Researchers have formulated a novel theory concerning the influence of evolving market conditions on the propensity of numerous otherwise prudent consumers to purchase risky products, such as subprime mortgages, cryptocurrency, or even cosmetic surgery procedures.

These alterations can manifest within product categories initially perceived as low-risk upon market introduction. As demand escalates, more enterprises may enter the market, offering lower-priced product variants carrying heightened risk. Suppose the adverse repercussions of such risk remain imperceptible initially. In that case, the market can progress to keep consumers uninformed of the risks, as highlighted by Michelle Barnhart, an associate professor at Oregon State University’s College of Business and co-author of a recent paper.

“It’s not solely the consumer’s responsibility. It’s not solely the producer’s responsibility. It’s not solely the regulator’s responsibility. All these elements together contribute to this quandary,” remarked Barnhart. “Understanding the development of such a scenario could aid consumers, regulators, and even producers in making more informed decisions when confronted with analogous circumstances in the future.”

The researchers’ revelations were recently documented in the Journal of Consumer Research. Lena Pellandini-Simanyi, from the University of Lugano in Switzerland, is the lead author of the paper.

Barnhart, whose expertise lies in consumer culture and market systems, has delved into credit and debit systems in the U.S. Pellandini-Simanyi, a sociologist focusing on consumer markets, has scrutinised personal finance within European contexts. Together, they scrutinised the Hungarian mortgage crisis to discern how risk-averse individuals gravitate towards high-risk products or services.

To gain insight into the consumer psyche, the researchers conducted 47 interviews with Hungarian borrowers who opted for low-risk mortgages in the local or higher-risk foreign currency as the Hungarian mortgage landscape evolved from 2001 to 2010. Additionally, they conducted a broader survey of mortgage borrowers, interviewed 37 finance and mortgage industry experts and financial regulators, and analysed regulatory documents and parliamentary proceedings.

Their investigation unearthed patterns contributing to the escalation of mortgage risk over time, alongside societal and market shifts fostering collective ignorance among consumers regarding escalating risks. Furthermore, they pinpointed attributes conducive to these patterns. Markets sharing these characteristics are likely to undergo analogous developments.

“Typically, upon the introduction of a new product, people exhibit a degree of scepticism. Early adopters scrutinise the product meticulously, educating themselves extensively to ascertain the level of risk,” explained Pellandini-Simanyi. “If they perceive the risk to be excessive, they refrain from purchasing.”

However, suppose the initial adopters successfully use the new product or service. In that case, subsequent consumers are inclined to assume similar outcomes without conducting thorough evaluations, even amidst a reduction in product quality, noted the researchers.

“Subsequently, a downward spiral ensues, with quality diminishing in the rush to meet consumer demand and maintain profits, while consumers increasingly rely on social cues indicating the product’s safety without scrutinising changes in risks,” observed Barnhart.

“This trend can also engender a ‘prudence paradox,’ wherein the most risk-averse individuals delay market entry until the final stages, culminating in the purchase of highly risky products. Their cautious approach results in delayed entry, but by then, they are left with inferior products.”

Typically, this cycle is only disrupted through intervention via market collapse or regulatory measures. For instance, although cosmetic surgery is generally safe, the proliferation of inexpensive procedures at facilities lacking adequate equipment and expertise led to a surge in botched procedures until regulations were enforced.

“These findings underscore the influence of social cues,” remarked Barnhart. “In such an environment, it becomes exceedingly challenging for individual consumers to evaluate and assess risks, as such actions deviate significantly from the norm.”

Pellandini-Simanyi suggested that consumers should meticulously compare their personal risk against that of others with genuinely comparable experiences to shield themselves against collective ignorance.

“Ensure that this entails an apples-to-apples comparison of products and consumers’ circumstances,” she advised.

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