A New Role For Psychological Economics in Consumer Research

Victor J. Cook, Tulane University [Associate Professor of Marketing and Area Coordinator, the Tulane University School of Business, New Orleans, LA 70118]
ABSTRACT - The rise of affluent consumers motivated psychological economic studies. A research paradigm is presented which defines the field in relation to other disciplines and illustrates the direction of research in the first ten years of the JCR. The author concludes consumer studies are too narrowly focused. Expanding the perspective of consumer research is a new role for psychological economics.
[ to cite ]:
Victor J. Cook (1984) ,"A New Role For Psychological Economics in Consumer Research", in NA - Advances in Consumer Research Volume 11, eds. Thomas C. Kinnear, Provo, UT : Association for Consumer Research, Pages: 709-713.

Advances in Consumer Research Volume 11, 1984      Pages 709-713

A NEW ROLE FOR PSYCHOLOGICAL ECONOMICS IN CONSUMER RESEARCH

Victor J. Cook, Tulane University [Associate Professor of Marketing and Area Coordinator, the Tulane University School of Business, New Orleans, LA 70118]

[This paper was supported by a research grant from the Tulane University School of Business.]

ABSTRACT -

The rise of affluent consumers motivated psychological economic studies. A research paradigm is presented which defines the field in relation to other disciplines and illustrates the direction of research in the first ten years of the JCR. The author concludes consumer studies are too narrowly focused. Expanding the perspective of consumer research is a new role for psychological economics.

THE AFFLUENT CONSUMER

Before the nineteenth century consumers had little discretionary spending power. Available income went to securing the basic necessities of life. Food was the most important component of a consumer's budget. Having little or no discretionary income, consumers were not a source of direct investment in the wealth of a country. Human resources were not considered a source of the wealth of a nation.

A New Source of Wealth

In the nineteenth century, economists considered business investment the only source of wealth. Later, the government was added as a source. The rise of the affluent consumer brought the average household boldly into the creation of wealth through its investments in durable goods as well as business and human assets. Since World War II consumer investments in transportation, housing, education and securities have come to have a significant impact on the nation's wealth. Consumer saving and investment decisions have grown in importance. With this new source of wealth came an interest in consumer willingness to invest, and a concern for the effects of consumer sentiments on the wealth of a nation. This was the traditional role of psychological economics. Van Raaij summarized this role: "economic psychology emphasizes the human factor in economic research (1981, page 23)."

The Income Revolution

The study of psychological economics grew with the rise of the affluent consumer and the creation of wealth by the average family. Katona argued "the sine qua non of a mass consumption economy is a substantial increase in the average family's income together with a great change in the distribution of income (1975, page 21)." In the twentieth century the income revolution produced a fundamental change in both the distribution of wealth and its forms in developed countries like the United States, Japan, the United Kingdom and Western Europe.

The extent of the income revolution in the U.S. today is portrayed in Figure 1. The distribution of effective buying income among four groups called the Wealthy, the Affluent, the Strugglers, and the Poor reflect their importance in the economy. Figure 1 shows the percent of the U.S. population of households that fits each of these classifications and the percent of total effective buying income for which each group accounts according to an analysis of the 1980 census based on data supplied by Market Statistics, Inc.

The Motivation for Psychological Economics

The affluent consumer is the motivation behind the study of psychological economics. From this perspective, the point of real interest in Figure 1 is neither that the top eight percent of wealthy households account for 22 percent of effective buying income nor that the 15 percent of poor households earn barely three percent of the buying income. The point of real interest is that nearly 60 percent of U.S. households, affluent by any world standard, account for over two-thirds of the nation's buying power. It is this majority of 50 million households with an effective buying income between $15,000 and $50,000 that has significant discretionary spending power. It is this majority of consumers that has become a new moving force in the pattern of modern economic development. It is this affluent consumer that motivates the pursuit of studies in psychological economics and consumer research.

FIGURE 1

THE AFFLUENT CONSUMER

A PARADIGM OF CONSUMER RESEARCH

Consumer research is an integrative discipline. It draws on economics, psychology, management science, sociology, statistics and other fields of study. Its scientific scope includes the consumption, saving and investment behavior of individuals, groups and populations. Consumer research must be as sympathetic to the theoretical rigor of its parent disciplines as it is to the demands of its users for realism. Two dimensions identify the major differences among the parent disciplines of consumer research and highlight the topics of psychological economics. These are the unit of analysis and the method of measurement.

Analysis and Measurement

The unit of analysis is one dimension in the consumer research paradigm presented in Figure 2. The unit of analysis is that which the scientist prefers to study in testing hypotheses. The alternatives lie on a continuum anchored on the one end by studies of the individual and on the other with studies of populations. Studies of various size groups occupy points between these extremes.

