Year: 2018

The underpinning of much economic analysis is whether or not consumers are rational in their choices. I would like to offer the notion that consumer rationality is a skill that can be either developed or left in a primitive state. This brief essay utilizes examples in the domain of budgeting to point the way toward educating the consumer to be more skillful in their rationality… or, at least, more reasoned in their choices.

Years ago, when text messaging was commonly an add-on to cell phone plans, my son, away at a high school asked me if he could add a ‘2000-messages-a-month’ option to his plan… and it cost only $10 per month. “Dad, 10 dollars a month isn’t much money.” “True”, I answered, “but let’s do the math. $10 a month would be $120 a year. You would be in high school for 4 years, so now we are up to $480 for this feature. In my high tax state and locality (NYC), this would mean I would have to earn $800 to pay for your text messages. Now, I earn $32 per hour as a Registered Dietitian so I would have to work 25 hours for this. Now, let me be honest, do I want to work a little more than 3 days of my life so that you, my dear son, can have basically unlimited text? No! I would rather take the 3 days off and go mountain biking.”

So, the ‘petty cash’ $10 per month looks quite different, and the consumer’s decision may change when the time horizon of the expense increases and the value of leisure is considered.

These days I am still a Registered Dietitian and I have too many patients with sub-optimally managed diabetes. Many of them are spending $165 to $220 per month for a cable TV subscription which gives them 800+ channels. I suggest to them, “Couldn’t you make do with the cheaper $79 per month plan? You would save between $1032 to $1692 after-tax dollars, which could buy you a lot of blueberries, walnuts, and other healthy foods to help manage your diabetes, and you will still have enough left over for a 4-to-5-day cruise. Or, you could take off an extra week to two from work each year. For what? For simply giving up some channels. And, if you are really ambitious, you could save enough to pay for one 10-day excursion to Europe every three years.”

We, the consumers, are relentlessly being bombarded by offers to sell us things (or services) we would want, where the price is expressed in some incredibly low monthly amount. If the consumer would convert this price into the number of days he could take off from work if he avoided this expense, or what he could have acquired instead if he put the monthly amount into an earmarked savings account, his purchase decision may change. Likely his future purchase calculus would become more reasoned.

Lastly, I suggest to patients (I suppose I choose them because they are a captive audience; at least for their hour-long session of NUTRITION counseling) to go through all the items on which they spend money each month, and look for all the ways they can save money by making some minor changes. For example, it is reliably estimated that using power strips for appliances and turning them off when not needed can save between $6 to $12 per month, which annually comes to $72 to $144 for the mere act of reaching down to turn off (and on) the power strip. I challenge them if they cannot come up with $150 per month in savings, incurring minimal disutility or minor reduction in features or conveniences. That would be $1800 after-tax dollars, another cruise with an unlimited bar and a room upgrade, or 3 to 4 weeks off from work.

Here’s a reverse example. I recently leased a new car for $289 per month with all the myriad of upfront fees – many of which seem to me ridiculous and extortionary – folded into the rate. It also includes $18 per month for a $5000 damage waiver.  Many people I know do not opt for the damage waiver because they calculate that over the 36-month lease, the total cost of the waiver is $648, which is about $1000 in pre-tax dollars. However, here they ought to think about the lease return experience of nearly every returnee, who gets hit with a bill for between $1500 to $3500 for repairing all the small dings and dents and cracks that occur inevitably.

The import of these examples is not whether or not consumer choice is rational. It’s that by teaching consumers to include other facets such as time horizon and the value of leisure or work avoidance in their calculus, they may make more skillful or reasoned choices.