing a 100 euros is a stronger feeling than gaining a 100 euros.
▪ We can manipulate this, by saying that the person will win more than €200, as
opposed to losing €100, they are more likely to play.
• Gains or loses reference points (gaining and losing depends on our expectations) → example: if I
expect a 6 for my exam and I get an 8, I’ll be very happy, whereas when I expect a 9 and I get an 8
I won’t be that happy. So these are the reference points.
o Gain = risk aversion
1. I give you €10 (I gain something, and I don’t want to risk it).
2. We toss a coin. If heads, I will give you €20. If tails I will give you nothing.
o Loss = risk seeking
1. You give me €10
2. We toss a coin. If heads, you give me €20. If tails, you give me nothing. (It’s not
about securing a loss, it’s about risking it → maybe I lose nothing)
This is Prospect Theory
• Loss aversion
o We like getting things but we dislike more losing things
o So, losing has a stronger psychological impact than gaining something, this is not
objective. Our attempt for optimizing avoiding losses will be different.
,• Reference points
o If gain: risk aversion → if we think we might gain something, we try to avoid taking risks
as much as possible and secure a small gain.
o If loss: risk seeking → if your perception is about losing something, most people would
prefer risking it, as there is a chance that they would not lose anything at all.
• This decision making is related to how we behave.
• We are not calculators but then what are we?
• This is all about fast thinking, research of Kahneman.
We are efficient information processors
• We are not going to use all the information there is to make a decision and take forever in making
a decision. Instead, to be efficient we use:
• Heuristics
o Shortcuts or rules of thumb
o Simple rules for quick decisions
o You don’t have to think about it, but just rely on direct clues from your context and
immediately you take the decision.
➢ A heuristic is not necessarily wrong. It’s a shortcut, so sometimes it’s wrong and
sometimes it’s right.
• Biases
o A judgement that does not follow logic → this is not necessarily wrong, but if you would
follow reason and logic you would not get to the same solutions.
o A bias is usually the outcome of an heuristic → you think quickly, using a quick shortcut,
which sometimes lead to decisions that do not follow, for example, the maximizing of
utility of different objects.
Availability heuristic
• We make decisions based on information
o but information can be activated more or less easily
o so the question is: do we use all information in general?
• No, we make decisions based on easy to access information
• Some features of easy to access information:
o Recent, frequent, extreme, negative
▪ Information that is negative tends to be more easy to access than information
that is positive.
▪ If something happened 5 minutes ago, it’s easier to access and more
applicable, than information from 20 years ago.
▪ Example of extreme is something that is unexpected: if the weather in the
winter is always the same, and suddenly it is much more colder, we tend to
use this information to base our decisions on in the future.
• It is a good predictor most of the times!
Anchoring
• An anchor is an initial value is used as a reference point
• The assessment of the value of a product is affected by the anchor
o Example: your assessment of what the price of a new computer should be is affected an
anchor: an initial value that you use as a reference point.
, o Example: you are in a restaurant and the waiter says that it will take a half hour, but the
food receives after 20 minutes → you’re happy. If the waiter says it will take 5 minutes,
and it takes 20 minutes → you will be mad. In this example it is the same amount of time,
but because of your anchor it leads to different responses.
• It happens even when the anchor is irrelevant for the judgement itself
o Everything that previously happened might influence your assessment of something
afterwards.
o Anchoring doesn’t have to be about the same topic, it can be about anything.
Question 1: b) anchoring effect
Question 2: c) availability
Question 3: b) correlation vs. causation confusion
Question 4: b) anchoring effect
Question 5: b) confirmation bias
Question 6: b) hindsight
Endowment and Marketing
Endowment (object retention)
• The endowment effect takes advantage of a very strong psychological effect: people are more
likely to retain/keep something that they already own, than to acquire the same thing if they don’t
own it yet. Once we have something, we want to keep something: the worth will increase.
• Example: the value of a mug
o Condition 1: the participants were shown the mug and asked how much they think the
mug is worth. They say around 3 euros.
o Condition 2: the participants were given the mug for free (“this mug is for free, take it, it’s
yours”) and they take it. Then the participants were told that if they wanted to sell it, they
could, and that the researchers would pay them money to take the mug back. This people
rated the worth of the mug 5 euros. Because they owned the mug, they rated the value
much higher.
Three main explanations for the endowment effect:
• Loss aversion
o A loss has a greater psychological impact than a gain (not only with money but also
with objects → losing an object has more impact than gaining an object)
• Psychological ownership
o Non-transferable positive valence of the object → once we own something, we feel
attached to the object and it is part of our identity. Therefore, we cannot transfer the
value into money easily. We will have a negative feeling when we lose it, because it
feels like we lose a part of who we are. Therefore, people increase the worth of the
object; they compensate by asking more money.
o Self-referential memory effect → if I don’t own an object, but just see an
advertisement on tv, the amount of cognitive processing space that that object is
creating in my brain is going to be less than if I actually have it and interact with it.
When we interact with something/if we have psychological ownership, then we
create a psychological/cognitive workload that is higher, therefore our imagination of
the worth of the object is also higher.
• Frequently used techniques (Interaction before buying) → free trial or apps; when products
give you samples; virtual fitting rooms; ordering something online and having the option to
, return it; pressing your own juice at the Albert Heijn; custom hoodies or sneakers; one free
month for Netflix or Spotify subscription; pillows in the store that you can feel and touch;
having Instagram and still continuing to use it even though there is now an update that is
different to your own values.
Tony Chocolonely example
• when you pick up a chocolate bar, the column collapses so you can’t put it back anymore and
feel obligated to buy it
• You can pull a leaver that provides you with a small piece of chocolate, so that you can taste
it
• There are boxes that can be used as bags, and in the store you see people using them
• The touching of the screen creates psychological ownership because you feel attachment to
your own created bar
• when you want to read the back of the chocolate bars you have to get them out of the pillar;
it forces you to hold it for a bit, and putting it back also forces you to touch the bars even more
and for longer → psychological ownership
