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This article looks at some of the more irrational aspects of our mobility decisions
by Robert M. Häusle – 27 July 2019
What does Behavioral Economics tell us about our mobility decisions
According to modern economic theory, we not only live long ago in the age of Homo Oeconomicus, but rather use a new pyramid of needs that gives new priorities to mobility and networking. The ever-increasing mobility of people, coupled with the introduction of the internet up to today’s digital transformation, lead to completely new possibilities for the individual. Today we see a strong development towards psychological needs, which are of crucial importance regardless of the fulfilment of others. Furthermore, the theory of Homo Oeconomicus is based on a human image, according to which human beings behave perfectly logically, rationally and economically in all situations of life, and today more than ever also ecologically, and for this reason used their resources optimally, maximize benefits and act efficiently, economically and sustainably.
The dilemma between theory and reality is very clear in the rarely rational behavior of human beings. Even when we know what to do – not smoking, caring for old age, shopping efficiently and sustainably – we are constantly doing the opposite. We smoke and drink, cause speculative bubbles and economic crises, are to blame for traffic collapse and buy or use what the advertising cleverly packs. In other words, we are behaving extremely badly.
But if you try to look at the irrational and emotionally misty behavior of people who consume mobility directly and indirectly from the realistic point of view of behavioral economics, we get closer to the nudging idea in the mobility environment.
We are not super-rational mobility consumers
In the contemplation of neoclassical economics, modern consumer presents himself as Homo Oeconomicus, who is a “rational agent”, a constant optimizer and a maximizer of benefits. According to this theory, for example, a kiosk owner optimizes his investments by offering his customers the combination of magazines, cigarettes and cold drinks that sells best. And we as mobility customers always made the most of our budget by choosing exactly the perfect combination of practical and inexpensive mobility solutions.
Over the last twenty years, a solid empirical basis has been developed. This shows that consumers in the laboratory and in reality, often behave differently than the theory of rational consumption behavior predicts.
Three main reasons are responsible:
- Unstable preferences (reference point effects and hyperbolic discounting);
- Misjudgments (self-overestimation due to too much optimism or trust);
- No optimization (rules of thumb and heuristics).
Consumer purchasing behavior is often influenced by reference point effects. In the rational model, purchasing decisions are essentially described in the abstract as a choice between two goods: apple or pear, beer or pizza, etc. The context is never really discussed. During the selection process, however, the purchase decision is often influenced by how a competing product is presented. Moreover, the value attributed to a good depends not only on the benefits of consumption, but also on how the benefits increase or decrease compared to a reference level.
The conventional economic theory also assumes that supply and demand are balanced in the free market. According to this, supply and demand eventually settle on a balance: the market price. If that were the case, we would sooner or later know the appropriate price for each product and therefore for every mobility service. Our demand would not be distorted by trends or fashion phenomena. The free economy would be an interplay of perfectly rational, economically minded beings. The fact is, however, that we are not Homo Oeconomicus, even if we are modern.
We rarely make optimal mobility decisions and are easily influenced
How often do we go to a store with a short shopping list, but in the end we buy lots of things that we don’t really need: the socks with funny dots, which we never wear, or pasta with wasabi flavor, although we prefer to look for classic things. How little efficient! In the eyes of traditional economic theory, we are behaving completely “then” at this point. Here you can draw parallels with the theory of mobility and the current discussion about the ecologically correct footprint.
Why do we humans do this? Firstly, because it is almost impossible to make optimal mobility decisions. These are based on the optimal availability of information but let us stick to the example of grocery shopping: in the supermarket it is easier to make a decision than, for example, in the choice of occupation, place of residence, partner or forms of mobility. But in order to make the optimal food purchase, as well as to find the optimal mobility mix, one would have to:
- Know the prices of all mobility providers and forms in all areas and regions of a city or region or within reach or make them intuitively recognizable and available,
- calculate whether it is economically worthwhile to go a little further or to use different parallel concepts in order to be able to use a mobility provider or form of mobility cheaper or more efficiently, and
- check all available mobility offers and forms for their actual compatibility. The eScooter and the sharing bike together may be cheaper than ever – but you can’t conjure up a simple, stress-free and sustainable end-to-end journey.
