Changing preferences…

Most of consumer’s theory in Economics is based on – guess what – consumption. How do people make their consumption decisions? What if the price of one good increases or if suddenly you have more income or an increase in your salary?

Of course, all these questions depend on one’s preferences. Each one of us have preferences – I for instance HATE mayonnaise, but love Spinach Pie and, say, Peanut Butter. But depending on the “levels” of my preferences I will decide how to spend my money among Spinach Pies, Peanut Butter and all the other goods. Of course that this decision depends on how much money you have available. If you had infinite money, you could buy all of everything you like, what would you care? But since this is not the case – at least for me (and if it is for you, maybe you might consider contributing to my blog with some small donation) – you have to decide what share of your budget goes to every good – and one of those “goods” might be tomorrow’s consumption, meaning: savings.

In any case, many policies are based in this simple model. If you want to create an incentive to consume more of an specific good (such as education for example) you just reduce the price of that good. Consumer’s theory shows how – in most cases – reducing prices will make you consume more of that good and less of others – proportionally.

But one thing that economist almost never talk about is that another way to generate incentives to induce an specific outcome is not to change prices or increase the wealth of the individual, but inducing a change in one’s preferences. For instance, if we convince people that sending their children to primary education is very important, then we would not see policies such as hot meals or a daily glass of milk in school – which are meant to create incentives by reducing the costs of school for your children.

But why don’t economist talk about this often? Well, it is because in real life, we don’t know – and we cannot know – what are the preferences of individuals. Therefore we don’t know how to change them. However, when creating and effective policy is out of our hands or we don’t have the political power to do so, people engage in activities that are aimed to change the preferences of people. This is what information campaigns are all about.

For example, vegetarians in the USA don’t have the political power to impose taxes on meat or poultry so that people will consume less of those. But they can engage in demonstrations and information campaigns that are intended to change the preferences of people, such as the one I saw in Boston a couple of weeks ago.

Protest Outside McDonald's

Some vegetarian protesters gathered outside McDonald’s to try to convince people not to eat there. This is clearly their best bet to reduce consumer’s demand for meat, because they cannot close the establishment or increase prices. Both measures would probably increase the cost of McDonald’s hamburgers: the second one by increasing prices directly and the first one by increasing searching costs of looking for another establishment with meat (imagine that in a small city in India should be very hard to find an restaurant nearby that sells a steak, so it will involve more time to look for it, increasing the costs of meat indirectly). However, as I said, they cannot promote these policies, so they have to try to change people’s preferences by standing there and handing out pamphlets with information.

Another example of this is Al Gore. He cannot clearly impose environmental laws in all countries in the world. So aside from lobbying for laws that protect the environment worldwide, he also tries to engage with “final consumers” by convincing them that there are some activities we could be doing to help the environment. He is clearly trying to affect our preferences so that we will invest part of our time in environmental activities (since time is costly, deciding to what we dedicate our time it has costs involved, so we also do it according to our preferences). A previous related post about recycling and why people choose most of the time not to invest their time in recycling activities is here.

Changing preferences is possible, but we don’t know how effective it would be. Think about smoking. The real decrease in smoking in the USA didn’t come after all the information campaigns against smoking, but after the bans for smoking in public closed areas. This last “policy” just increased the cost of smoking, therefore, reducing demand for it.

The reason of the  “inefficiency” of changing preferences is that we don’t know how to measure preferences, therefore, we don’t know how to change them – and if indeed they changed. However, aside from being costly and unmeasurable, it is still a very used method. The world of marketing is intended to change preferences, by trying to convince people that one particular brand is better, even though the product is the same across all brands. Information campaigns are aimed to do the same thing.

In short, next time you see an add or any information campaign, be careful, they are trying to change your preferences!