Wednesday, November 26, 2008

Irrational economic agents and the economic crisis!

Behavioural economists have debunked the rational economic agent hypothesis for some time now. The ongoing crisis appears to have made consumers in the US even more irrational in their consumption patterns. In what can be best termed as the "Wal Mart effect", large numbers of consumers are flocking to budget stores and stocking up materials in the belief that buying at Wal-Mart and Co. equals saving money. There appears to be a prevasive feeeling that you can save money by spending it, especially on cheap buys, whether you need them or not!

The downturn has had the obvious effect on people cutting down on certain spending like luxury goods, vacations, weekend holiday commutes etc. But the money saved on these appear to being spent with vengeance elsewhere, often on the not-so-essential items just because they appear cheap. People are signing up for discount stores that sell in bulk and over-purchasing ‘bargains’ that are so enormous they will not live long enough to use the item, and are whittling pennies from cable bills only to squander dollars on gas driving miles to discount stores, or on coupon-spurred splurges for nonessential items, like Cheez Whiz or organizing supplies.

Faced with declining conventional sales, businesses are adapting to the changing environment with innovative sales and marketing tactics that seek to play on the psychological insecurity of their consumers. Retailers have been cutting prices aggressively and offering interest free loans in an effort to lure in consumers. As one consumer said, "my phone bill still has charges like $4.99 per month for technical stunts I can’t even pronounce, much less access. No wonder Verizon is doing well"!

1 comment:

Mberenis said...

Don't focus on the negative, realize that to dark there is light. I did some research and this is what I found. The bailout is causing lenders to practically give away money. You would be surprised at how much cheap and in some cases "free" money is going around out there.

Bailouts for Everyone