Suzy Davidkhanian: [00:00:00] Hi, everyone. Today is Wednesday, July 15th. Welcome to eMarketer's weekly retail show, Reimagining Retail. This is the show where we talk about how retail collides with every part of our lives, and I'm your host, Suzy Davidkhanian. On today's episode, we're exploring the psychology behind consumer decision-making and why the same shopper can splurge in one category while saving in another.

Joining me are senior analyst Grace Broadbent. Hey, Grace.

Grace Broadbent: Hi, Suzy.

Suzy Davidkhanian: And we have a very special guest, Professor Ayelet Fishbach from the University of Chicago's Booth School of Business. Hi, Professor Fishbach. Hi, Suzy and Grace. Glad to join you. We are so excited to have you. But before we even get started, let's do a very quick speed intro.

So in 30 seconds or less, Professor Fishbach, tell us what do you do in a sentence?

Ayelet Fishbach: What do I do? I am a business professor. I am a [00:01:00] motivation scientist. I am a behavioral scientist, and I mainly focus my research on consumer behavior and management.

Suzy Davidkhanian: And I was very fortunate to take one of your classes, and it was a very memorable one, so thank you so much for joining us.

One more quick question. What is your current favorite, you pick which one you wanna answer, book, podcast, TV show, movie?

Ayelet Fishbach: Oh gosh, there are too many. I'm one of those people that has a pile of books that I read simultaneously, and many podcasts. So you know, I'll go for a TV show because this is where I'm more consistent.

I just re-watched a entire Morning Show, okay, with with Reese Witherspoon and Jennifer Aniston. That was fun.

Grace Broadbent: I've seen that. I love that.

Ayelet Fishbach: Is it? It- Yeah ... I

Grace Broadbent: should

Ayelet Fishbach: put it to the top of my list.

Grace Broadbent: You should, yes. It's great. Yeah. I'm, I think I'm behind. I think I have a season to catch up on, but yes, highly recommend.

Suzy Davidkhanian: They are so good. Oh, [00:02:00] that's always-

Grace Broadbent: I know, I love both of them. Yeah. All my favorite actresses and actors all in one.

Suzy Davidkhanian: I love that. Okay, so back to business. On a recent Wall Street Journal article, they introduced this idea of the frugal rich. It's this higher income consumers who happily buy private label groceries or shop discount retailers, but then they also don't think twice when it comes to splurging on vacation, concert tickets, or any other experience.

So on the surface, that really does feel very contradictory, but maybe we've been asking the wrong question. Instead of wondering whether consumers are becoming more frugal or more indulgent, maybe we should be asking, how do consumers decide what's worth it? So today we're gonna use that idea of the frugal rich phenomena as a jumping-off point to explore the psychology behind consumer decision-making, and what retailers and brands can learn about how consumers define value, make trade-offs, and ultimately decide what's worth paying for.

But before we get into [00:03:00] it, I want to ask you both, what's the last purchase that sent you down a rabbit hole because you didn't wanna get it wrong? Professor Fishback, let's start with you.

Ayelet Fishbach: For me, that was an electric toothbrush. They go on a a huge range of prices. You can get them for $20 or for $400, and as far as I can tell, they, they all do exactly the same, which is brushing my teeth.

And yeah, that that was a journey. I'm still not sure I got the right one.

Suzy Davidkhanian: It's so funny 'cause I just bought one too for travel, though, which also there are, like, the cheap ones where the, you throw them out 'cause the battery runs out, or the Sonicare that they sell you a dream- It's hard to know.

Ayelet Fishbach: It's very hard A- and even if you even if you go for, say, decided on a S- a Sony cam, and now you have 10 versions of them, so- How-

Suzy Davidkhanian: I just experienced that Yeah. E- ex- exactly. It's hard to know. Yes. Every purchase of mine is a rabbit hole. Grace, what about you?

Grace Broadbent: I'm actually deep in wedding planning mode at the [00:04:00] moment, so all my current rabbit hole is save the date cards.

I think I have been on every single website for save the dates, looking at them, and I don't even care that much about them, but it just feels like a, It's an emotional experience, as the start of wedding planning and getting it right, but there's too many options, and it's do I want one-sided paper?

Do I need double-sided paper? There's triple back paper. There's too many paper options in this world, and- It's a lot ... I don't care that much about it, but I also can't make a decision to save my life,

Suzy Davidkhanian: congratulations.

Grace Broadbent: Thank you. Yes. It's a lot of decisions and a lot of rabbit holes I will find myself over in the next year.

Suzy Davidkhanian: And it's interesting, and you're teeing us up to our conversation 'cause everything in wedding planning is expensive, and some things are way more expensive than others. I imagine the save the date card is expensive, but compared to other things, maybe not as expensive. And there's that contradiction that we're seeing, and it's one of the biggest stories right now in retail, where it [00:05:00] seems like consumers are financially stressed, they're fragile, but then they're still traveling, they're planning weddings, they're splurging on experiences.

