Researchers have formulated a new theory regarding how shifting market dynamics can prompt significant numbers of typically cautious consumers to opt for risky purchases, such as subprime mortgages, cryptocurrencies, or even cosmetic surgery procedures.

These changes often begin in product categories initially perceived as low-risk upon market entry. As demand grows, more companies may enter the market, offering cheaper product versions with higher risks. Suppose the adverse effects of these risks are not immediately apparent. In that case, the market can evolve in a way that blinds consumers to these dangers, explained Michelle Barnhart, an associate professor at Oregon State University’s College of Business and co-author of a recent study.

Barnhart emphasised, “It’s not solely the fault of consumers, producers, or regulators individually. It’s the combined effect of these factors that create this dilemma.” Understanding the development of such situations could assist consumers, regulators, and producers in making more informed decisions when faced with similar circumstances.

The findings of the research, published in the Journal of Consumer Research, were led by Lena Pellandini-Simanyi from the University of Lugano in Switzerland. Barnhart, who specialises in consumer culture and market systems, and Pellandini-Simanyi, a sociologist with expertise in consumer markets, focused on analysing the Hungarian mortgage crisis as a case study. They aimed to understand how risk-averse individuals opted for high-risk products or services.

To delve into the consumer mindset, the researchers conducted 47 interviews with Hungarian borrowers who had taken out mortgages in local or higher-risk foreign currencies between 2001 and 2010. They also surveyed a broader group of mortgage borrowers, interviewed 37 finance and mortgage industry experts and regulators, and analysed regulatory documents and parliamentary proceedings.

Their investigation uncovered patterns that demonstrated mortgages becoming progressively riskier over time and social and market changes that led consumers to overlook these escalating risks collectively. Moreover, they identified specific characteristics that facilitated these patterns, suggesting that similar markets might evolve in comparable ways.

“In typical scenarios involving new products, early adopters tend to be quite skeptical. They scrutinise the product extensively, become well-informed about its nuances, and assess its risks comprehensively,” explained Pellandini-Sumanyi. “However, if these early adopters experience success with the product, subsequent consumers may assume it will perform similarly for them, often without conducting the same level of scrutiny, even as product quality may decline.”

Barnhart added, “This sets off a chain reaction where quality diminishes due to the rush to meet consumer demand and maintain profitability. Meanwhile, consumers increasingly rely on social signals indicating the product is safe, without critically assessing how its risks may have changed.”

The researchers also identified a ‘prudence paradox’ in which the most risk-averse individuals delay market entry only to purchase the riskiest products because they wait too long. This cycle typically only breaks with external intervention, such as market corrections or regulatory measures. For instance, while cosmetic surgery is generally safe, an influx of low-cost procedures at inadequately equipped facilities led to a surge in botched surgeries until regulatory oversight caught up.

“These findings underscore the influence of social information,” Barnhart noted. “In such environments, individual consumers find it exceedingly challenging to assess risks independently, as this deviates significantly from established norms.”

To shield themselves against collective ignorance, consumers are advised to meticulously evaluate personal risk factors about others facing similar circumstances, as suggested by Pellandini-Sumanyi. “Ensure your comparisons are apples-to-apples in terms of products and consumer situations,” she concluded.

More information: Léna Pellandini-Simányi et al, The Market Dynamics of Collective Ignorance and Spiraling Risk, Journal of Consumer Research. DOI: 10.1093/jcr/ucae018

Journal information: Journal of Consumer Research Provided by Oregon State University