Shortages & Surpluses - Consumer Products - III

 

• Actual Consumer Behaviour

How do consumers behave in reality? We all (every person) have interactions with other people – our family, friends, employees, bosses, sales clerks, TV personalities (even if the interaction is only one way) etc. etc. Over just one day we receive a lot of (mis-) information that in a large part guides us in our actions – including what consumer goods we end up buying. What our contacts tell us play a big role in our day-to-day buying decisions.

The human race is notorious for its herd-like behaviour. We all would like to believe we make rational and informed decisions; but do we? We are all unique, but isn’t there also strong pressure to conform? Look at the stock market – if all decisions were rational why does that market sometimes streak ahead to ever-higher values – values that cannot really be justified? Why, all of a sudden, will every stockbroker and investor turn his or her back on the market - causing a huge crash? Major shifts are relatively rare but definitely important?

Could it be that human behaviour is like the sand mountain children build on beaches around the World**? Watching such a sand mountain grow you see the peak rising towards the sky and then suddenly collapsing. If you watch the process for a longer time you will notice the collapses are not the same – some are smaller, some are huge. The huge ones, like stock market crashes are rare, smaller ones are more frequent. Either way you cannot predict when or where a sand avalanche will occur. You only know that these avalanches will occur and some will be big, many will be not so big. Look at the stock market and consumer buying habits and you can find similar behaviours.

Communication in stock exchanges is extremely rapid. People are close to one another and can see the result of everyone’s actions almost immediately. In retail markets communication may not be quite so rapid but still we see communication of preferred products spread very quickly. Certainly we experience something different from the way forecasters and buyers assume consumers behave – consumers buy in ‘avalanches’ and not at some sort of average. Sometimes a popular item is a huge success (assuming the supplier can maintain supply) and, much more often, popular items are smaller successes – but still large enough to cause shortages. (Could it be that many times we do not really know how big a success could have been – because our stores and warehouses have run out?)

What causes these avalanches of demand? I don’t think we will know the answer to that for a very long time. We can predict they will occur and statistical physics can model the situation and show the frequency of big and small avalanches, but determining in advance what product will get consumers’ blessing is not going to be possible any time soon. However, we do know they occur and that the herd-like behaviour of humans might well result in bigger avalanches –if the article in question continued to be available in our stores.

We know they (avalanches of demand) will occur for sure – we just cannot know when, what it will be, or where the avalanche will start. {Have you ever watched flocks of starlings flying in formation? There seem to be hundreds or even thousands of birds in such a flock – and they all turn almost at the same time – as though there is some supreme controller steering them. But every bird is alone interacting only with its neighbours – each bird cannot possibly see all the rest nor react to all the rest. A local movement spreads almost instantly throughout the flock – not dissimilar to the way an avalanche of demand spreads in our markets}.

We are often ‘surprised’ when a new acquaintance knows someone from our network … ‘it’s a small World’ etc. In fact we are all closely connected – there is a claim that it takes a maximum of 6 links between you and every other person on the planet! So, even if it takes seven links we are close. Interactions between parts of the network will, somehow, influence the rest! When an avalanche starts – it moves quickly.

The ‘Tipping Point***’ describes the phenomena of how an avalanche of demand can occur – but cannot tell us how to predict them in advance. It does tell us how or who might be the triggers for a really big avalanche of demand.

** Critical Mass – how one thing leads to another, by Philip Ball; ISBN 0-09-945786-5

In a sense the whole book is an elaboration of the argument summarised on page 568:  "Society is complex but that does not place it beyond our ken. As we have seen complexity of form and organisation can arise from simple underlying principles if they are followed simultaneously by a great number of individuals." Complex behaviour can result from the interaction of lots of simple parts. This is now well established, but the implied corollary that the complexity we observe is a result of lots of simple interactions (or that it is useful to model this in this way) does not, of course, follow. Grounds for hope does not make it a reality.

*** Tipping Point, by Malcolm Gladwell;

1. The Tipping Point is that magic moment when an idea, trend or social behavior crosses a threshold, tips, and spreads like wildfire. At what point does it become obvious that something has reached a boiling point and is about to tip?
   
2. The possibility of sudden change is at the center of the idea of the Tipping Point -- big changes occurring as a result of small events. If we agree that we are all, at heart, gradualists, our expectations set by the steady passage of time, is it reassuring to think that we can predict radical change by pinning their tipping points? Can we really ensure that the unexpected becomes the expected?

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