Dr. Heather Kappes on how people spend and spending patterns in post COVID19 world

In general, people with low incomes or limited resources tend to be really good at making the most of their scarce resources.

But they don’t have as much attention to give to longer-term problems (like saving for retirement or helping a child with their homework). Attention is eaten up by figuring out how to deal with the lack of money for immediate problems.

• A lot of spending is habitual, meaning that people shop—mainly for things like weekly grocery items—on autopilot. These kinds of habits get shaken up when contexts change such as during the COVID19 pandemic.
• We might be pushed off the “hedonic treadmill” (a concept that tries to explain why we quickly adapt to the good things in our lives and look for more) and reset our consumption
• Shopping will be a different experience if we have only a few giant companies to choose between, even if those companies produce multiple brands. On the other hand, it will be a chance for new players and those with smart novel strategies to carve out space in a less crowded market.

As Coronavirus sweeps throughout the World, implications of #COVID19 pandemic on political landscape, culture, education, healthcare and socio-economic aspects of modern life bother minds of people with the lowest and highest incomes alike. As of April 2020, economic outlook seems to be grim at the moment. IMF suggest that the global economy is pushed into recession (1) while World Bank says that significant economic pain seems unavoidable in all countries (2).  With public health systems being urgently patched up and operating in a survival mode, Governments attempt to boost confidence in economic revival in the shortest term possible with G7 countries committing approximately €3.2 trillion to support their economies. However, citizens of those G7 countries (and across the globe) mostly consider that their Governments reaction was not sufficient according to the International Survey on Coronavirus (link).

But what worries majority of people? The questions like “How much my way of living would get affected when (not even if) my income drops?”, “How should plan my spendings?” as well as “What happens to my savings?” are very relevant for each of us and do need answers.

We have invited Dr. Heather Kappes from London School of Economics & Political Science () to talk about how people spend, what economic research and economic experiments have taught us, and which research findings are relevant for post COVID19 life.

Here is a transcript of the interview with Dr. Kappes:

Andrew Ivchenko: Why is learning about how people spend their money particularly important as COVID-19 effects expand over time?

Heather Kappes: There’s a lot of research in psychology about what kinds of things affect decisions about spending money. Most of that research looks at what we’d call a “one-shot” decision: people decide how much to spend on a specific thing or decide which thing to buy from a few options. In real life, of course, the decisions we make today affect the decisions we make tomorrow. If I drain my bank account today, I can’t buy anything tomorrow, unless tomorrow happens to be payday. So it’s important to also look at what happens in a series of decisions.

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One outcome you can look at with a series of decisions is to what extent people are “smoothing” their spending over time. Smooth spending means that you spend a similar amount during each time period. That could mean that adults spend a similar amount each year, which probably means they are getting into some debt early in their career, and then paying that debt back later in their career as they earn more, and saving up to let them keep spending at a similar level when they stop working. That’s “smoothing” over the adult lifespan, and some theories in economics suggest that’s what we should be doing. You can also look at smoothing over shorter periods of time, when it might mean not spending your full paycheck each pay period so that you have some savings for emergencies.

Expilab helped me develop a 12-round game that lets us measure how well people smooth their spending over periods of income and no income. With my colleague Rebecca Campbell and some wonderful students, I used this game in a project at the Science Museum () in London to test things like: how do people play differently if they get income on a schedule that they’re able to figure out how to predict (income, no income, income, no income, etc.), compared to on a schedule that they can’t predict? Or what’s the effect of seeing a leaderboard that compares you to other people, versus not seeing any comparisons to others? In the context of a hypothetical game, we can test things that would be difficult or impossible to vary as an experiment in the real world.

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Andrew Ivchenko: What do we know about how people spend? What have we learnt from this experiment at the Science Museum?

Heather Kappes: One thing we know is that when people have a scarcity, like when they’re short on money, they get really focused on how to deal with it. There’s a nice book about this by Eldar Shafir () and Sendil Mullainathan, where they give examples like someone on a low income without much money in savings, whose car breaks down. This person needs their car to get to work, so they really have to figure out how to afford the repairs. In general, people with low incomes or limited resources tend to be really good at budgeting, comparing prices, doing what they need to do to make the most of their scarce resources. But this can also mean that they don’t have as much attention to give to longer-term problems (like saving for retirement) or for unrelated issues (like helping a child with their homework). Attention is eaten up by figuring out how to deal with the lack of money for immediate problems.

Most of that research on scarcity looked at one-shot decisions. With our spending game, we saw that scarcity also has lasting effects. People who started out the game with a small amount of the game money did worse than people who started out with a big amount. We thought about this as being like starting your working years with only a little in savings (which many people do—many may actually have no savings or be in debt at that time of their life). Even if they then earn the same income as someone who started out with a lot in savings, the latter person does better. We didn’t have a prediction ahead of time about which would be better. We knew that scarcity helps people focus on how to use their money, so we thought there was a chance the people who had only a little savings to begin with would do better. But, they did worse. The reason seems to be that they spent too little in many rounds. Having experienced that time of scarcity made them too careful. They lost out on some of the points they could have had (which represent, in the real world, some of the happiness that can be gained by spending well).

We knew that scarcity helps people focus on how to use their money, so we thought there was a chance the people who had only a little savings to begin with would do better. But, they did worse.