The method of measurement, or the way the scientist calibrates perception, is the second dimension in the consumer research paradigm. The two alternatives are observation of behavior and self reports about behavior. These are not mutually exclusive, as observation may be combined with self report data.

Figure 2 defines the topics of psychological economics (in the boxes) as well as the principal concerns of its parent disciplines, economics, psychology, management science and sociology. It may reasonably be claimed that the four quadrants in Figure 2 define a complete paradigm of consumer research.

FIGURE 2

A PARADIGM OF CONSUMER RESEARCH

Economics and Psychology

Usually, economists begin their study of consumers with observable measures of the behavior of populations (Quadrant I of Figure 2). The consumption function is a good example of this point of view. Psychologists, on the other hand, usually begin their study of consumers with self report measures at the individual unit of analysis (Quadrant IV of Figure 2). Psychoanalysis is a pure case of this point of view. These philosophical differences represent points of departure for economics and psychology.

Boulding stated the economist's position: "It is the behavior of commodities not the behavior of people which is the prime focus of interest in economic studies (1956, page 82)." Katona summarized the psychologist's point of view: "it is the individual who represents the starting point of psychology ... it is the individual who thinks, feels, and learns (1975, Daze 41)."

Psychological Economics

The two quadrants of the paradigm in Figure 2 enclosed in boxes represent areas largely undeveloped by the competing philosophies of economics and psychology. The boxes define the domains of psychological economics. The field of study adds the important dimension of consumer population surveys (Quadrant III) to classic observations of aggregate economic analysis. Psychological economics also adds consumer laboratory experiments (Quadrant II) to validate the assumptions Or economics and enrich the methodologies of psychology.

Katona and his associates at the Survey Research Center of the University of Michigan led the development of scientific consumer population surveys. In the process they created one important branch of the field of study now known as behavioral or psychological economics. That work continues today. It is expanding in new directions through the use of consumer attitudes in econometric forecasting (Curtin 1983) and analysis of microconsumption patterns using syndicated consumer population surveys (Utsey and Cook 1983).

The development of consumer experiments is a newer field of study in psychological economics. Beginning with the work of Smith (1976) and Plott (1978) the fundamental assumptions made by economists concerning the behavior of individuals in free markets have been subjected to rigorous laboratory testing. The results provide insights into the working of these markets and add the second branch to the field of psychological economics. That work continues to grow rapidly in importance. Grether and Wilde (1983) have extended and defined the domain of experiments in consumer research.

PSYCHOLOGICAL ECONOMICS IN CONSUMER RESEARCH

Each of the first issues of the first ten volumes of the Journal of Consumer Research offer a perspective on the state of the art and on the meaning of the paradigm of consumer research in Figure 2. These ten issues contained a total of seventy-nine original research papers, four commentaries, and one editorial.

Quadrant I Studies in Consumer Research

Research by economists, management scientists and sociologists are all found in Quadrant I, though the domain is dominated by economists. Economic studies are those based on observations of the behavior of populations. A classic example, in volume two of the Journal, was a study by White designed to analyze "some of the factors influencing a consumer's decision to use bank credit cards versus checking accounts (1975, page 10)."

Following the tradition of economic studies of consumer research, White did not survey the opinions of individual consumers. A "cross-section sample of 649 households in a large metropolitan area was chosen from the files" of a bank (page 13). He recorded the "amounts and number of debits and credits cleared on each day of each month...a total of 27,900 separate transactions were available for analysis (page 14)." The conclusions of this study fit the classic pattern of economic analysis. "If it is desired to increase the use of credit cards for transactions ... a first step requires the cost of credit card operations be brought below that of checks so that banks have an incentive to pass cost savings on to the consumer (page 8)."

Economic approaches to consumer research are characterized by a reliance on observations of population behavior. Though survey methods are sometimes used in Quadrant I studies on consumer behavior, the purpose is to collect observations, not self reports. Volume six of the Journal offers a good case in point. The purpose of this study by Morgan, Metzen and Johnson was "to estimate the implicit prices for units of breakfast cereal characteristics (1979, page 67)." To achieve this objective, the researchers took a classic Quadrant I approach to the problem. "Price data for this investigation were obtained by requesting information on cereal purchases from state purchasing agents for all 50 of the United States, for the period 1972 through 1976. Contract information (vendor, product, size of package, price, basis of price quotation, and length of contract) was received from 12 states (page 68)." This survey produced a sample of the details on 1,702 contracts written by state purchasing agents over the five year period. The researchers assumed the purchasing agents sought to maximize the satisfaction of their clientele's food expenditure.

