Tuesday, November 29, 2022

Happy people spend less on consumption

The Effect of Consumer Confidence and Subjective Well-being on Consumers’ Spending Behavior. Lenka Mynaříková & Vít Pošta. Journal of Happiness Studies, Nov 29 2022. https://link.springer.com/article/10.1007/s10902-022-00603-5

Abstract: The paper focuses on the role of consumer confidence and selected well-being measures in aggregate consumption and in subsets of aggregate consumption on a broad set of 22 OECD countries. Consumer confidence played a positive and statistically significant role in the development of expenditures especially on durable and semi-durable goods and services. The increase in cognitive, affective and eudaimonic measures of well-being, measured by the Cantril ladder, positive and negative affect and freedom to make life choices variables, had negative impact on total consumption and expenditures on semi-durable goods and services. Possible explanations for these estimates are provided in the paper. Based on the purpose of expenditure, consumer confidence was a significant determinant of all expenditures except for unavoidable spending such as food, health, housing, water, energy, and fuel. The subjective well-being indicators showed a negative impact on expenditures on clothing and footwear, recreation and culture, and restaurants and hotels. Possible explanations for the positive and negative effects of subjective well-being measures on consumption, benefits of including the freedom of choice variable, and directions for future research regarding the introduction of understudied variables are discussed.

Subjective Well-being, Emotions, and Consumers´ Consumption Expenditure

Economic research has confirmed the importance of studying consumers' feelings and emotions when predicting consumer behavior (Ahmad & Rangaraju, 2017; Johnson & Naka, 2014; Nyman & Ormerod, 2014). Regarding the relationship between consumption and SWB or its components, studies (Bertram-Hümmer & Baliki, 2015; Dumludag, 2015; Gokdemir, 2015; Guillen-Royo, 2008; Noll & Weick, 2015; Zhang & Xiong, 2015) focus mainly on levels of consumption. Specific findings depend on what a given study actually measures–e.g., some studies consider happiness a synonym for SWB, others draw a difference between these two. For instance, Schmutte and Ryff (1997) describe psychological well-being as a general feeling of happiness. The Organisation for Economic Cooperation and Development (2013) describes three main types of SWB measures: cognitive measures related to the evaluation of life experiences or life as a whole (e.g., life satisfaction, Cantril ladder); affective measures related to “emotional well-being” (positive and negative affects or affect balance at or during a certain point or period in time); and measures related to the concept of “eudaimonia,” which capture individual happiness or welfare (Deci & Ryan, 2008; Heintzelman, 2018; Huta & Waterman, 2014). Most studies regard life satisfaction as a cognitive self-evaluation of happiness (Diener, 1984; Veenhoven, 1994) or SWB (Andrews & Withey, 1976; Campbell, 1976; Michalos, 1980). Tsurumi et al. (2021) found that total consumption contributes primarily to cognitive and eudaimonic measures of SWB. Duesenberry’s (1949) theory of consumer behavior suggests that various types of consumption enhance happiness and therefore also SWB in at least three ways. Increased consumption of durable goods, food, or housing may enhance happiness by alleviating material hardship or making life easier, serving as a form of coping mechanism against increased stress (Cheng et al., 2016). Conspicuous consumption of visible goods such as expensive vehicles, holidays, clothes, cosmetics, or jewelry may enhance happiness by increasing social status (Chao & Shor, 1998; Dutt, 2006; Johanson-Stenman & Martinsson, 2006; Kaus, 2013; Perez-Truglia, 2013). Finally, spending on leisure or charitable activities may enhance happiness by positively affecting social relationships (Pugno, 2009).

