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Summary Consumer And Economic Psychology (PSMIN08)
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Consumer and economic psychologyWeek 1 reading 1: Introduction to economic psychology: 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
• There are psychological factors that may play a role in financial crises: our emotional tendencies, such
as fears in the face of financial risk, and social nature, including our tendency to compare ourselves
with and to follow others
• Household and personal economic decision-making are becoming increasingly complex and have
significant consequences for our quality of life and psychological well-being.
• People’s thoughts and feelings about material possessions, money prices, the economy and inflation are
at the core of economic mental life, and that the psychology of such things is fascinating and worthy of
study for its own sake
• Economic psychology is described as the science of economic mental life and behaviour
• Characteristics of economic psychology
• A branch of applied psychology
• An important characteristic of economic psychology
• The science of economic mental life and behavior
• The study of “how individuals affect the economy and how economy affects individuals”
• An interdisciplinary field of study
The emergence of the discipline
• The origins of psychology can be traced to greek philosophers and, more recently, to 17th centenary
economists who reflected on psychological matters, notably Adam
• Homo-economicus , a rational individual who makes rational decisions that maximize utility, is self-
interested, capable of learning from experience, and with stable, consistent preferences
• Many economists reflected on the social and psychology behind it, came up with many theories along
the way
• There was also reflections about economical decision making, stating that there are decision rules
which are both adaptive and maladaptive
• Another major development in economic decision theory concerns choices between alternative courses
of action whose outcomes are distributed over time, these are known as inter-temporal choices.
• Behavioural economics is the branch of economics that uses psychological concepts and theories to
better understand economic behaviour.
• One of the first interdisciplinary collaborations in behavioural economics was research showing that
economic behaviour can violate homo-economicus’s (expected) utility maximisation principle because
people’s evaluation of the same good can vary, depending on whether they own it or not
• They explained this endowment effect in terms of prospect theory’s value function, which assumes that:
economic outcomes are evaluated as gains or losses relative to a reference point, and people are loss-
averse. The other key element of their explanation is that owners ‘frame’ the evaluation of the good
from a different reference point to non-owners.
• The similarities between behavioural economics and economic psychology are:
• First, both acknowledge many of the same historical roots
• Second, both disciplines are essentially empirical sciences, placing a premium on the validity of
theories tested against behavioural evidence.
• Finally, both are applied sciences motivated to develop effective support for individuals and society in
the economic domain.
• The differences between behavioural economics and economic psychology are:
• First, economic psychology draws broadly on contemporary psychology, which includes the primary
goal of modelling mental life. On the other hand, the psychological component of behavioural
, economics is dominated by the approach to the psychology of judgement and decision-making
developed
• Second a difference in epistemological approach was noted, with economic psychology being prepared
to employ a more eclectic range of research methods in contrast too, behavioural economics which
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.
• Third, it was explain that another significant contrast between the two disciplines relates to research
ethics. Specifically, whereas economic psychologists allow the deception of research participants, as
long as an appropriate ethical code is adhered to, such as that of the British Psychological Society,
this is not acceptable, according to behavioural economics research ethics.
• Finally, it should be noted that behavioural economics adopts a distinctive political position concerning
the role of interventions to effect behavioural change, libertarian paternalism
Research methods
• Quantitative research methods have dominated economic psychology, although qualitative methods
have made important contributions, often within multi-method research strategies
Economic mental representation
• According to 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
• This definition focuses on the 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, one of the earliest contributions of psychology to behavioural economics was research
showing that psychologically money is not completely interchangeable, since the way people use
money depends on how they mentally categorize it
• Judging whether a given price is cheap or expensive is a fundamental process underlying consumer
behaviour. It is important to understand this especially because inflation expectations affect individual
and household economic behaviour, and surveys of inflation expectations are used to inform monetary
policy.
Financial behavior and economic activity
• The quality of decisions to spend, save or borrow is central to the financial well- being of individuals
and households.
• Income is a major driver of saving and most economic analyses hold that the effects of individual
psychological factors cancel out at the aggregate saving level. On the other hand, it was argued that
individual expectations of future income do predict aggregate saving and borrowing.
• 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. Audits and fines,
attitudes towards taxes and non-payment, social norms and notions of fairness influence an individual’s
tax behaviour.
• As well as the world of work, the world of leisure is a fascinating domain for economic psychology (for
ex: gambling)
Life-span perspectives
• Joint purchase decisions depend on a couple’s relationship quality, their previous decision histories
and on each partner’s use of social influence strategies. She then shows how intra-household money
management systems affect each partner’s access to monetary resources, with women tending to be
disadvantaged.
• The economic understanding and behavior of children, adolescent and young adults are important for
the progress towards the goal of adult financial autonomy
,• Social norms such as fairness, and stereotypic expectations such as entitlements to earned income, are
important psychological determinants of household financial behaviour.
• Cognitive functioning, knowledge, emotions and motivation play a role in personal economic decision
making. Age-related changes across adulthood impact on the quality of decision processes.