Recording observed behavior of a population is not just a tradition of economic studies in consumer research, it serves as the very definition of such studies. The ingenuity of economists in their search for observable facts surrounding consumer behavior is limited only by the reach of their theory and the availability of public data. Since economic theory is nearly boundless and almost everything in marketing is public, one might expect a high incidence of economic studies in consumer research. This is not the case. Based on the first issues of the first ten years of the Journal of Consumer Research, economic studies account for only nine percent of the published papers.

Quadrant II: Consumer Laboratory Experiments

Judged by the precepts specified by Smith (1976) and extended by Wilde, few reports on consumer laboratory experiments appeared in the first issues of the first ten years of the Journal:

Smith's precepts are intended to guarantee that a well-defined microeconomic environment has been created in the laboratory, that adequate control over that environment has been maintained, and that any 'results' obtained are relevant outside the laboratory. Consider the first of these goals. A well-defined microeconomic environment requires that individuals have consistent preferences and act so as to maximize their own well being. Nonsatiation guarantees that both these requirements will be satisfied. However, a well-defined microeconomic environment also requires that individuals act through an institutional setting in order to determine final allocations which, in turn, determine rewards. ... Thus, a fourth precept, which I call saliency must be added to Smith's precepts. Saliency requires that the reward earned by an individual is tied to decisions made by that individual (Wilde 1981, page 140, italics inserted)."

Consumer experiments seem not to approach research design with the rigor suggested by Smith and Wilde. Apparently consumer researchers assume individual self reports of preference are equivalent to observation of individual choice behavior. Consumer research generally gives little attention to the institutional setting and the relationship between rewards and the decisions subjects make.

In volume one of the Journal Jacoby, Speller and Berning report a study designed to test "the hypothesis that finite limits exist to the amount of information consumers can effectively use (1974, page 33)." Part of the test involved engaging "192 paid housewife volunteers residing in Lafayette, Indiana (page 34)" in simulated shopping trips in which "their task was to choose the brand they liked best (page 35)." Rewards were not related to brand choice. Subject behavior was unrelated to their own well being. Control of preferences was weak. Attention was not given to the reality of the institutional environment. Actual choices were observed and an experimenter "was able to record the amount of time it took each subject to reach a decision (page 35)." By the standards of Smith and Wilde this was not a well-defined microeconomic environment, but it is typical of consumer laboratory experiments.

In volume nine of the Journal Huber, Payne and Puto report a study designed to show "that both the similarity hypothesis and the regularity condition can be consistently violated by the addition of an asymmetrically dominated alternative (1982, page 90)." Their demonstration of this premise was based on "one hundred and fifty-three students in graduate and undergraduate business classes (who) were asked to make choices from among six product categories: cars, restaurants, beers, lotteries, film, and television sets (page 92)." The subjects choices were not among real alternatives. They offered self reported preferences for synthetic items. Again, rewards were not linked to the decisions to be made. The environment lacked an institutional setting. There was no indication that choice affected the well being of the subjects.

In the first ten years of the Journal, only nine percent of the papers were representative of Quadrant II studies. Too few consumer research papers are based on observation of individual behavior under laboratory conditions.

Quadrant III: Consumer Population Surveys

The first paper in the first issue of the first volume of the Journal was dedicated to psychological economics. It was followed by three commentaries on the same topic (Crockett, Bymers and Foote 1974). Katona, delighted on the one hand by the progress made in psychological economics, found ample reason for dissatisfaction with its acceptance in the economics profession. "Econometric studies are still commonly restricted to an analysis of the interrelations among aggregate data that reflect past activities (Katona 1974, page 1).n Crockett saw "little in the findings 'Katona cites that will surprise a modern consumption theorist. On the contrary, there is valuable confirmation of that theory and some interesting insights into the characteristics of the utility function (1974, page 11) " Bymers was happy to recognize Professor Katona's "insistence that it makes a difference who holds the purchasing power, what their asset structure is and how they perceive the current economic scene (1974, page 11)." Foote found it ironic that Katona "clings to the archaic framework of the economists whom he professes to enlighten, (to) their conception of the economy not as a diverse and complex structure of contending groups, but as an aggregate of individuals propelled by subjective perceptions, attitudes, expectations, aspirations (1974, page 12)."

A example of Quadrant III studies in consumer research appeared in volume nine of the Journal. Heberlein, Linz and Ortiz began with "413 residential customers drawn at random from the residential population served by the Wisconsin Public Service Corporation in Green Bay, Wisconsin (1982, page 108)." Their purpose was to measure the "satisfaction, commitment, and knowledge of customers on a mandatory participation time-of-day electricity pricing experiment (page 106)." Though the researchers had detailed billing records for each customer, these observations were not used in the study. Customers were asked if they were satisfied. "Eight satisfaction items were put in a Likert Scale with a mean of 26.5 and a range of possible scores from 10 to 38 (page 108)." Commitment to off peak use was measured by self report. "Almost 80 percent reported they were somewhat committed or strongly committed to reducing electricity usage during peak periods (page 110)."

