April 27, 2011
UW Bothell research shows panic at the pumps unfounded, has negative consequences
Although gas prices tend to spike and then recede, consumers react as if the spikes were permanent, altering spending patterns and curtailing other expenditures, and creating an artificial strain on the economy, according to new research from UW Bothell.
John Godek
Historical data shows that gas prices regularly shoot up and then drop back down, much like a roller coaster. While it is true that the baseline trend for gas prices is generally on the increase, the rise has been on par with many other, larger expense categories, such as health care and housing.
John Godek, researcher in the Business Program at the UW Bothell, wanted to gain a better understanding of why consumers react so strongly to spikes in the price of gasoline. Godeks research indicates that consumers view gasoline price surges as long-term, broad-based shocks to their discretionary income. As such, individuals tend to account mentally for the spikes in a manner that impacts much of their other spending instead of seeing the spikes as the short-term changes they have historically proven to be.
“In other words,” says Godek, “consumers seem to forget that price surges are normal and are typically followed by somewhat equivalent price slides.”
This behavior, though, has serious side-effects. When consumers overreact to spikes by tightening their belts, it creates an artificial strain on the economy. According to Godek, “Understanding this mental accounting framework might help policy leaders communicate more effectively about gasoline price spikes, partially buffering negative impacts on the economy.”
Godek and Kyle Murray, of the School of Business at University of Alberta, co-wrote a paper about their research, which was published in The Journal of Behavioral Decision Making.