Economic psychology and society
• Charity and helping others is a fundamental human motivation. The act of giving a sum to a charitable
cause gave people more pleasure than merely knowing that the same amount of the tax they paid went
to that cause. Various characteristics of charitable causes influence donation behaviour, including the
extent to which those in need elicit empathy.
• 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, generally defined as gap between the material resources people need to live and those they
actually have, clearly has a negative impact on subjective well-being.
• Being insured also has an influence, the insured may take unwarranted risks or make fraudulent claims,
while insurers can mis-sell their products or turn a blind eye to false claims.
SUMMARY
Economic psychology, the science of economic mental life and behaviour, is increasingly relevant as
people are expected to take more responsibility for their household and personal economic decisions. This
chapter serves as a brief introduction to the field as well as to the following chapters of the book, which
are organized into seven parts. We first traced the emergence of the discipline, from Adam Smith to
George Katona and Herbert Simon, and discussed its relationship with behavioural economics. We also
introduced important theories of economic decision-making based on risk, value and affect, and theories
of intertemporal choice (Part 1). Then, after a brief look at methodology (Part 2), we examined the nature
and behavioural consequences of economic mental representations about such things as material
possessions, money and the economy (Part 3). We next turned to central aspects of economic psychology
in everyday life – financial behaviour such as saving and tax-paying, and matters, such as
entrepreneurial activity (Parts 4 and 5). In these and other chapters we noted some of the important
implications of the research for supporting individuals and the economy. Finally, we considered two
broader perspectives on economic psychology: life-span psychological development from childhood to
old age (Part 6); and societal issues such as charitable giving and pro-environmental behaviour (Part 7).
Week 1 Reading 2: consumer psychology, what it is and how it emerged?
What is consumer psychology?
• Consumer Psychology is about understanding why and how individuals and groups engage in
consumer activities, as well as how they are affected by them
• Consumer Psychology is an interdisciplinary subject area and it combines theories and research
methods from Psychology, Marketing, Advertising, Economics, Sociology and Anthropology.
• When learning about Consumer Psychology, it is important to establish a broad understanding of why
consumers behave and think the way they do. The more you know, the easier it is to explain consumer
behaviour.
• It is important to remember that Consumer Psychology is first and foremost a scientific discipline and
consequently should always be treated as such.
• When conducting research, Consumer Psychologists make use of a wide range of research methods,
both quantitative and qualitative.
• Almost all behaviours that humans engage in are directly or indirectly linked to consumption. Even
traditional holidays such as Christmas are these days mainly about consumption
, • We are living in a consumer- driven society. Consequently it is not difficult to see how consumption
infiltrates individuals’ lives in many various ways
• Consumption is an integral part of people’s lives. For example, it has been found that consumer
activities can impact upon people’s identities and how individuals convey their social status through the
use of certain products and service
• The consumer society we live in is pushing consumers in a different direction. The media is constantly
subjecting us to images of ideal beauty which makes people feel that they are not
good/beautiful/thin/young enough and consequently they spend money on both beauty products and
cosmetic surgery.
• Media exposure influences how consumers view particular products and services and whether or not
they will purchase them. These days the psychology of advertising is one of the more commonly
researched areas of Consumer Psychology
How the science of Consumer Psychology grew in parallel with the consumer society
1840-1920:
• The rise of advertising and experimental psychology
• The importance of material possessions play an important role in people’s lives
• Academics become interested in advertising
• Coca-cola is taken to court: the person who took them to court then continued to research how
advertisements affect purchase behaviour
• The assembly line is invented and there is continued interest in advertising research. The assembly line
ensured that all sorts of products could be produced relatively cheaply in their hundreds, thousands and
eventually millions. With the rapid growth in manufacturing practices, competition between products
and brands became even fiercer and now more than ever producers needed advertisers to help ensure
that their products would sell
1920-1938:
• In the 1920s a number of things happened that contributed significantly to the development of the
consumer society in which we live today: radio, automobile, new-service institutions, mail-order
catalogue, market flooded with new products
• John B. Watson was the first prominent psychologist to apply psychological methods to advertising
• The psychology of advertising continues to grow
• Emerging diversity of consumer-related research areas
1939-1970:
• World War II: Even though times were hard during the war, the consumer society continued to grow,
even if this did not affect all corners of the world and perhaps not always in an expected way
• After World War II: After World War II consumption around the world gradually started picking up
again and consequently a renewed interest in advertising also emerged
• Governments promote consumer societies: With WWII now part of history, governments around the
world were looking at ways to strengthen their economies. One obvious way of doing so was to
increase consumer spending which led to an increase in advertising and research (during the 1950s and
1960s) on questions related to attitudes and persuasion
SUMMARY
Consumer Psychology is the study of human behaviour and thought processes in relation to products
and services as well as how people are affected by consumer activities. How individuals are influenced
by consumption may be seen by how they choose their material possessions. By choosing the ‘right’ kind
of products, they can display their identities to others. Another example of how consumption can
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