MASTER OF BUSINESS ADMINISTRATION

2020-22

Term – IV
2021-2022

Consumer Behaviour

PSYCHOLOGY AND CONSUMER ECONOMICS

This paper explained how generalizations formed by the traditional economic analysis on
consumer spending and saving behaviour in response to different economic cycle stages differ
from the psychological analysis. This article mainly explains how subjective factors such as
expectations and attitudes of consumers given importance in behavioural analysis help
understand consumer response in different problem areas.

INFLATION AND CONSUMER SPENDING

The basic assumptions of economists about inflation are that it increases in price as there will be
a mismatch between the rise of prices and goods supply, and rational people who expect the
price rise might end up hoarding goods. Thus, it is traditionally assumed that people spend more
and save less during inflation. But physiological studies states that people save more during
inflation as they will be optimistic about the future and postpone spending. Hoarding of goods is
an immediate response, while spending less is considered as a long-term response. The
saving/spending behaviour was further studied produced the following results. Americans
viewed inflation as an adverse effect and failed to acknowledge that it played a role in increasing
their income and credited themselves for their economic gains. The survey conducted in 1969
and 70 states that most people believed inflation is unstoppable and the only way out of this
situation is by spending less, and only a few believed in hoarding.
PERSONAL SAVINGS IN PERIODS OF PROSPERITY AND RECESSION

There was a change in saving pattern observed between 1930 great depression and 1970-71
recession, where people saved less in an earlier case as expected by traditional approach as there
will be less income to save but conversely, people saved more during 1970-71. But the
psychological factors support the change in pattern as they argue savings grow as necessary
during the recession. Most Americans borrow money to buy luxury products like cars rather than
spending a lump sum at once. During the recession, they postpone purchases, which results in
less borrowing, resulting in fewer instalments and help to save more. The same pattern is
observed in unusual expenditures like travel, vacation, etc. The strength of saving, which will
eventually help prepare for any adversity, also motivates to save more.

WEALTH AND SAVING

Further, saving not only depends on the income but also the wealth of an individual. J.E Meade
made a general assumption that a person who earns more has more to spend. But, if we take the
psychological considerations, there are two reasons why the people who make more might save
more. Firstly, they might have cultivated saving as a habit or thrift in nature. Secondly, the
appetite to save might increase with the increase in reserve funds. Interestingly, a survey
conducted about the satisfaction of accumulated reserve funds during the 1950’s, ’60s and 71
among Americans was not excellent as 1/3 of participants were not happy with their
performance. Studies reveal that even though there is a lot of desire to save among American
family heads, they lack implementation as a study indicates that most of the families who were
affirmative on saving ended up buying Cars. In one panel study on liquid asset holdings, it was
observed that the people with more holdings ended up saving more compared to the people with
fewer holdings by the end of the year. Thus, accumulating more wealth not necessarily reduce
the appetite to save.

SATURATION WITH CONSUMER GOODS

Finally, according to a view after prosperous period there must be saturation in the consumer
demand as prosperous period involves gratification of wants. But, according to the theory of
Kurt Lewin, human aspirations are not static; they grow with achievements, are influenced by the
attitudes of the group he belongs to and is reality oriented. According to the survey conducted on
American families to compare their wants in the late 1960s and wants 10 to 20 years ago, only a
small portion said they have what they wanted to have. Most of the people’s new wants aroused
mainly due to reasonable period of the 1950s and 60’s where the standard of living increased.
But everyone did not view raised income, the standard of living as the same. Few felt they had
achieved better; few felt there is lot to gain by comparing with others or as they did not meet the
expectations they set. A survey conducted on respondents repeatedly between 1967 and 1972 on
whether they are financially better off than 5 years ago, 60% replied Yes. The same respondents
are being asked if they are confident about whether they will be better off in the next 5 years
60% of the people who answered Yes to question one said Yes. This shows that positive past
performance increases the aspirations of the future. So, the saturation of aspirations happens if
one is unable to foresee a bright future.

CONCLUSION

Overall, we can say that the assumptions made purely based on empirical statistics might not be
applicable in every scenario as behavioural aspects and attitudes of all consumers are not similar
and there is always a scope to learn and change with the time.

THE PSYCHOLOGY OF BUYING

Researchers attempt to duplicate or simulate buyers' purchasing decisions. This can be done in a
qualitative or quantitative way, such as through a focus group, interviews or surveys. These
methodologies, on the other hand, may not capture the entire scope of the psychological
processes that purchasers go through while making decisions. This article looks at how these
mechanisms work and how they can be tapped into.

The Consumer Psychology Perspective:

In the review of the consumer psychology literature consumers are divided into subgroups. One
is the behavioural decision theory (BDT) subgroup, while the other is the information processing
segment. The information processing section focuses on cognition and affect, whereas
behavioural decision theorists emphasise choice models, economic psychology, and search
tactics. Both try to understand buyer’s choices although differently –

 BDT focuses on the decision-making model, particularly the factors of choice, while
social cognition focuses on phases in the communication model and attitude formation.
  BDT focuses on stimulus-based tasks, whereas social cognition focuses on memory-
based tasks.
 In social cognition, cognitive response and recall measures are used, but in BDT,
information acquisition, verbal protocols, and response time are used.

Multiple dual processing models have been recognized in the work of social cognition.

Role of Dual Processing:

Multiple cognitive styles can be engaged during the course of a single decision, according to dual
processing models. The balance between these styles is influenced by the amount of drive and
thought required. When it comes to making a purchase, buyers are frequently confronted with a
myriad of brands and items to choose from. To deal with these time constraints and cognitive
limitations while making generally rational and pleasant selections, purchasers appear to use a
two-step decision process. Using non-compensatory decision rules, an initial simplification phase
entails picking a selection of brands or items for future consideration. This is simply done by
ranking the features amongst the products offered. This screening of products is more rational in
nature than emotional. Then using compensatory process a more in-depth screening is done. The
buyer compensates a very good feature of a product with its really bad feature in order to
understand the total value of the product.

Non- compensatory rules are more decisive in nature and deals with absolutes, as in exact
features needed/wanted and features disliked. On the other hand compensatory rules are more
like a trade-off/compromise, where one feature can overcome the lack of another.

Factors Influencing Decision Rule Usage:

Marketers have long utilised event- or situation-based segmentation to tailor marketing

campaigns. Similarly, the use of cut-off or screening rules will most likely be situational. Time
pressure, search complexity and expense, and switching costs are only a few of the situational
considerations that influence the implementation of decision rules. Additional internal buyer
factors have also been determined by authors, such as past experience with the product, risk
tolerance and cognitive factor. Likewise, marketing elements will also play a role. Product
differentiation, as well as the breadth and depth of accessible models, are product-related
elements that are likely to influence a buyer's decision-making methods.
Measurement and Analysis Considerations:

It is anticipated that the more elements a buyer must examine, and the more complicated the
elements are, the more likely she or he will use non-compensatory choice processes to simplify.
Prior to performing research, it is critical for the researcher to examine these factors.

There are several approaches to examine these processes in the context of a survey. Common
question structures, such as ranking, can help us measure non-compensatory decision rules.
Conjoint analysis and discrete choice models have long been used to capture compensatory
decision processes. These methods employ a variety of measurement tools, including self-
explanatory questions.

Implications for Marketers and Researchers:

A researcher can adjust the research methods used and the insights gathered to the marketing
challenge driving the project by better defining the nature of the buyer choice process in a
specific situation.