Article Summary: Psychology and Consumer Economics

The article written by George Katona in 1974 is a seminal work discerning the new age rationale
between the consumers and the deep psychological processes that affect a consumer’s
consumption sentiments, thus affecting the economic activities at an aggregate level. Earlier the
economists had derived direct relation the consumer expenditure as a function of income
received from government or private business practices. Today, this thought process is changed
as it is widely recognized that the consumer confidence and willingness to buy are the other
important factors affecting consumer expenditures. Today, instead of searching for a single
reason that affects income, prices, interest rates and consumer expenditures; economists and
behavioral scientists expand their field of study to include economics, psychology and sociology,
to find the answers. The author presents the result of the methodologies through four areas, that
are listed below. It should be noted here that psychological processes, though can be studied
through varied social experiments, their exact quantifications cannot be achieved and it widely
varies with person to person along with the state of their external environment.

Inflation & Consumer Spending: Inflation is phenomenon in which the income of people grows
faster than the supply of goods and services. Due to rise in income levels, people are willing to
pay higher price in order to attain a fixed number of goods or services present in the market. This
is leads to increase in the price of the said goods and services. Psychologically people resent
inflation. The studies have two distinct consumer expenditure patterns linked to inflation. In case
of inflation some people who have access to liquidity tend to spend more to stock up on goods,
in order to beat inflation. While sometimes, rising prices cut a bigger hole in the pocket and
people refrain from buying goods to beat inflation. Interestingly, in both these methods, people
try to beat inflation by increasing the size of relative savings, the first case occurs when there is
an immediate threat or emergency like situation that leads to inflation while the latter occurs in
more general conditions. The author emphasis on the fact that it is the stimuli to the environment
that leads to a certain response and these responses should not be compared directly without
focusing on the external stimuli leading to the responses.

Personal Savings in periods of prosperity and recession: The author tries to explain the
underlying psychological phenomenon’s in the rise and fall of personal savings in the periods of
prosperity and recession. It was thought the during the periods of recession the savings would
decrease and during upswings the savings would increase, However, in reality the opposite was
found to be true. This is explained via examples of multiple factors. Example, the market for car
sales is affected by business cycles. During recessionary periods, people buy less and thus,
aggregate savings increase and during upswings, given the larger influx of income, people are
psychologically secure and tend to spend more, thus resulting in reduced savings. Unusual casual
expenditures such as travel and small consumer durables follow the same cycle. Another factor,
the frequency and size of income increases, follow the reverse trend. This factor reduces during
recessions and increases during upswings. There is no direct answer to the question whether
savings increase or decrease during recessions.

Wealth and Savings: Modern economists state that consumption is a function of both income and
wealth. The author postulates two distinct diametrically opposite phenomenon’s arising out of
different psychologies that affect the wealth and savings in different manner. In the first, a
wealthy person tends to spend more as compared to another similar individual; given that both
have same incomes but different wealth (pre-acquired). The second, states that due to enduring
personality traits such as habit, a wealthy person tends to spend less and save more because
he/she already has a taste of achievement in savings and this feeling grows with time due to
rising levels of aspirations. However, being a psychological factor, it cannot be answered with
definite certainty pointing out which kind of people will behave in which manner.

Saturation with Consumer Goods: Reduction in consumer demands is led by long prosperous
periods. During upswings most of the consumer demands are satisfied and there is lack of want.
Another point of view is based on rising aspirations. The author points out to experimental
evidence, stating that aspirations are not static, they tend to grow over time and are affected by
the performance of other members belonging to one’s social group while being reality-oriented.
Accomplishments and ever rising aspirations, lead to increase in needs and wants especially
consumer durables.

The author concludes the paper on the note that the problems discussed above show the
methodology of behavioral and psychological economics. The problems seem rather simple at
first but are largely affected by the people’s perceptions of the situation. The involvement of
psychological studies with economics have thus led to a greater clarity in the field of consumer
economics.