Similar to the consumer confidence, the impact of SWB on consumer behavior may be more profound during exceptional situations that lead to more dramatic behavioral reactions and changes, as we see in cases of panic buying and other herd behavior phenomena during disease outbreaks, national disasters, wars, or terrorist attacks (Leach, 1994; Lins & Aquino, 2020). Terror management theory (Arndt et al., 2004; Kennett-Hensel et al., 2012) explains how exceptional events motivate compensatory behavior to alleviate negative emotions. The compensatory behavior can take the form of purchasing unnecessary products or products of daily need in extensive quantity to regain the sense of control, security, or comfort. The threatening situation can make these purchases look necessary for survival (Arafat et al., 2020; Chua et al., 2021; Dodgson, 2020; Fairfield et al., 2015; Hendrix & Brinkman, 2013). Studies (Bentall et al., 2021; Burroughs & Rindfleisch, 2002) show that fear, anxiety, depressive mood, or elevated stress levels can lead to an active response such as over-purchasing or impulse spending behavior. These responses serve as a self-protective mechanism to manage negative emotions and restore a positive sense of self (Sneath et al., 2009). However, Landau et al. (2011) point out that some individuals may react passively and decrease their spending.

According to cognitive behavioral theories, cognitive evaluations (i.e., appraisals) influence emotions, while, at the same time, emotions influence the cognitive evaluation, and this interaction leads to a behavioral response (Ellsworth, 2013; Moors et al., 2013). The consumer confidence may function as an appraisal tied to specific emotions. Studies (Hampson et al., 2020; Kursan Milaković, 2021; Ng & Russell-Bennett, 2015) show that psychological mechanisms through which the consumer confidence leads to changes in spending behavior have a cognitive and affective dimension, but the affective component has not been sufficiently explored, with few exceptions (e.g., Sekizawa et al., 2021; Van Giesen & Pieters, 2019). Sekizawa et al. (2021) found that the level of the CCI and its fluctuation in Japan are associated with anxiety and positive affects; therefore, when the consumer confidence is higher, people tend to be happier and less anxious. The affect-as-information model suggests that emotions provide information related to one’s current available tendencies and cognitions (Schwarz & Bohner, 1996); therefore, people use emotional information to make judgments that influence their attitudes and behavior (e.g., Gino & Shea, 2012; Gino et al., 2012; Higgins, 2006). Two types of current emotions affect our decisions. We experience integral emotions when we make decisions, but we happen to have incidental emotions, unrelated to the appraisal (Brooks & Schweitzer, 2011; Olekalns & Smith, 2009; Tsay & Bazerman, 2009). Anxiety aroused prior to a decision may lead to perceiving certain behavior as worse, while positive emotions may lead to overvaluing benefits, undervaluing losses, and being more open to risk-taking (e.g., Barry et al., 2004; Friedman et al., 2004; Steinel et al., 2008; Van Kleef et al., 2004). Our decisions are also affected by anticipated emotions that we expect to have post-decision and that influence our risk estimation, intentions, and expectations (see e.g., Bagozzi et al., 2016; Carrera et al., 2011; Kotabe et al., 2019; Riquelme & Alqallaf, 2020; Zampetakis et al., 2016). Dread (i.e., extent of perceived lack of control, feelings of dread, and perceived catastrophic potential) is one of the anticipated emotions with a significant effect on our decisions and behavior (Senik, 2008). Together with the uncertainty of the situation, they create two psychological dimensions of the “risk” (Peters & Slovic, 1996) that influence the cognitive evaluation of risk and determine behavior, as explained by the risk-as-feelings hypothesis (Loewenstein et al., 2001). Perceived risk and uncertainty can strengthen fear and anxiety (Mi et al., 2019; Zheng et al., 2019), which can result in higher pessimism, more pessimistic risk estimates, and make consumers more risk-averse (Kuhnen & Knutson, 2011; Miu et al., 2008; Patt & Weber, 2014; Peng et al., 2014; Smithson, 2008; Stanton et al., 2014). Therefore, uncertainty and perceived risk can increase saving behavior (Bande & Riveiro, 2013; Carroll et al., 2012; Ceritoglu, 2013; Chamon et al., 2013; Mastrogiacomo & Alessie, 2014; Mody et al., 2012). However, this precautionary motive to build up a financial reserve is not universally supported (Fossen & Rostam-Afschar, 2013).