So we see them buying private label, but we also see them paying a gazillion dollars for different things like travel. So on the surface, Professor Fishback, that feels very contradictory, but is it perfectly rational in the end?

Ayelet Fishbach: Let me start by saying that people are inconsistent if anybody thought that they are consistent surprised, they are not, okay?

We can be a different person when we make different purchases. It's not surprising that we are inconsistent, but yet as as marketers and also as consumers, we want to get some order in it, okay? We want to understand the inconsistency. We want to know why we sometimes use system one the same system that Grace is using for choosing these cards, okay?

So we look at all the options and very rationally calculate what worth it. And [00:06:00] other times we use system two and just "Boy, this looks really nice. I should have it," and there is no second thought. So

Suzy Davidkhanian: are there decision rules that we can, like rules of thumb when it comes to decision-making, or it's really truly about in the moment?

Ayelet Fishbach: It's not always at the moment, okay? So some purchases do trigger our the what you call rational, okay, yeah our system of thinking through the problem. Some purchases do trigger our self-control alarm. If the purchase is something that we are going to repeat, okay, we- maybe we make it on a weekly basis or, and monthly basis, so we might think through it because it will accumulate.

If this is a more fa- utilitarian product, we might think more carefully. If we are in the mindset in which we wanted to signal something about our identity, where we want to [00:07:00] show to other people or to ourselves we are competent, that we are careful, we will think more carefully.

But this is not 100% of the time, okay? Sometimes we are on vacation in a new place, we never plan to quite repeat the same experience and the same place again, and we just get whatever feels right without really thinking through the options

Suzy Davidkhanian: It feels like we do oversimplify things, right? And put everybody into one bucket and hope everybody acts the same way.

One of the things when we were chatting ahead of time that I hadn't really thought through was the role uncertainty plays in decision-making. So the last few years, there obviously, we d- haven't stopped talking about COVID, though that was six years ago now. That brought about inflation, it went down, it came back up again.

Now people are concerned potentially about their future with AI and what work will look like. So from a behavioral standpoint, how does uncertainty influence the way people are actually [00:08:00] making decisions?

Ayelet Fishbach: Uncertainty is really hard to model, in particular in the domain that we are discussing, trying to predict consumer behavior, because uncertainty makes us nervous as consumers, okay?

That could lead to less purchasing and maybe try to save more because you don't know what the future will bring. However fears of inflation lead people to stock up, okay? Because prices might change. One way to relieve the nervousness is through consumption behavior, okay?

And looking for deals. And so again, we are going to get the same psychological state, which is being nervous, being uncertain, leading to more splurging and less saving. Also, learned helplessness, okay? Which is basically the psychological state of people that feel that they cannot control their life, that they don't know what the future will bring, sometimes lead people to [00:09:00] feel that, eh, nothing really matter, okay?

I have no control and therefore I might as well buy whatever I can afford today because I don't know what the future will bring. All this to say is that what we know is that people right now are more uncertain, are more nervous. You're right, it started with COVID. It continued with some uncertainty about the economy with the AI revolution, which I guess we live through it right now.

We know that, and then people respond in different ways that are just extremely hard to model.

Grace Broadbent: I like the term learned helplessness a lot. I feel like that puts a name to something I've been seeing a lot, especially among young people who started their financial adult lives during COVID and now are facing all the other hurdles you mentioned.

And there's a trend of younger people in particular saying I'm never gonna be able to afford a house. I'm never [00:10:00] gonna be able to afford to have kids. I'm never gonna afford a car," all these things. So instead of maybe the, quote, "more rational thing" is quietly saving money for all these things, it's, "I'm just gonna go to all these concerts," or, "I'm just gonna go on this trip," because it's like I'm never gonna get to the big goal anyway, so I might as well enjoy life now, and who cares about that big goal later on, so helplessness, but just enjoy yourself in the moment because you have no idea what the future will bring.

Ayelet Fishbach: I- in a way, what you're saying is that if you don't have control, you might as well just do whatever feels good. The problem is that we do want people to feel like they control their lives.

Grace Broadbent: Yes, absolutely.

Yeah. A whole generation out of control is not a good-

Ayelet Fishbach: Not

Suzy Davidkhanian: ideal ...

Grace Broadbent: future. Yeah.

Suzy Davidkhanian: 'Cause the other flip side, maybe it's not exactly the flip side, but there's this whole idea around optimizing your spend, right? So some people will spend countless hours going down rabbit holes [00:11:00] to save $10, but then instantaneously will buy a first class ticket without thinking twice about it.

What's happening there? Is that just a different kind of sense of organizing the uncertainty?

