We know we could save money by switching – be it phone contracts, energy providers or banks – but we don’t. Why not? A study co-authored by a Cambridge Judge Business School academic based on a database of 60,000 UK customers provides some insights.
“The surprising thing we found is that, although the possibility of making big savings did prompt people to switch, they were six times more likely to switch if they incurred charges above and beyond their contract,” says Dr Christos Genakos, University Senior Lecturer in Economics at Cambridge Judge. “So fear of losing money – loss aversion – was a far greater motivator, even when people could have saved the same amount by switching.”
Dr Genakos and his team had unprecedented access to the database of 60,000 customers using price comparison website Bill Monitor, which sends customers weekly bulletins about how much money they could save by switching.
In a way, he says, the finding shouldn’t be surprising, as human survival instinct makes us hard-wired for loss aversion. “A biological perspective,” he says, “would go back to when we were fruit collectors, and say it was more critical to keep the little food we had than to get more.”
Dr Genakos says his findings pay tribute to the pioneering work of Daniel Kahneman (2002 Nobel in Economics) and Amos Tversky, two psychologists, who in 1979 first proposed the idea of loss aversion using laboratory experiments. “We are essentially finding the same behaviour using data from real consumers in their natural environment making real choices.”
Consumer expert Martin Lewis, of the comparison website Money Saving Expert, recognises the pattern. “A customer asked me the other day if he should fight being overcharged £9 on his bill, so I asked Twitter. People overwhelmingly said, ‘Yes, fight it!’ Which they would never do just to save £9!”
But what are the implications for the mobile phone industry, or energy companies, banks or others that rely on competition to create a fair market? “It’s a question of information and how regulators interact with markets to improve them,” says Dr Genakos. “How do you design markets which are beneficial for customers?”
“In this case, price comparison websites provide a kind of third-party system, but by focusing on potential savings they are perhaps not giving consumers the whole picture. And perhaps the regulator [Ofcom] might suggest ‘overage’ charges are made more transparent by phone companies.”
Ofcom says it has been working closely with phone companies “to help customers avoid running up unexpectedly high bills.” A spokesperson says: “Many of the major providers now send alerts warning customers they are about to reach/have reached their data allowance.”
What phone companies also do is encourage customers to take a higher, more inclusive tariff. “Companies certainly play with your fear of bill shock to push you to higher, more inclusive tariffs,” says Dr Genakos. “We are paying for peace of mind – but is that necessarily a bad thing?”
In competitive markets it all comes back to information, and whether or not customers are able to make a good decision with the information they have. The government’s Competition and Markets Authority is currently carrying out a study into how well price comparison sites are serving customers, but Lewis agrees there may be too much choice out there.
“The number of newer, smaller energy companies coming on the market has proved detrimental to switching,” he says. “If people have too much choice, they won’t do anything. We’re developing a new option of switching which asks you questions and then tells you what company and tariff you should switch to, so it’s effectively taking choice away.”
However, Lewis says Dr Genakos’s research is “extremely interesting, because it may mean we are getting our language wrong. We currently send out emails to customers saying ‘Could you save £350 a month?’ whereas perhaps we should say ‘Are you overpaying £350 a month?'”
Dr Genakos admits that it’s “an extremely interesting conclusion, as more information would not seem to solve the problem, but what we do with it is less clear.” For now, though, it seems fear is a stronger motivator than love.
Find out more
Visit Dr Christos Genakos’s faculty webpage
Visit Martin Lewis’s profile on the Money Saving Expert website