How Consumers Simplify the Decision-Making Process

A standard objection to the use of markets in organizing society’s production and consumption is that individuals are “malleable” — subject to social influence. They use a two-step approach. First, critics bring up the tiresome strawman of a hyper-rational homo economicus whose preferences are determined, constant, and transitive. Second, they point to common human behavior that contradicts the ideal homo economicus. Conclusion: markets are frail, economists are charlatans and we can’t trust individuals to make decisions in their own lives.

Frequently making an appearance in discussions over marketing, the malleability objection complements this interventionist strategy by saying that — actually — our preferences aren’t “ours” at all. Rather than originating from some deep and independent individuality of our own minds, they are processes of social internalization, development and community esteem. In economics speak, preferences are endogenous: we want what our community teaches us to want — not what we actually want. Preferences are, at least partially, socially determined and so subject to what is called ‘ cumulative advantage — or the Matthew Effect: a slight, even fleetingly random, advantage in taste evolves into an extreme dominance for no other reason than its initial random advantage. This, of course, would be a problem for most economic reasoning since methodological individualism and humility before individuals’ ultimate ends is a cornerstone of Austrian and mainstream thinking alike.

Here’s a classic example. 14,000 online music enthusiasts were asked to rate and download songs they have never heard before. They were divided into nine different groups, eight self-contained “worlds” where participants could only see the ratings and downloads of members of their own world, and a ninth control group that weren’t shown any ratings at all. Duncan Watts, one of the co-authors of the study , describes the study in a New York Times article:

we didn’t manipulate any of these rankings — all the artists in all worlds started out identically, with zero downloads — but because the different worlds were kept separate, they subsequently evolved independently of one another.

If people’s music preferences were entirely exogenous (driven by their own independent taste), the ratings and downloads ought to have been roughly the same across all nine worlds – other people’s opinions of what was good music wouldn’t alter ratings and downloads very much compared to the uninfluenced ninth group. And the, objectively speaking, “best” songs ought to have come out on top in all worlds. Results:

“the particular songs that became hits were different in different worlds, just as cumulative-advantage theory would predict. Introducing social influence into human decision making, in other words, didn’t just make the hits bigger; it also made them more unpredictable.”

The market critic would quickly jump at such results, relegating the market’s ability to satisfy consumer wants to the dustbin of failed economic theories. One conclusion that could be drawn: those who became rich via entrepreneurship weren’t actually entrepreneurial or apt at delivering the goods or kind of music the masses wanted. They were just lucky, subject to the cumulative-advantage effect. Moreover, since they got rich without displaying providing any real service or insight, we can now freely take their incomes, houses, and yachts.

Consumers Must Narrow Down their Choices

Here’s the ironic thing: anybody accepting a world of spontaneous order and less-than-perfect information ought to have expected as much. In a time scarce world, with never-before-seen access to more books, music, art or items that you could ever hope to survey, even perfectly rational individuals could take others’ actions into account. Indeed, failing to do so would be utterly irrational and subject to extreme hubris: nobody else’s taste in music could ever be informative to me.

An individual, facing a decision, may it be “which car best suits me?”, “which t-shirt should I buy?”, or “do I like this song/toothpaste/?” has to trade off time for information. In the extreme, somebody with unlimited time and effort can survey all the t-shirts in the world, can listen to all the music in the world, try out every single car model — and then make a decision for which car to use. Most of us have slightly tighter constraints and happily trade off the effort involved in finding a (potentially) better t-shirt elsewhere for the good enough t-shirt in front of us; we’re satisficing rather than maximizing. Contrary to simple two-goods models in introductory economics, real-world consumers simultaneously trade off many resources (goods, assets, time, effort) along many dimensions at ones.

So, for somebody to realize their time and effort constraint into surveying all the world’s music (it would take you six lifetimes to listen to everything that’s on Spotify today), allowing others’ display of taste some weight into my own decision-making is perfectly rational. Heavily relying on the advice of friends and a song’s popularity in the general population is the necessary trade-off of a world with less-than-perfect information.

Letting Others Do the Work (of Consumer Decision-Making) For You

Indeed, on a more fundamental economic level, this is the logical conclusion of division of labor. Taking information from others is how we survive in large-scale complex market societies. This is easy to see when discussing a broken car or leaking pipes: you could probably learn how to fix those pipes yourself and develop your car mechanic skills to be able to repair the car, but it would likely take much more time, effort and money than you’re willing to part with — hiring a specialist makes economic sense. Similarly, you can think of relying on others’ tastes when it comes to music or food flavors or TV shows to be a trove of useful information, deflated appropriately by how much you tend to like what others like.

That is, allowing additional information about others’ tastes (even marketing!) is not simply marketing brainwashing or mindless steps in following the communitarian herd, but a thoughtful — indeed, quite possibly a rational — process of trading off other resources along other dimensions. For some (say for experts, or those enjoying the challenges of learning and overcoming problems) it might make sense to extensively survey the market or devote time to learn how to repair a car.

For most of us, it’s a waste of time and energy.

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