Shopping

In the last few months, American consumers have undergone a profound shift in their shopping habits. We've transitioned from being incessant consumers - the spendthrifts of the world - to reluctant savers. Here's the Times:

American consumers and businesses are embarking on an era of thrift as the recession deepens, saving more money as they cut spending on purchases as varied as sweaters, new homes and office towers.

Department of Commerce Report on Personal Income and Spending
That was the picture painted by two government reports released on Monday. One showed that Americans cut their spending for a sixth month in December as they worried about losing their jobs and earning less in a deteriorating economy. The personal saving rate in the last three months of 2008 rose to its highest level in six years.

I recently had an article (adapted from my book) in the Dallas Morning News that looked at some recent research on the neuroscience of shopping, and what happens when people become reluctant to buy:

The challenge for policymakers is a daunting one: How do you convince people that now is the time to buy? Fortunately, neuroscience is here to help. A recent experiment, led by researchers at Stanford University and Carnegie Mellon, sheds light on what happens inside the brain when people make shopping decisions. While economists have long assumed that consumers are rational agents and purchase goods based on calculations of utility, that assumption turns out to be false. In reality, every shopping decision is an emotional tug-of-war, as the pleasure of getting something new competes with the pain of spending money.

The experiment went like this: A few dozen lucky undergraduates were given a generous amount of cash and offered the chance to buy dozens of different objects, from a digital voice recorder to gourmet chocolates to the latest Harry Potter book. While the students were making their shopping decisions, the scientists were imaging the activity inside their head with a powerful brain scanner.

They discovered that when subjects were first exposed to the item, a part of the brain called the nucleus accumbens (NAcc) was turned on. The NAcc is a crucial part of our dopamine reward pathway - it's typically associated with things like sex, drugs and rock 'n' roll - and the intensity of its activation was a reflection of desire for the item. If the person already owned the complete Harry Potter collection, then the NAcc didn't get too excited about the prospect of buying another copy. However, if he'd been craving a George Foreman grill, then the NAcc flooded the brain with dopamine whenever that item appeared.

But then came the price tag. When the subjects were exposed to the cost of the product, the insula was activated. The insula is associated with aversive feelings, and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insula excited. Apparently, this includes spending money.

By measuring the relative amount of activity in each brain region, the scientists could accurately predict the subjects' shopping decisions. They knew which products people would buy before the people themselves did. If the insula's negativity exceeded the positive feelings generated by the NAcc, then the subject almost always chose not to buy the item. However, if the NAcc was more active than the insula, the object proved irresistible. The sting of giving up cash couldn't compete with the thrill of getting a George Foreman grill.

The first thing to note is that retail stores already manipulate this cortical setup. Just look at the interior of a Costco. It's no accident that the most covetous items are put in the most prominent places. A row of high-definition televisions surrounds the entrance. The fancy jewelry, Rolex watches and other luxury items are conspicuously placed along the corridors with the heaviest foot traffic. And then there are the free samples of food, liberally distributed throughout the store.

The goal of these discount warehouses is to constantly prime the pleasure centers of the brain, to keep us lusting after things we don't need. Even though we probably won't buy the Rolex, just looking at the fancy watch makes us more likely to buy something else, since the coveted item activates the NAcc.

But it's not enough to just excite our reward centers: Retailers must also inhibit the insula. This brain area is responsible for making sure we don't spend excessively, and when it's repeatedly assured by retail stores that low prices are "guaranteed," it stops worrying so much about the price tag. In fact, researchers have found that even when a store puts a promotional sticker next to the price tag - something like "Bargain Buy!" or "Hot Deal!" - but doesn't actually reduce the price, sales of the item will still dramatically increase.

These retail tactics lull our brain into buying more things, since the insula is pacified. (Paying with a credit card seems to have a similar effect. Because the actual payment is postponed until the end of the month, the insula doesn't fully process the pain of spending money. Of course, this leads, over time, to rampant credit card debt.)

The problem is that these retail tricks are no longer working; even Costco reported a drop in December sales. When times are tough, the emotional tug-of-war inside the brain is thrown out of whack, and consumers act like everything is overpriced. We're so worried about the dismal economy that the reward areas of the brain are stifled.

Furthermore, this research also helps explain why the dour economic mood can so easily become a tailspin, as bad news makes consumers even less likely to spend money, which leads to more bad news, and so on. (This is what happened to Japan during the1990s.)

I then allude to some economists who are proposing a nationwide 10 percent off sale, subsidized by the federal government.