Ayelet Fishbach: Partially. There are also a couple of other biases that lead people to sometimes think a lot about a little thing and not think much about the big thing. A one bias is that we often give each purchase the same amount of cognitive work, okay?

A- and give or take, I'm going to spend I, I don't know 15 minutes thinking about each purchase, whether it's a toothbrush or a flight ticket, okay? I basically think I, I look at I don't... 20 options that are presented to me and choose between them. The problem is that, of course the little purchase that if I find a great deal I'm saving very little money, or I, no I'm not really optimizing my life by much.

Whereas the [00:12:00] big purchase is where I should put the work. The other bias that you see in a consumer's decision-making is that we often think in terms of percentage. Okay, what is the discount? What is- ... the deal here? And so 20% discount sounds great, and you don't stop to think whether it's 20% of $10 or 20% of $1,000.

And like many other people the last I think it was last week, maybe the week before, there was the Amazon Prime, and you look at Amazon Prime Day, you look at all these amazing deals, and the website really present this in terms of the discount. I found myself buying shampoo for 40% discount and I felt so accomplished.

Of course, I just saved a few dollars. It's true. There is mental math.

Grace Broadbent: Yeah, and I think it also traps you sometimes. I ma- I was a victim of Amazon Prime Day where I made some purchases I didn't [00:13:00] necessarily need because it's like, "Oh, it's 40%. I have to buy it. That's a good deal." It's the perception of perception of value is different than is this actually a good buy and a good value.

Suzy Davidkhanian: It's an interesting, it's an interesting idea though, right? Because everybody defines value. That's our whole premise, right? Everybody defines value in different ways, and it's monetary, but it's also time savings or it's get it faster delivered to you, less friction. Just depends on who, and now we know you can't bucket everybody into one sort of idea, even if you're all shopping Amazon Prime.

Grace, are we seeing this play out also around payments and loyalty, and what are brands doing to adapt to these different types of shopping sort of mental math ways?

Grace Broadbent: Yeah, so it's so interesting on... I'll focus it on the credit card space, which is a lot what my research and writing goes to, is there's very interesting separation of credit cards right now where middle credit cards have really been squeezed, where right now [00:14:00] it's all the super high premium credit cards are, have been revamped and are really gaining in popularity among even g- younger generations.

And then there's the lower value, no annual fee credit cards that, all their rewards and points right now are focusing on, gas and groceries and the basics. All the premium credit card brands are really leaning into this idea of the experience economy where people really value these personalized, unique experiences.

American Express is a good example of this. They have all these exclusive experiences at, the US Open or the NFL Draft, or Chase did do a World Cup partnership to really get these people unique, valuable experiences. Amex has also done a lot of private exclusive travel. When White Lotus was big last year, they did a couple White Lotus trips for their cardholders.

So they're really leaning [00:15:00] into- Unique, exclusive experiences is kinda where those higher income consumers are willing to spend their dollars.

Ayelet Fishbach: So it's interesting that you mention experiences as as something where you get the person to spend more money because experiences are exactly th- that kind of thing that doesn't set our self-control alarm off.

Okay? I- it's not a repeated consumption. I don't plan to go to this White Lotus hotel every month or every year. It, it's being evaluated with no comparisons and then there was no really good deal, okay? Just I'll- Yeah ... I'll pay whatever it is.

Grace Broadbent: Exactly. And I think the exclusivity part of it too is important as well of, this is a once in a lifetime experience, or this is only available to a small amount of cardholders and things like that, which really, like- Make it feel like a once in a lifetime deal, it's more valuable because not everyone else [00:16:00] has access to it, which, can lead to more spending than they typically would otherwise because they can't miss out on this.

Suzy Davidkhanian: Definitely scarcity plays a role in that. And I- ... you were talking, I was like, "Oh yeah, FIFA did that too," right? But it's different, even if their cus- the people who are going to watch the matches are price sensitive, it didn't matter because they were leaning into this emotional connection.

But the Amex examples are really interesting because it feels like you're starting to signal wealth in a different way now in, in... If you think about that Wall Street Journal article of there are h- high household income earners that are trading down to buy things like wrapping paper, but also doing these crazy trips like the White Lotus.

Are we seeing, is there something new sort of in our... We- we're moving from quiet luxury to proudly signaling that we know how to be savvy shoppers. Is that something that we're finding happening more and more in terms of "Look at how smart I am. I just saved ultimately $2, but it felt like 40%," sounds like a lot.

Ayelet Fishbach: Suzy, [00:17:00] you're basically bringing the idea that a lot of consumer behavior is driven by signaling, okay? We want to signal to others that we are smart, okay? That we are savvy, that we are wealthy, that we care about all kind of values, okay? It could be the environment, it could be our children.

