How supermarkets use your behaviour against you

I’ve never liked food shopping or supermarkets. I especially don’t like navigating overlit aisles after a busy day in an air-conditioned office. It’s worse for those with kids who know that all hell can break loose in the fruit and vegetable section.

Finding a bargain in these circumstances can be almost impossible. The carefully positioned “Best value” and “Super deal” signs are distracting, and the price comparisons are worse again.

That brand of shampoo I like is €6.79, and the little red flag underneath informs me that’s 10 cent cheaper in this shop than in a rival store. Good news.

But wait now, the tin of beans is 95 cent, and another little red flag says it’s also 95 cent at the main rival’s store. Why am I being told this seemingly useless piece of information? Will this influence my shopping habits? Why highlight this product and not another?

The key here is focus. I am distracted, tired and usually irritated when shopping. The supermarket wants to focus my attention on the fact that it offers good value and I don’t need to shop around.

Welcome to the world of behavioural economics. This element of it is called the “focusing illusion”. Over the last number of years, the arrival of German discounters has been good for increased competition. The days of doing a weekly shop at one place are gone. However, supermarkets have been attempting to fight back with price-matching and price-comparison tools and by employing the findings of behavioural economists.

You’re being irrational

Behavioural economics, a relatively new area of study, is a mash-up of psychology and economics. In the age of enlightenment, people were placed firmly in the centre of existence and were considered completely rational. Classical economic thinking, which evolved around this time, presumed people always acted rationally and in their own self-interest.

Traditional economic models are built around that assumption. Behavioural economics is a paradigm shift in the way the science is done. It says “I am irrational, you are irrational and so is your neighbour”. (You only have to look at the 2015 car in their driveway that’s way beyond their pay cheque to think that is true.)

With this new branch of science, human behaviour is not assumed, it is observed and experimented on. The sea change occurred when Daniel Kahneman, a psychologist, won the Nobel Prize for economics in 2002.

Nudge units

The impact behavioural economics has had over the past few years cannot be overstated. In part, this is due to a book called Nudge, written by Richard Thaler and Cass Sunstein. In 2010, British prime minister David Cameron was so taken with it that he set up his own "nudge" unit, helped by Thaler. It has now been spun out to 200 behavioural scientists across various government agencies. Thaler's co-author has been a prominent adviser to the White House, too.

One innovation of the UK nudge unit involved the use of something called “social leverage”. In order to make people more tax-compliant, letters were sent informing those in arrears that the majority of residents in the area had paid. People make the same decisions as the social group they identify with, and so they paid up. Governments using this science to “nudge” behaviour is one thing, and in a certain light could be deemed paternalistic.

Perhaps more worryingly for consumers, so-called hacks from nudge economics are being adopted by companies to maximise profits. Pete Lunn, one of the few practitioners in Ireland, has his own Price Lab at the Economic and Social Research Institute. He has been conducting experiments in his lab that look at the point at which a utility tariff becomes too complex.

Lunn says companies are definitely using the findings of behavioural economics, because “more and more consultancies are selling themselves as behavioural. So they are offering to take the science into your company and help you sell your products”.

Back to the supermarket use of the “focusing illusion”. Lunn says one practice he really doesn’t like is “when supermarkets try to tell you that you would not have paid less if you’d gone elsewhere by putting labels on their products telling you the price at a rival supermarket”.

The focusing illusion “means that you use small amounts of information to make larger decisions and usually that’s a sensible thing to do”, he says.

This is hardwired to help us assess our environments. When supermarkets use it, they are trying to get you to focus on a price that is a saving. However, it’s “false evidence”.

“It would be absolutely crazy not to try another supermarket on the basis that one product is cheaper there,” he says.

A similar trick used by retailers is “anchoring”. This is an age-old practice in the marketplace. An example of this is the quoting of a higher recommended retail price. We assume this is a decreed price. Lunn says, “The price quoted anchors you to think the product is worth X amount. If the recommended retail rate price is €30, your brain sees that as a benchmark. If the company says they are giving it to you for €25, then it looks like you’re getting a good deal. If they had just quoted €25 you might respond completely differently.”

This is used all the time. The good news, however, is that consumer-protection law is trying to catch up, and it’s now not permissible to consistently sell at “discounts”.

A very clever use of a very clever piece of behavioural economics that Lunn has noticed is a recent credit union ad for the “they won’t be kids forever” loan.

This is a unique way of selling a loan. It uses what is termed “loss aversion”. Kahneman discovered that we don’t make decisions around gain. Much more endemic and powerful is the avoidance of loss. Experiments show that if something is framed as a loss, we react totally differently than if it is framed as a gain, regardless of whether the numbers add up exactly the same.

The credit union ad has pictures of children on holiday. “What they’re saying is, ‘Take out a loan, they’re only going to be young for so long.’ They’ve managed to frame it as a loss: if you don’t [take out the loan] they will grow up and you won’t get the chance again. It looks to me like a marketing professional understood the power of loss aversion and said ‘we can reframe this as avoiding a loss’. If you can reframe something as a loss rather than a gain, more people will go for it, and that’s a trick.”

Energy companies

At his Price Lab – where volunteers are always welcome – Lunn has conducted experiments into the complexities of utility packages. Currently the trend is to sell at discounts. However, what many don’t realise is that when an energy company says it will give you 15 per cent off for six months, that is 15 per cent off its standard unit price.

“What they have actually done is instead of giving you one piece of information, which is how much do you pay per kilowatt hour, they’ve given you two or three bits. You have to get hold of their standard rate, work out the discount, work out your current tariff and work out the real price and savings, if any,” he says.

Lunn’s lab has shown that by making bills more complicated and offering discounts, consumers make less accurate choices. Although he agrees that swapping can make savings, he advises using comparison websites.

• Anyone interested in volunteering at the Price Lab should go to esri.ie/be