29 Nov The $104 Coffee!
Would you pay $104 for a cup of coffee?
I would hope not.
What if I said that most commercial borrowers and coffee lovers are?
“Bounded rationality” is known in psychometric circles as humans making their daily decisions on limited information given the scarcity of their time to research that would allow them to make decisions otherwise. Hence most decisions are made to be on the most satisfactory basis, but not the most efficient.
Switch not Bitch
An interesting article in this week’s financial review headlined “customers urged to switch not bitch when it comes to banks” (link to article). The headline statement is obviously underpinned by borrower resentment knowing that there could be better funding deals to be had, but they don’t have the time or knowledge to harness these better deals. Hence, the bitching becomes the emotional release of such sentiments.
Banking Landscape: Positive or Negative Reinforcement?
Taking it one step further, “bounded rationality” extends to “operant conditioning” which explains why our overarching behaviour is altered by the activity of reinforcement. These terms were coined by Skinner (1948) to capture human behaviour that is reflective of the incessant exposure to positive and negative reinforcement and even by punishment.
When dealing with financiers, the operating landscape for the borrower could easily be represented by these environments. Hence, there is a behavioural element for commercial borrowers to stick with the status quo in fear of reprimand by the way negative reinforcement by the financier or by outright punishment. As they say, don’t tip the apple cart….
Emotional Control: who has it?
This behavioural tendency within our primitive DNA places limitations around proactivity towards our banking requirements. It creates a subjective emotional barrier for borrowers to proactively seek improved funding arrangements when they are quite easily attainable. Therefore, as a topic of discussion, it can be noted that financiers grip an element of emotional control over borrowers which allows for higher margins and revenue for the bank. This may not be a deliberate ploy of the financiers, but certainly one that plays to their advantage.
In relative terms, commercial business owners are making much higher impact decisions within their businesses daily, than towards their decisions in managing their banking affairs. The ability to break through this paradigm will certainly liberate any borrower into harnessing more efficient funding arrangements that are available in the market.
The $104 Coffee
If the first thing you did in the morning when you opened your wallet was to buy a coffee, would you pay $104 for it? I would say not. But what if you did? What if, every morning when you opened your wallet and bought your coffee you paid $4 to the barista and $100 in EXTRA interest to your financier.
If you had to pay a barista $104 dollars outright for the coffee I could safely say you would have a healthy discussion with the shop owner or immediately go to another coffee shop to remedy the situation. Why wouldn’t you do the same with your financier? The question is thrown out to you and I would love to hear your response.
It is a very topical area.