The use of consumer population surveys reflects the scientific point of view that perceptions and attitudes, as well as expectations about the future are as important in consumer research as observations of past activities. The contributions made by this viewpoint to consumer research should not be hidden by controversy over measurement error - the validity of observation compared with self report measures. If measurement error is reduced to the level associated with observation, studies based on surveys of a consumer population are classified as Quadrant I consumer research. For example, a study of buying behavior based on a diary panel is properly classified in Quadrant III as a consumer population survey. A study of buying behavior based on the same probability sampling methods making use of a scanner panel is classified in Quadrant I because the behavior of the population is observed.

Another contribution to consumer research was considered by Katona to be only a means to an end. That contribution is the acceptance of consumer survey research methodology in the scientific community. This acceptance has in turn led to major new developments in syndicated consumer survey research on microconsumption. An important example is the Simmons Study of Media and Markets (1982). Simmons reports annually on the microconsumption behavior of a probability sample survey 15,000 households in hundreds of product and service categories.

The long tradition of measuring consumer sentiments, the general acceptance of consumer survey methodology and the availability of large scale syndicated studies of micro consumption behavior should have led to a high incidence of Quadrant III papers in the Journal. It has. In the first ten years, twenty-five percent of the papers were based on consumer population surveys.

Quadrant IV Studies in Consumer Research

The self reports of individual consumer are the foundation for studies of information processing, social comparison, 2nd choice behavior.

Psychoanalysis is a pure form of the study of individual self reports. The counterpart of psychoanalysis in consumer research is information processing studies, though these differ at least in the immediacy Of subject reports. "The method of research is usually to have an individual actually perform the shopping choice behavior of interest, and to have the subject think out loud as he is doing so. This verbal record is called a protocol, and should be distinguished from retrospective questioning of the subject about his decision (Bettman, 1974, page 71)." Bettman's paper closed the first issue of volume one of the Journal and set the stage for a generation of information processing studies in consumer research.

Social comparison and choice behavior are the topics of many Quadrant IV papers published in the Journal. These research topics are particularly well suited to study through individual self reports. One of many examples of research combining social comparison with choice behavior is Wind's (1976) study of relevant others. His approach "considers the preference of a relevant other as another factor and simply adds it to the original set of factors (Daze 53)."

Studies in Quadrant IV of Figure 2 reflect the impact of social psychology on consumer research. Psychological studies dominated the first ten years of the Journal of Consumer Research. Fifty-seven percent of the papers published in issue one of the first ten volumes were Quadrant I studies of consumer behavior. Often these studies gave little attention to the difference between current and retrospective questioning of subjects or to their ability supply self reports. Many were based on convenience samples.

A Summary of the Evidence

Wind observed that "an examination of published JCR articles suggests that most of them are heavily oriented toward marketing and, to a lesser extent, toward social psychology. Articles on consumer behavior from the perspective of other disciplines are missing, and even more noticeable by their absence are truly interdisciplinary papers (1977, page 59)." Wind's conclusions are reflected in the evidence reported in this paper and summarized in Figure 3.

FIGURE 3

PSYCHOLOGICAL ECONOMIC STUDIES IN CONSUMER RESEARCH

Measured by the seventy-nine original papers in the June issue in the first ten volumes of the Journal of Consumer Research the field is dominated by a psychological perspective. Quadrant I studies in consumer research represent only nine percent of the sample of published papers. Psychological economic studies - consumer population surveys and consumer laboratory experiments - represent thirty-four percent of the sample papers. The balance, fifty-seven percent, are attributable to Quadrant IV consumer research.

A NEW ROLE FOR PSYCHOLOGICAL ECONOMICS

The topics of consumer research are the spending, saving, and investment behavior of individuals, groups and populations. The topics of research may be approached from several different scientific viewpoints. The principal dimensions on which these points of view differ from each other are the unit of analysis and the method of measurement. A sample of the papers appearing in the first ten volumes of the Journal of Consumer Research indicates a significant imbalance in favor of studies based or individual consumer self reports. A new role for psychological economics is to expand the perspective of consumer research.

Consumer research should move toward more laboratory experiments and population surveys. Consumer researchers should look to population surveys as an alternative data source. Consumer researchers should look to laboratory experimentation as an alternate testing ground. Researchers of all scientific backgrounds should better understand the options and viewpoints of the different parent disciplines. In this way a more even mix can be achieved between economic, psychological economic, and psychological studies of the spending, saving and investment behavior of consumers. Consumer research will achieve a more balanced interdisciplinary scientific perspective.

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