And many of our purchases are meant to send these signals. However, as people, we are complex, okay? We have different things that we want to signal. And now if I can have like some products that I got for great value in relatively more affordable stores, I can signal my savviness. I can signal that I am frugal, that I'm responsible, that I'm competent, and also that I'm down to earth Okay.

However, with the luxuries, I signal that I am part of this unique club of people that can afford it, that I'm a [00:18:00] fun person. Okay, so you see both signaling of wealth and signaling of f- fun. And all these signals coexist. We can try to understand in which situation and in in which crowd people are going to signal one thing or another.

Grace Broadbent: I don't know how new this concept really is, though. I feel like we've been talking about it a lot, but it's always existed, and if you go back to the term old money versus new money, that's been around for decades. And it's like the old money, are less flashy about their wealth.

They're, like, making decisions or don't have to show how much money they have at all times, versus new money, wanna flash their wealth is the stereotype. But that's been around for years. So it's just the different ways that plays as years go on, and whether it's about quiet luxury or this just the whole signaling wealth and where they stand.

Ayelet Fishbach: Yes, but I would add that I [00:19:00] completely agree. I would add that that the old money and the new money, e- everybody's trying to signal something, okay? Yeah. A- and s- and sometimes what you're trying to signal is that I am not snobbish. Okay, where, right? Whereas other time what you want to signal is I'm part of those elite group of people who can buy this expensive things.

Suzy Davidkhanian: Or I'm down to earth. I still think of the badge of honor that is the Trader Joe's tote bag that was also very hard to get, right? And that was everybody, no matter who you were, if you were a fan of Trader Joe's, no matter what your household income was, old money, new money, no money, you...

Everybody wanted that, right? And so that also became... It feels like the narrative is changing towards smart shopping, and being part of a group is part of your identity, and you can, if you have money, you can go up and down.

Ayelet Fishbach: Exactly.

Suzy Davidkhanian: And now we also... we can't not talk about AI, right? Now we have the most [00:20:00] ever possible number of tools that you can think of to help us make smart decisions.

We have our mobile phone with apps. We obviously have browser extensions. I'm thinking about Rakuten. We have creators, loyalty programs, obviously AI, LLMs. Is there a point where we try to make the perfect decision, and that's actually getting in our way?

Ayelet Fishbach: So you started by saying that this is easy. I am not sure.

When you introduce more tools, when you introduce more ways, it's not necessarily going to make it easier. When we look at how much time consumers spend on making these decisions, there is no indication that it is easier for them in the sense that people are not spending less time. If anything they spend more time.

AI, okay, maybe it will save us time on consumption. So far I'm unaware of any evidence for this. I just know that here there is another thing that you need to check [00:21:00] before you make a purchase. It's, the old research was on choice overload- ... and choice overload is still very much part of the problem, but right now it's not just choice overload, it's an overload of how to even approach the choice.

What's the right way of starting to sort all these options?

Grace Broadbent: Yeah, I absolutely agree. I feel like it's just gotten more complicated, and there's too many now options to search in addition to too many options of what to buy, and then all these options of how to pay for the purchase as well. And I think it's, overcomplicating ones, and people are losing valuable time by, continuing to ask six different chatbots or Google searches or their credit card apps or whatever it may be to find the best deal.

Suzy Davidkhanian: I think that's the key, right? I think we often forget that to save that extra $10, we might have spent three hours on it, and we don't necessarily value our [00:22:00] time quite in the same way as we do the game of saving money.

Grace Broadbent: Yes, absolutely

Ayelet Fishbach: Which is a big mystery in decision research. How come people don't value their time?

Yeah, I know some of us have more money than others, but none of us has unlimited time, and we should be valuing our time more. Maybe just a matter that it's easier to think about purchases in terms of dollar value than time. But yes we spend a lot of time and agony over our purchase decisions.

It is not easier.

Suzy Davidkhanian: And it's true, like when I was at Macy's, we talked a lot about the jam experiment, right? If you have too many choices, people walk away. Of course, if you're a merchant, if you don't have enough choice, people aren't gonna buy from you either because they were looking for something specific.

I think on the retailer front, it's so hard to bucket everybody into one sort of type of consumer and to understand what value means to them. But it is clear from our discussion that decision fatigue is real, and so as a [00:23:00] retailer or brand, you have to really figure out how to make at least that part a little bit easier.

Easier and fun. I think that's a great place to leave it. Thank you so much, Professor Fishbach. Thank you so much for having me. Thanks, Grace.

Grace Broadbent: Yes, thanks. This has been great.

Suzy Davidkhanian: And thanks to our listeners and to our team that edits the podcast. Please leave a rating or review, and remember to subscribe. I'll see you for more Reimagining Retail next Wednesday, and on Friday, join Marcus for another episode of Behind the Numbers.