Economics, 3rd Edition

IN THE NEWS

(Continued )

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130  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

go into a shop or a store and see 

something you really like. It might 

be an expensive purchase and you 

might know that you should not 

really be thinking of buying it but the 

item has really caught your atten-

tion and you are debating whether 

to buy it or not.

On the one hand, you know that the 

price that is being asked represents a 

loss – the money you will have to give 

up is an opportunity cost and means 

you will have to sacrifice other things 

that it could also buy you. Equally, you 

also know that owning this item will 

provide you with some form of gain – 

utility. When making the purchasing 

decision, therefore, you are balan-

cing out these competing forces. The 

brain plays a role in this; there seem 

to be two main parts of the brain that 

are involved in such decisions – the 

nucleus accumbens and the anterior 

insular. The nucleus accumbens emits 

two neuro transmitters – dopamine 

and serotonin. The former is associ-

ated with desire and the latter with 

inhibition. The anterior insula is a part 

of the brain that has some association 

with emotional experience and con-

scious feelings. This will include feel-

ings of pain, happiness, disgust, fear 

and anger.

The research was relatively com-

plex but the main results from the 

investigations are given below:

t
 When making decisions on finan-

cial instruments, investors tend 

not to act rationally. These can 

be called ‘risk-seeking mistakes’ 

and ‘risk-aversion mistakes’.

t
 Activity in the nucleus accum-

bens has an association with 

risk-seeking mistakes and risky 

choices.

t
 Activity in the anterior insula is 

associated with risk-aversion 

mistakes and riskless choices.

t
 Distinct neural circuits associ-

ated with anticipatory affect lead 

to different types of choices.

t
 Nucleus accumbens activation 

represents gain prediction.

t
 Anterior insula activation repres-

ents loss prediction.

t
 Activation of these brain reg-

ions can predict decisions to 

purchase.

In this chapter we looked at a model 

of consumer behaviour based on a 

model of rational decision making – 

 

maximizing utility with the  constraint of a 

limited income. However, this might not 

be the case in reality. The expectations 

that we might have about a purchase 

might trigger behavioural or affective 

(to do with emotions) responses which 

might influence what we eventually end 

up buying. The findings might be related 

to a wide range of decision making, 

including how we choose to buy insur-

ance and assurance, gambling at casi-

nos, at racing and so on, and how we 

pay for goods and services.

There is a suggestion, for 

example, that the perceived risk 

associated with buying goods and 

services through credit cards is dif-

ferent to that of cash. It has been 

suggested that we are ‘anaesthet-

ized’ against the effects of paying. 

As a result there may be a tend-

ency to overspend when purchas-

ing with credit cards compared to 

cash. There may also be similar 

effects going on when people pur-

chase online rather than going to a 

shop or a store. By understanding 

how the brain works in this respect, 

there may be possibilities of building 

incentives or disincentives to pur-

chase to take account of the way 

these parts of the brain work.

In making purchasing decisions, 

we know that there are a number of 

‘laws’ of economics that we might 

quote. Such ‘laws’ allow us to be 

able to make predictions – the very 

basis of having theories. However, 

if these laws are based on inaccur-

ate or incomplete knowledge of how 

humans actually carry out these 

actions then the model will not be 

able to be used as a predictive tool.

We assume, for example, that 

humans are attracted to preferred 

products (how that preference is 

generated is another story). We also 

assume that consumers prefer lower 

prices than higher prices and that if 

a price is deemed ‘excessive’ then 

we will avoid purchasing the item. 

Prices represent a potential gain and 

a potential loss. However, we might 

view similar losses and gains in dif-

ferent ways. In some cases we might 

view a loss as being more important 

than a gain even if they were of equal 

magnitude. That contradicts the 

rational approach that character-

izes much of economic theory. If our 

decision making is being affected 

by the activation of these distinct 

neural circuits then the extent to 

which they are activated might 

influence our choice. For example, 

the research cited examples where 

men were shown pictures of sports 

cars and other types of car deemed 

to be less desirable. Viewing sports 

cars produced a greater degree of 

brain activity in the mid-brain. Similar 

results have been obtained in cases 

where both men and women are 

shown preferred rather than less 

preferred drinks, brands of beer and 

coffee.

If this is the case, then it might 

suggest that advertising over a long 

period of time might have significant 

effects in influencing our choices 

if it has effects on our perceptions 

of preferred or non-preferred pur-

chases. What is happening is that 

the perception of loss and gain is 

being altered in relation to the price 

that is being charged.

The second piece of research 

involves the effect on human behav-

iour of different emotional states and 

the effect that hormones play in influ-

encing the brain and human behav-

iour. In a paper presented to a British 

Psychological Society (BPS) meeting 

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CHAPTER 5  BACKGROUND TO DEMAND: THE THEORY OF CONSUMER CHOICE  131

in April 2009, Professor Karen Pine of 

the University of Hertfordshire out-

lined her research findings from a 

study looking at the link between the 

menstrual cycle in women and pur-

chasing decisions. Professor Pine’s 

study involved 443 women aged 

18 to 50. It appeared to show a link 

between the stage of the menstrual 

cycle and purchasing decisions. Of 

the women in the sample, 153 were 

in the later stages of their menstrual 

cycle, known as the luteal phase. Of 

this group, over 60 per cent said that 

they had indulged in overspending 

and had bought items on impulse. The 

spending, in a small number of cases, 

was way over normal budgets – some 

women saying that they had over-

spent by as much as £250. In many 

cases, the women said that their pur-

chasing decisions at this time were 

accompanied by feelings of remorse 

afterwards.

Professor Pine commented, ‘The 

spending behaviour tends to be a 

reaction to intense emotions. They 

are feeling stressed or depressed 

and are more likely to go shopping 

to cheer themselves up and using 

it to regulate their emotions.’ The 

study also found that those women 

with severe pre-menstrual tension 

(PMT) displayed more extreme 

examples of this behaviour.

Part of the explanation for  this 

behaviour is that hormonal  changes 

 

in women at certain times of the 

menstrual cycle are associated with 

changes to the part of the brain that 

is linked to inhibitions and emotions. It 

has also been suggested that purchas-

ing decisions may be linked to a desire 

of women to make themselves look 

more attractive. There has been other 

research which suggested that part 

of female behaviour is driven by the 

need to demonstrate their fertility – a 

throwback to very early days when sur-

vival of the species depended in part on 

the ability to reproduce successfully. 

Around 14 days before the start of 

ovulation is a time which sees women 

increase their spending on items that 

enhance their attractiveness. These 

items include make-up, high-heeled 

shoes and jewellery. Professor Pine 

has said that her findings are suppor-

ted by other research which shows a 

so-called ‘ornamental effect’ linked to 

stages in the menstrual cycle.