Both the consumer confidence and SWB are closely related to expectations, which can be defined as the assumptions individuals uphold about their future (Augusto-Landa et al., 2011; Conversano et al., 2010; Diener et al., 2003; Eid & Diener, 2004; Mäkikangas & Kinnunen, 2003; Pleeging & Burger, 2020). Optimistic people are generally happier, more resilient to negative economic or political shocks, and have a greater SWB (Arampatzi et al., 20152020; Ekici & Koydemir 2016; Frijter et al., 2012). Optimism represents a psychological capital that serves as a buffer against misfortune (Youssef & Luthans, 2007). This corresponds to the economical view of confidence related to predictability (Malovaná et al., 2021). As explained by Akerlof and Shiller (2010), high confidence can lead to increased optimism about the future, while low confidence leads to higher pessimism. Similarly, a high trait of optimism can lead to higher confidence and thus spending more/saving less, while a high trait of pessimism leads to lower confidence and thus spending less/saving more. A distinction between optimism and pessimism as stable personality traits and as states that are more changeable may be necessary. The self-regulatory model talks about “dispositional optimism “ as a global expectation that good things will be plentiful in the future and bad things sparse and is associated with less distress, more active coping, and lower engagement in avoidance or denial (Scheier et al., 2001). Buchanan and Seligman (1995) describe that pessimists explain away bad events with internal, stable, and global causes, while optimists focus on external, unstable, and specific causes. Both theories suggest that optimism and pessimism involve cognitive, emotional, and motivational components, and thus influence our judgments, decisions, and behaviors. Since optimists can be pessimistic under certain conditions and vice versa, optimism and pessimism probably have both a trait and a state component (Luthans & Youssef, 2007). Although traits are more related to overall well-being, states relate more to specific outcomes such as educational or work-related goals and success (Kluemper et al., 2009; Peterson, 2000). While the trait may be important in explaining consumers´ habits, the state may help explain changes in the consumer confidence. Katona (1968) hypothesized that spending would increase when people became optimistic, and precautionary savings would rise when they became pessimistic. Kahneman and Tversky (1982) describe the forecast error as a tendency to overestimate the likelihood of positive events, and underestimate the likelihood of negative events, which can be explained by psychological biases such as the law of small numbers (Rabin, 2002) or the hindsight bias (Shiller, 2003), which make situations seem more predictable and more probable. Shiller (2003) explains that people make forecasts in uncertain situations by looking for familiar patterns and assuming that future favorable patterns will resemble past ones. Finally, due to the illusion of control, people optimistically distort the reality, believing that their own situation will be consistently better than the general one, which makes them expect a personal success with a probability inappropriately higher than the objective probability warrants (DeBondt & Thaler, 1995). The biases affect both the subjective probability of future economic events and their retrospective interpretation and may create the illusion that we can control the external factors to create an optimistic future. Especially during critical events, people amplify the forecast error and perceive their personal and future conditions better than the aggregate and past ones (Bovi, 2009), so that they can be individual optimists and social pessimists at the same time (Rosner & Nagdy, 2014). In line with Buchanan and Seligman (1995), if we feel we are in control of our lives, we feel more optimistic about our situation (regardless of the objective factors) than about the national situation, which we cannot control directly.

