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May 20, 2013

 By Professor Elior Kinarthy Rio Hondo College, California

Modern economics starts with training individuals to replace 20th century classical economic decisions based on logic, with 21st century decisions based on behavioral studies (Kahneman). Classical economics maintain that rational behavior by consumers and retailers is enough to reduce risk in business and maximize wealth. For example, mortgage brokers in the United States decided not to require down payments on home sales in order to increase their sales of mortgages. The sub prime mortgage crisis that resulted proved that seemingly rational decisions could have disastrous results. Behavioral economics theories consider consumer-retailer interaction the “human face” of the product-service paradigm of trade (Thaler). This new economics is a paradigm shift guided by behavioral cybernetics, a system of laws and rules generated by tested hypotheses.

The academic goal of the chapter is to introduce the reader to the nature of behaviorism, persuasive communication, and the psycho technological forces that impel attitude change in business, government and the market place. The newly emerging consumerism is behavioral, testable, multi-dimensional and internet based. Behavioral economics rely on tested rules that consciously evaluate decisions and calculate risk. (Prospect Theory, Daniel Kahneman). The behavioral approach says that modern consumer-retailer relationships are based on research and psychological rules that support less risky decision-making. Within this framework coaches, regulators, judges, referees, consumers, producers, retailers, wholesalers, in fact, anyone who handles cash or credit can learn to make interactive decisions that will optimize performance between buyers, sellers and systems.

Another goal of this chapter is to introduce, and analyze Moore’s law and its milestone effect on modern economics. Moore’s law describes the “game changing” force of technology – specifically the invention of the microchip in 1960. The microchip catapulted society to an unprecedented logarithmic scale of financial growth. This chapter discusses key research that demonstrate the paradigmatic changes that are beginning to occur in the behaviors and attitudes of consumers and retail sales personnel, business owners and government regulators.

The following are 4 examples of economic interactions between buyers and sellers using the behavioral concepts introduced in this chapter.

1. Anchoring effect: An utterance (intended or not) can affect the price, cost, saving, value, scarcity, or mark up of an item by a seller. An utterance may “anchor” the buyer’s expectation and that may influence the outcome of the sale or purchase. For example: George is an experienced real estate salesman. He made a casual remark to a customer buying a home that gave higher value to the house than the buyer wanted to pay. Later on the buyer bought the home for a higher price than expected. The “anchoring” effect used by George makes his yearly income higher than other salespeople in his real estate group. Question: What would stop some salespeople from using the anchoring effect?

2. Risky shift or “group think”: Feeling pressure from friends or peers may affect your independent decision-making ability when you shop, attend business meetings or vote in jury trials. For example: Mary went to buy a car with her two best friends who own Toyotas. Her family has always been Ford customers. Discuss what Mary could do to avoid a risky shift or a groupthink effect on her purchasing behavior. How could she retain her independent thinking?

3. Bernoulli error: The Bernoulli error discounts the psychological value of money in favor of its utility. For example: Bill’s broker keeps recommending stocks that earn at least 10% capital gain per year. He is surprised when Bill expresses his unhappiness with the results and threatens to move his millions to another brokerage. What reference points about Bill is the broker possibly missing?

4. Endowment effect: People often have an emotional attachment to an item that affects its selling price (possessive value). This endowment effect was studied in Behavioral Economics in the 1970’s with Thaler’s classical economics professor refusing to sell his $35 bottle of wine for $100. Classical economists would consider making more than a 150 percent profit as good business sense. How would this be viewed from a behavioral perspective?

The above excerpt is from a chapter proposal – IGI Global Publication Journal of Applied Behavioral Economics. The chapter may appear in Multi-perspective analysis of retailer-consumer relationship edited by professor Elena Druica, University of Bucharest, Romania and professor Fabio Musso, University of Urbino, Italy.


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