Why we find spending on expensive dinners/trips/other leisure activities a lot easier than on productive things such as buying books, courses etc. ? Why do governments spend so little on research programs? There is a connection here.
Recently, I was in a book store and found myself mulling over whether I should buy a book that would cost a few thousand rupees. I took about 10 mins to decide but couldn’t and put the decision off for a while. Then I went to a nearby cafe to meet some friends and spent the same amount of money as the book in that cafe instead.
It took me a moment to realise that while I wasn’t able to decide whether to spend the same amount of money on a book, I didn’t think twice before spending it on food and coffee!
Fortunately, I don’t give in to shame. I decided to analyze this buying behaviour of mine and here is what I found:
In buying a book there are two costs involved - the first is the the labelled price of the book and the second is the effort I would put in reading the book (perhaps several hours). Moreover, after having put the effort, I don’t know if I will get the expected payoff - I have no idea whether I will enjoy reading the book (or would want to leave it midway), and I have no idea whether it will be of any significance or utility in my real life (I.e., will it benefit my career or personal life in anyway). So there are two costs (monetary price and effort in consuming), and the payoffs are quite uncertain.
On the other hand, getting food and coffee in my favourite cafe for myself and even paying for friends is a straightforward calculation: The labelled price of the food is clear, there is absolutely no immediate cost I pay in consuming the product - I.e. consuming the food in itself is enjoyable rather than onerous (at least in the short run for immediate gratification). Further the payoffs are clear. Since I have been to this cafe before, I was certain that the food would be good. So no uncertainty there. Further, there are subtle social rewards even in paying for friends in a cafe. Hence, there was an assured good outcome unlike in the case of buying the book where there was a possibility that I may have not enjoyed it, it may have not been useful, and it may have been onerous.
Beyond the labelled price, the cost of consuming a product, and the beliefs about the certainty of the payoffs also matters in buying behaviour. Indeed the difference between immediate and delayed gratification plays a role here but the more important point is my belief in whether the payoffs are certain and the cost of consuming the good beyond the labelled price.
Again, let me emphasize that immediate versus delayed gratification is not the new point here, even though it is relevant. Indeed, there is a lot of research already on the fact that we prefer immediate gratification over delayed gratification. There is also a lot of research on the expected payoffs or expected utilities. It is the issue of hidden costs or the cost of consuming the product (beyond labeled price) that a lot of research has not explored until now.
These insights on buying behaviour have two very important applications:
For individual consumer goods, especially books, physical fitness subscriptions or products (gyms, personal trainers, etc.), courses etc. All these products require a consumption cost beyond the labelled price in terms of time and effort. They also come with an uncertainty of the payoffs. Reducing either can help their sales. User centric design experiences can help reduce non monetary consumption costs. For example, health products successfully convince consumers that the payoffs are certain only if they are willing to put the effort (present bias kicks on and people buy these products even if they never hit the gym after the first week). Note: Financial investment products are slightly different. There is no cost of consumption beyond the labelled price but an uncertainty in the payoffs.
For public spending, allocating budgets to research and social programs poses a similar structure of the problem. Low certainty about the payoffs (research allocations are especially vulnerable here as most research may not produce tangible benefits) and costs beyond the allocation of money (whether the programs are implemented properly or not matters and implementation requires tremendous efforts on part of many stakeholders). Therefore, it is of great value for startups or others who would like the governments to spend more on research to package these demands in a way that reduces payoff uncertainty and if possible, the non monetary costs (give them a specific plan, soften the ground, already align stakeholders before the implementation).
P.S. I went back to the bookstore after the cafe and bought the book nevertheless.
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