Behavioral Economics and Subliminal Manipulation

October 25, 2013

The science of economics (to the extent that it can be called a science) is at its core a study of human behavior. Economies are simply the result of all of the millions of actions taken by investors, business people and consumers. But most of the time economists are telling us about the larger issues like inflation, wages, unemployment, and production. Behavioral economics, on the other hand, is a very specialized branch of the science which looks at the psychology of economic decision making processes of individuals and (sometimes) institutions. Scientists in this field study why we buy more or less of something, what affects our decision to buy or not, and how that might be influenced.

The "ground level" focus of this part of economic study makes the research findings particularly useful; perhaps even more useful than the discoveries of significance to national economies. After all, studies can show that when a government spends too much and so must tax away too much of an economy it hurts production and job growth, but the politics of societies that vote themselves entitlements will usually overrule any productive use of this knowledge, and the expenditures will stay too high. Economists can probably demonstrate that shifting taxation more onto the wealthy doesn't harm an economy if the total amount of taxes collected and revenue spent stays the same, but the wealthy will effectively lobby against this anyhow. But discovering a simple thing like the fact that a person will be more likely to buy a $100 blender if a $180 blender is sitting next to it on the shelf is immediately useful -- at least to the owner of a store selling blenders.

The possibility of immediately applying what is learned by behavioral economists makes it an exciting field, but it also suggests that there are many ways to manipulate people when they are making personal financial decisions. Of course, such subliminal manipulation in the marketplace (subliminal refers to processes below the threshold of consciousness) has been going on for as long as people have been buying and selling things. It's just getting more scientific now. Let's look at one example, and consider how we might avoid being victims.

Weber's Law

What is Weber’s Law, and why should you know about it? It was not originally part of the study of economics. It is was formulated long ago by Ernst Heinrich Weber (1795–1878) from his observations of how humans respond to a physical stimulus. He measured and quantified this in several ways. In one experiment he blindfolded a man and gradually increased the weight the subject was holding. The man was told to respond as soon as he felt the increase in weight. It was found that the smallest difference a person can perceive as a difference, is proportional to the starting value of the weight. In other words, if you start at an ounce a half-ounce difference is easy to detect, but if you start at ten pounds you won’t notice a difference of even several ounces. Weber actually created an exact formula describing this phenomenon.

A century later scientists in the field of behavioral economics applied the idea to the money decisions that people routinely make. In this context the law was stated something like this: A change of stimulus is more emotional and motivational according to the base. For example, when subjects were observed or tested it might be found that they would drive across town to save $10 on a $20 item, but not to save $20 on a $500 item. Notice that in the latter case the effort was the same for double the savings, yet people would not normally respond to the savings in the same way when buying something with a higher price. You can imagine how this knowledge might be applied.

In case you can't imagine an application, here's an example: a furniture salesman can safely assume that you won’t walk away from a couch you like, and which costs $1,200, just to save $20 on it somewhere else. He can avoid dropping the price and sell you on the other benefits. Another example is one you might be very familiar with. It is a car buyer's tendency to pay for many extras that he or she might not have considered buying for a car that is already owned.

In other words, Weber's Law explains why car dealers can so successfully sell options for your new vehicle. The day before you bought that car, you may not have paid even $200 for a stereo for your vehicle, but you easily agree to pay $400 for one as part of a new car purchase. The reasoning, or rather the (mostly) unconscious psychology, goes like this, "What’s $400 more when I am already spending $24,000?" Well, actually, it’s the same amount as yesterday, but good luck trying to explain that to your subconscious mind.

Once you are aware of Weber’s Law you can start to watch for examples of it in your own thinking and behavior, in order to avoid irrational decisions and defeat manipulative sales people. For example, suppose you normally would travel halfway across town to save $20 or $30 on groceries. Now you are looking at a new computer for $899 and your wife mentions that she saw the same one at another store for $859. Ordinarily you might hesitate to leave and go to the other store to save $40 on a $900 item, but if you realize that this is just the psychology of the situation and an extra thirty minutes work is worth $40 you can choose to save the money.

There are certainly other areas of life would you expect to see the effects of Weber’s Law. You might think nothing much about who pays some $300 closing cost on a home you are buying for $200,000, but is that rational. If you would spend a minute negotiating at a rummage sale to save a buck or two, why not try to get the seller to pay that cost? By the way, this psychological phenomenon probably operates in many non-financial areas as well. I'll let you ponder that thought on your own.

The good news is that you can learn to recognize when you are being subliminally manipulated, and so avoid making some irrational decisions. The bad news is that this particular phenomenon is just one of many that are being investigated and, more recently, taught to marketers. In the future I'll report on tricks which are being used to subliminally influence you.

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