In addition, we humans are easily distracted and misled. Even if all the information was available to us for an optimal mobility decision, it would not be said that we are really on course. Just think of the pasta and the dotted socks! And then there is our manipulability, where we are just as influencing as when shopping by wiping out the special offers and discount promotions. So, the idea that we are making rational economic decisions is fine, but it is far from true. In order to break down our decision-making behavior in the field of mobility, we could move into the field of Behavioral Economics or research into irrational human behavior in mobility-relevant situations.
We attribute greater mobility value to things, who we own
We do not intentionally attribute greater value to our own things. It is probably simply the case that the goods themselves seem more valuable to one than others. This has to do with the fact that we attribute a higher material value and importance to things when we own them ourselves – again, this is not very economical. From a purely economic-rational perspective, we should evaluate goods regardless of their possessions – but we do not.
Behavioral Economists conducted some important and relevant experiments in which participants in a group were asked to estimate the value of items they did not own or did not own. Participants in a second group received the same items as a gift before estimating the trade value – the subjects from group two attributed a much higher monetary value to the items.
This phenomenon is described as an “Endowment Effect” in the literature, which means “possession effect”. This effect has been widely researched and apparently affects even the experts themselves – here we are talking about rejection, which is, of course, completely irrational. Behavioral Economics calls this phenomenon a loss aversion: we want to avoid the pain of loss rather than achieve comparable benefits.
This would also explain the endowment effect in mobility. The sense of loss that we associate with the separation of individual means of movement in the car is stronger than the anticipation of acquiring a new freedom of mobility and independence from predefined forms of movement.That’s why we spend more money on something we own or than we would be willing to pay ourselves if we only used it. It’s not particularly rational, is it?
Our distinct ego seduces us into irrational economic behavior
Consumer happiness is essentially not based on the acquisition of an attractive product. Many people also simply love the feeling of doing a good deal or a closed trade. It’s exciting and we feel smart and cunning about it – this added value is also known as transactional benefit. The business community uses it in a targeted and regular way to entice us to consume. Retailers don’t even really have to cut prices, it’s enough if we feel they’re reduced.
And that is not the end of irrationality. Many people prefer to behave uneconomically rather than admit to malinvestment. This phenom, too, is ultimately due to loss aversion and can be transferred to the mobility dilemma: the more money or effort we put into a particular form of mobility, the more likely we are to continue to invest in this form of ” self-mobility” in order to achieve optimal mobility in the event of a failure of the project, not to lose everything that has been invested so far – even we already suspect that this is inevitable.
The experts refer to this as the Sunk-Cost-Fallacy-Effect (SCFE-Effect) or the term “escalating commitment” in the literature. We prefer to continue stubbornly at this point, rather than admitting the mistake.
Chances are good that even if you pride yourself on being rational most of the time, you still occasionally fall for the sunk cost fallacy
The sunk cost fallacy is a commitment to something based on previously invested money, effort or time. We are unwilling to walk away from the choice that we or someone else has made — even if, rationally, we know a different decision could lead to more money or more happiness.
We need nudges especially when decisions involve long-term consequences or many choice options
All these examples ultimately show us two statements: Traditional economic theory is constantly reaching its limits with its ideas of a thoroughly rational Homo Oeconomicus, and for this purpose Behavioral Economics provides much more realistic explanations. So, what do we do with the realization that we modern human beings are constantly irrational for a variety of reasons? – The findings of Behavioral Economics can also be used in practice and also in the question of urban mobility. A deeper understanding of how people make transportation-related decisions is essential to transforming personal mobility and should be more explicitly incorporated in all future mobility transformation programs and projects.
Examples show that we need more Behavioral Economic assessments and that “nudge” should use the mobility discussion model more than ever to show comprehensible patterns and to “nudge” better mobility decisions. It is therefore time for us to study economic behavior in mobility decisions from a human, realistic point of view.