The Post-Recession Consumer

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The Post-Recession Consumer

Consumer buying habits depend largely on people's expectations for the future. As documented in a range of books including Predictably Irrational1 and Freakonomics,2 consumers aren't the purely rational decision-making units originally assumed by Adam Smith. Their expectations and the resulting decisions are based on a combination of analysis and emotion.

Most people tend to extrapolate the recent past into the future. If business conditions have been bad for the past few years, people typically start acting as if the economy will stay bad forever. Similarly, after several years of boom times, few people worry about the next recession.

Consumer memory is normally fleeting. People quickly adjust to new situations as they emerge. For example, in an economic downturn, they tighten their belts. But when things return to what they consider to be "normal," they adjust their behavior once again and begin spending at some long-term average. This has many historical precedents, such as the oil crisis of the 1970s. At that time, people cut their use of gasoline dramatically. But when the crunch eased, they went back to driving and actually increased their use of gasoline with the rise in popularity of gas-guzzling SUVs.

But sometimes the environment delivers a shock that changes behavior for a longer time. This is the result of a well-known decision-making error called the availability heuristic. It involves estimating that some event is more likely to happen simply because it's easily available in memory. Psychologists have found that availability in memory increases sharply when experiences are vivid, unusual, or emotionally charged. So, the availability heuristic predicts that the severity of a shock largely determines how much and how long behavioral changes will last.

That's important because the Great Recession seems to have been severe enough to cause major changes, although probably not permanent ones. Research recently reported in the McKinsey Quarterly3 supports this conclusion. It shows that a significant number of consumers reported having switched from premium brands to lower-priced products, and most of those did not intend to go back to their old ways.

The number of consumers who have tried cheaper products varies depending on the type of product. For example, beer drinkers didn't switch as much as people who bought cold remedies. But, in every category, there are a growing number of potential customers "in play," ranging generally from 4 to 10 percent of the category...

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