I’m thinking about this finding a lot right now, because at some point people will go back to work and essentially re-start their careers. Many will be doing that with little or nothing in savings. If we see the same thing as in our game experiments, then once they’re earning again, they might be very cautious in their spending. Of course, it’s important to keep in mind that results from a specific experiment might not generalize (3). Sometimes researchers—me included—tend to be too confident that our results are relevant to any new situation. But the data we have can be a starting point.

In our spending game project, we also saw something that probably won’t surprise people who have done freelance work or have something like a zero-hours contract where their pay can vary dramatically from one period to the next. People managed to make their spending the smoothest when their income came on a schedule they were able to predict. They did the worst when they got a lot of income at the beginning of the game and then not much at the end. In this case, they often didn’t save enough, because they expected to earn more later on. That case reminds me of people who get laid-off or whose skills become obsolete at the middle of their career. They earned well at the beginning but didn’t save enough, because they weren’t expecting things to go badly later.

Another result of our game replicated research that others have done: People did a bit worse when they saw a leaderboard. In our game, it was especially bad if your leaderboard was made up of people who had played very well. In this case, people seem to feel that “keeping up with the Jones’s” pressure to spend too much, and they don’t save quite enough to see them through the bad months.

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Andrew Ivchenko: Which findings from economic research can be relevant for building better understanding of COVID19 implications?

Heather Kappes: We know from straightforward surveys (4) that there are an awful lot of people in countries like the UK and US who don’t have much money saved for emergencies. COVID-19 clearly qualifies as an emergency, and tons of people who had thought their jobs were secure are suddenly unemployed. Given that research, it’s not surprising that we’re seeing that already in the first month, people are having cash-flow problems (5).

We also knew from research that many people plan to deal with emergencies by borrowing from family or friends—depending on the country, a substantial portion of people choose this option in surveys like the one linked above, and researchers like Jon Jachimowicz (@jonj ) have dug into how community support is especially important in lower-income communities. Actually, community support networks are a key ingredient in some of the most successful initiatives for fighting poverty—look at Mauricio Miller’s work, for instance (6). But since COVID-19 has affected nearly everyone, it seems unlikely that people will be able to borrow from friends and family as much as they might have thought. This will probably mean that people find it harder to deal with this type of emergency.

Andrew Ivchenko: How may spending patterns change in the post COVID world? Any implications for retail sector in particular?

Heather Kappes: A lot of spending is habitual, meaning that people shop—mainly for things like weekly grocery items—on autopilot. These kinds of habits get shaken up when contexts change. While many businesses are closed and people are staying home to avoid spreading COVID-19, they’re likely to be shopping at different places and may be buying different things or in a different way than they were before. For instance, I saw a piece yesterday (7) suggesting that certain processed foods are selling well right now. Depending on how long things are locked down, some of these changes may be long-lasting.

Some of the changes will come from the way people have modified their attitudes or brand loyalties. For instance, people are talking right now about wanting to patronize businesses that they think have treated their employees or customers well and punish those that haven’t. Whether we stick to those intentions remains to be seen.

We might expect that having experienced this major unexpected event, people would be more likely in the future to try to build up emergency savings. There was some evidence that after the 2008 financial crisis, the average consumer started to reduce their debt and increase their savings rates (8). But overall these effects in most countries seemed to be pretty small and maybe not very long-lasting.

Some observers are suggesting that things might be different post-COVID-19 because there’s been such a radical collective shift to the way we’re living. Psychology describes a “hedonic treadmill” which helps us quickly adapt to the good things in our lives and look for more. That’s the reason why a raise in income, or a new piece of furniture, doesn’t usually make us as happy for as long as we expect it to: it quickly become the new normal and we look for more. Robert Frank (@econnaturalist ) had a super interesting Twitter thread the other day where he talked about “why would the sacrifices necessary to make progress against both future pandemics and the climate crisis be much less painful than many believe?” Similarly, the trend forecaster Li Edelkoort is suggesting that this epidemic will help people get used to shopping less and traveling less, which would be good for the environment (9). It might be the thing that pushes us off the hedonic treadmill and resets consumption.

One concern is that the epidemic is especially difficult for smaller companies and independent businesses to weather. I’ve heard about small-to-medium enterprises (for instance, an accessories company that does $50 million annually) which are now bankrupt, and David Chang has worried that the restaurant industry won’t survive (10). Shopping will be a different experience if we have only a few giant companies to choose between, even if those companies produce multiple brands. On the other hand, it will be a chance for new players and those with smart novel strategies to carve out space in a less crowded market.

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Andrew Ivchenko: What are the key directions that economic & consumer research should prioritize now in order to understand COVID19 consequences?

Heather Kappes: Personally, right now I’m most interested in basic descriptive research to see how things are changing over time. How are emergency savings levels fluctuating, what are people buying, what are they putting off buying, etc. It’s going to be really important for governments and people involved with making policy to know how people are coping, in close to real-time.

This kind of research can also track changes in psychological constructs like optimism about the future, feelings of autonomy, connections to others, etc. These feelings will shape the decisions that people make in the future, so keeping track of them can help us make predictions about what the future will look like. Ideally, researchers will be putting together panels of respondents whom they can follow up with repeatedly over time. We need to make a special effort to reach respondents who might be hardest to find—those who are most struggling as a result of the COVID-19 epidemic, and also, those who don’t (yet?) see this as a real meaningful experience. Their voices might be harder to hear, but their experiences will be important for seeing what to do and where to go.

Have a question or would like to add something? Leave the comment below or let’s chat @AndrewIvchenko ()

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