A package of Milano cookies used to be an obvious addition to Tatiana Homonoff’s grocery list.
Costing $3.89, the sandwiched cookies, held together by a thin layer of what is usually chocolate, were a treat too good to pass up. But Homonoff, a New York University professor who teaches economics and public policy, finds herself hesitating in the grocery store aisle nowadays. The price on the Pepperidge Farm-made delicacies has jumped to $4.19 thanks to the wrath of surging inflation that stands at its highest level in four decades. And while it’s only a few dimes—a minuscule amount in the grand scheme—it’s enough to make Homonoff pause while putting the cookies into her cart.
Homonoff’s not alone. Prices on just about everything, from cookies to cars to clothing, have jumped in tremendous fashion since late 2021, when the consumer price index, the widely watched inflation gauge, began to trend upward. Inflation has always been a financial nightmare for lower- and middle-income households in the U.S., a fact that has already started to bear some truth this time around. And for anyone, if you have to pay $1 more for a gallon of milk, and you buy milk once a week, that’s $52 a year. Or, in other terms, the cost of a Christmas present, or a new dress, or a trip to the movies with your girlfriend. “We’re in a time of unprecedented inflation,” Homonoff tells Fortune. “This isn’t just, this feels a little bit painful.”
Yet Americans, already dealing with the lasting mental anguish of living through a two-year-long pandemic that’s still kicking, are feeling the frustration on a more innate level as well, behavioral economists say.
“We are hardwired to detect changes,” especially for when things go poorly, says Maurice Schweitzer, a professor of management at the University of Pennsylvania’s Wharton School who studies emotions and the negotiation process. “That’s when we really disengage our autopilot and become present focused to figure out what’s wrong. … In our minds, we know that a gallon of milk costs $2, a gallon of gas costs $3, or that we go to the grocery store and spend $200 each week. What’s happened very recently is that we’ve seen a change [and] something triggers in our brain that says, ‘Hey, this isn’t a good deal, something’s not right.’ And we get kicked out of complacency into a state of concern.”
People, as well as capuchin monkeys, do tend to feel the hurt of a loss far more than the excitement of a gain that’s of equal weight, based on a cognitive bias called loss aversion.
Take the case of whether you would be willing to risk losing $100 at a casino for the possibility of winning $100, for example. Most people, Carnegie Mellon University professor George Loewenstein says, would decline the offer. The pay-out would instead have to be closer to $200 for people to see the risk-reward as worth it, and, even then, only about half would take the odds, Loewenstein says. Between the stock market, politics, and even how to get shoppers to carry their groceries home in a green way, it’s a conundrum that can be applied to any number of applications. In 2018, for instance, NYU’s Homonoff set out to figure out how consumers responded to the promise of a 5-cent bonus for using reusable bags and to a 5-cent tax for using disposable bags. And surely enough, while the bonus had “almost no impact on bag use,” the tax resulted in demand for disposable bags being halved, according to the study. Now imagine the same principle but in the increasingly expensive milk aisle.
“Cheaper milk makes me happier, but only a little bit happier,” Homonoff says. “More expensive milk, even if it’s the same price change, makes me really angry. Because, relative to what I used to pay, that feels like a loss.”
For Homonoff, the pain is even worse with the now $4-plus Milano cookies because of what’s known as “left-digit bias,” a phenomenon of consumers placing an inordinate amount of weight on the number furthest to the left in a price (or for that matter, a used car’s mileage, an SAT score, or grade averages.)
Left-digit bias is, effectively, the reason why Levi’s sell a pair of jeans for $49.99 rather than $50, why an AriZona iced tea goes for 99 cents instead of $1, and why a Big Mac goes for $3.99 and not $4—because consumers have a hard time grappling with a price change once that number on the left ticks up. So when a product like Milano cookies breaks through that $4 threshold, shoppers like Homonoff take notice. “$2.89 to $2.98—that feels like the same. $2.98 to $3—that feels like an increase,” Homonoff says, before later adding, “I’m just drowning in left-digit bias” when at the grocery store today.
Understanding the why behind loss aversion is still a bit tricky. On a clinical level, the brain’s emotional center, the amygdala, has been found to play a “necessary role in generating loss aversion during human decision making,” according to a 2010 study. However, other considerations like a person’s wealth, status of power, and cultural background have all been found to play a part in how susceptible one’s decision-making process is to loss aversion as well. But, all told, researchers seem united in the fact that, as one group concluded in a 2016 study, loss aversion appears to be “an endogenous feature of human decision-making.”
Still, Americans have so far been willing to quiet the voice of their inner dissenter and push ahead with spending.
The University of Michigan’s Consumer Sentiment Index, just weeks after hitting a new decade-low in March, quickly bounced back in April. Data from the Bank of America Institute show that credit and debit card spending was up 15% in the first eight days of April versus the same period of last year, while card spending per household, among cardholders who bring in less than $50,000 annually, had jumped more than 33% in April from the same period of 2019. And Bank of America itself saw travel and entertainment spending from its credit and debit cardholders jump 57% in first quarter, versus the same period of 2021.
COVID-19 has been anything but unilateral in its implications for Americans as a whole, though. So, while some may be out spending, others are still stuck at home just trying to make their groceries last another couple of days, says Schweitzer.
“The experience people have had in the past two years is very uneven. Some people have emerged through the pandemic with their careers intact, with appreciated assets, and in a strong financial position. Others have suffered devastating losses,” the University of Pennsylvania professor wrote in a follow-up email. “There is great inequity.”
Even the workers who managed to negotiate higher salaries and wages for themselves over the course of the pandemic are likely feeling the pain of higher prices—if not more so than they would have before, Carnegie Mellon’s Loewenstein says. “It feels like something they finally achieved has been taken away from them,” Loewenstein tells Fortune. “Even though it’s worse—making the same wage and inflation hitting you—I can easily imagine that the better situation feels worse because it feels like this thing that’s finally come to you, that you’ve been longing for and now it’s being wrenched from you.”
The frustration won’t last forever. Eventually, consumers will adjust and settle in with inflation acting as their new normal—so long as prices are elevated. And if and when they do come back down to Earth, well, loss aversion would seem to imply the reaction will be relatively muted by comparison to the uproar that has taken place in recent months.
“Our memories will fade,” Schweitzer says. “We’ll remember an intense, bad experience, but, in terms of evaluating something, we’re sensitive to the end points. If we watch a movie, we really care about how it ended. If we go to a restaurant, the end of that meal weighs in our mind more than the simple sum of the moments.”
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