Irrational? You talkin’ to me?

The market can stay irrational far longer than you or I can remain solvent.  John Maynard Keynes

By golly,  the hearing aid market may be a bit irrational right now. “Irrational” in Economic-Speak means that consumers are making choices which are not maximizing their self-interest, probably because said consumers lack sufficient information to make informed (self-interested) decisions.  For economists, being rational is synonymous with being selfish, in the sense that each of us has limited resources, so it’s in our best interest to hold onto those resources for dear life and dole them out only when we get “maximum utility{{1}}[[1]]A unit measure of a person’s preferences.  Higher units correspond to greater preference[[1]]” by doing so. {{2}}[[2]]This is not a debatable issue, it’s just a set of assumptions and definitions for the discipline called Economics.  Ethics and Economics are different disciplines, so one can hit the morale high ground(Ethics) by being irrational (Economics) and vs.  Sometimes the disciplines converge.  We’ll talk about that interesting topic in a series sometime in 2012, but not now.[[2]]

My “irrational” thoughts were cemented yesterday when I entered the search term  “hearing” on a news/entertainment site and the first link that popped up was:

FDA Hearing Aids $99/$179 – Doctor-Designed Audiologist-Tested  

Oh good grief.  Yes, I admit I clicked.  It went to a 404 page– site not found.  Ever-helpful Google popped up similar sites which I declined.  So much for information gathering.  What can consumers make of this?  What can I make of this?  Nothing good for them or me.  But enough about me.  If you want to know my personal opinion— which is rational and therefore selfish because like Mr.  Keynes, I worry about solvency–you’ll find it on my practice website.

Let’s talk about consumers.  Classical economists believed that consumers were rational, meaning that they and everyone else had full knowledge of the markets and therefore made decisions that were in their best interests. Keynes disagreed with the classical economists, arguing that rational choice was limited in reality by uncertainty–insufficient knowledge in the present, inability to predict the future.  Keynes, you– and now finally I– know that that there is no way that consumers can gain full knowledge of hearing healthcare, not to mention predict their future consumption needs.  Uncertainty is scary and promotes irrational behavior, such as holding on to more money than you may need in times of pessimism.

We cannot expect consumers’ choices to necessarily serve their best self-interests, especially in highly uncertain times and most especially when readily-available information is inadequate and, well, rotten.  Consumers are at least as likely to behave irrationally as they are to behave rationally.  Ergo, the market is irrational — at least when it comes to hearing aid information and consumption choices at the present time.  Parse the citation above and judge for yourself how likely a consumer is to make an informed, rational choice based on the “information” provided:

•  FDA Hearing Aid. Sounds scientific, reliable and safe — not only Made in the USA but Made in the FDA. The concept of the federal government selling hearing aids is no more far-fetched than the idea that your health insurer has taken up retailing medical devices.  You’ve paid them both — taxes to one, premiums to the other.  Time to get something back on your investment!
• $99/$179.  Sounds affordable and appeals to your Diminishing Marginal Utility property{{3}}[[3]]Consumers derive less utility from each additional unit of a good they consume.  The typical example is food– the first donut has more value than than the second, etc.  Not sure how Lay’s potato chips work with this rule. [[3]] because the 2nd hearing aid costs a bit less than the 1st.
• Doctor-Designed.  As our profession has made clear this past decade, “Doctor” has lots of cred with consumers (aka patients), conjuring up reassuring images of handsome people in white coats.
• Audiologist-Tested.  Confusing but respectable.  Guess Audiologists aren’t Doctors, after all, even if they’re good looking and wear white coats.  But, hey, they’re pretty good technicians and they work with Doctors so this sounds like a consumer win-win.

You can expect a lot of sales of mail-order and Over-the-Counter (OTC) products when consumers decide, based on limited information, that the offer hits the right combination of Price and Value.  My own father, who prides himself above all else on his rationality, mentioned the plethora of full page hearing aid ads he sees and how they give him a feeling that something’s not right.  His question to me was telling:  “WHY, do I feel that way?”   Keep in mind that he’s due for a new set of hearing aids, has only been moderately happy with his last set, and is loath to part with another $6K. {{4}}[[4]]I case you’re wondering, I am not my father’s audiologist.  I live in another state.  His local audiologist is there whenever he needs her, which is worth its weight in gold, or dollars, to him and to me.[[4]]It won’t surprise me a bit if he checks out one of those ads before he purchases his next set from his audiologist, but I’ll be surprised if he ends up buying from one of the advertisers — he is a rational dude.

But Wait, There’s More!  Some consumers of  OTCs and mail order instruments will end up pleased with their purchases and the purchase prices.  Even if they aren’t,  they may remember how they got their instruments and at what price.  To the extent that their memories turn on a “habit” and an “anchor price,” they are likely to do it again, since Irrational Behavior is Habit Forming as shown in this video.  Will my father be irritated and take me out of his will for giving him advice that cost him an extra $4000?  Not impossible.   The only way to answer such questions is to act like an economist:  collect the data, account for as many variables as possible, take technology and time trends into account, and come up with models to predict the future.

Future posts are going to look at some of the ways in which economists go about determining Demand.  we’ll start with Utility, which was touched on in this post and move on from there.  Eventually, we’ll get to the Supply side but that will take awhile.

Photo courtesy of opinion juris