One of the important variables explaining differences in dealing with uncertain situations, making decisions, and coping with emotions is therefore the perceived control we have over our life. The locus of control (Rotter, 1954) reflects individual differences in beliefs about the degree to which we can control the outcomes of events in our life (Galvin et al., 2018). It moderates the effects of external stressors on affective and behavioral responses (Debus et al., 2014; Jiang et al., 2020; Reknes et al., 2019). Similar to optimism, it can serve as a buffer against economic, psychological, political, and other shocks by giving the individual a sense of control and freedom to decide what to do. Individuals with an internal locus of control believe that they have control over the outcomes in their life (Twenge et al., 2004). They have a greater appreciation of freedom of choice, represented by the size of an opportunity set with mutually exclusive alternatives (Verme, 2009). People with an external locus of control believe that things happening in their lives are beyond their control and have no power in affecting them, since they happen due to chance, fate, luck, or are the result of the control by powerful others (Fong et al., 2017). They have a lower appreciation of freedom of choice, since it is regulated by the degree of perceived control, which shapes the expectations we have about the outcome of our choices (Verme, 2009). The external locus of control leads to more problems in dealing with stress and uncertainty (Debus et al., 2014; Reknes et al., 2019). Externals often blame others for their problems and adopt the victim mentality to protect their self against shame, guilt, or regret we may feel when we accept that things went wrong because of our actions (Ng et al., 2006; Twenge et al., 2004). This mentality may lead the externals to be more passive because they do not believe they can actively cope with the situation (Ng et al., 2006). Veenhoven (2000), Inglehart et al. (2008), and Verme (2009) in their analyses of relationship between happiness and other psychological variables used a “perceived fate control” variable represented by a question: “Please use this scale where 1 means ‘none at all’ and 10 means ‘a great deal’ to indicate how much freedom of choice and control you feel you have over the way your life turns out.” The question combines information on both the freedom of choice and the locus of control. Based on their studies, we may consider these variables interrelated. Since the locus of control is not measured internationally, but data on the freedom of choice are available, it may improve our understanding of the psychological variables behind consumer behavior. Hampson et al. (2020) show that the effects of the consumer confidence depend on the locus of control, with the influence of national consumer confidence significantly stronger for consumers with an external locus of control, who are more susceptible to lowered well-being in response to external stressors (Debus et al., 2014). As suggested by Sekizawa et al. (2021), cognitive evaluations of the national economy lead to behavioral changes based on whether an individual feels personally financially affected by the situation and whether the level of affectedness is strong enough to evoke emotional feelings of financial vulnerability. In Hampson et al. (2020), the locus of control served as a moderator of the relationship between the national consumer confidence and perceived financial vulnerability, defined as the probability that an individual will experience financial hardship, i.e., will not be able to maintain the current standard of living (O’Connor et al., 2019). When individuals experience higher perceived financial vulnerability, they become more price-conscious when making new purchases, as this helps to conserve financial resources (Hampson & McGoldrick, 2017). As the financial vulnerability is psychologically very taxing, it can lead to reduced well-being, physical and mental problems, or material deprivation (O’Loughlin et al., 2017). Understanding its role in consumers’ behavior and its relation to the national and personal consumer confidence and psychological variables of overall well-being, locus of control, negative or positive affect is of both theoretical and practical interest (O’Loughlin et al., 2017; Treanor, 2016).

Studies (Demirel & Artan, 2017; Kłopocka, 2017; Matošec & Obuljen Zoričić, 2019; Taylor & McNabb, 2007) agree that macroeconomic variables alone explain only a small proportion of consumer behavior. Therefore, we expect that other factors play an important role, though they may affect different consumers differently, and probably influence especially discretionary, infrequent, and planned purchases, not strictly necessary for life. Their effect may be more visible during exceptional circumstances (Desroches & Gosselin, 2002), as these result in a strong emotional reaction and affect the perception of uncertainty. The psychological concepts described above can be understood through the lenses of the cognitive appraisal theory, which shows how the cognitive evaluation of stressors (for instance, economic recession) interacts with emotions, potentially resulting in a behavioral change (Moschis, 2007). The reaction to a stressor follows an appraisal-emotion-behavior sequence (Folkman & Lazarus, 1984), where individuals evaluate to what extent a stressor potentially affects them. The cognitive appraisal leads to a positive or negative emotional response that affects our expectations about behavioral outcomes, while the locus of control or freedom of choice gives the individual a sense of how the stressor is controllable. This results in a behavioral response, which may include active or passive coping strategies and behavioral adaptations to deal with the stressor and accompanying emotions, such as hedonic shopping, over-purchasing, or saving (Hampson et al., 2020; O’Loughlin et al., 2017; Sekizawa et al., 2021; Treanor, 2016).