George Katona (1901-1981) was a prominent economic psychologist; he is also recognised as a founder of behavioural economics in the early (‘old’) period (1950s to 1970s), alongside Herbert Simon. Katona made major contributions in incorporating psychological concepts (e.g., consumers’ perceptions, attitudes, expectations and aspirations, sentiment, pessimism versus optimism) into the analysis of economic phenomena or events, at both the microeconomic and macroeconomic levels. Furthermore, on the methodological side, Katona believed that observation of human behaviour is essential in studying economic affairs, and he was a pioneer in using information on consumers’ attitudes, expectations, and other mental constructs, obtained through surveys, in economic analyses and for theory development. Through his research work with colleagues, primarily at the Survey Research Center in the University of Michigan, he notably set a path to the study of economic or financial decisions of consumers in behavioural economics.

Katona has largely dealt with the combination of psychology and economics, which is at the core of consumer behaviour. Yet, he already used the term ‘behavioural economics’ himself, for example in his article “Psychology and Consumer Economics” for the inaugurating issue of the Journal of Consumer Research in 1974 [1]. Nonetheless, Katona saw behavioural economics and psychological economics as closely tied (i.e., he writes of “behavioral or psychological economics”), as indeed they share common concepts and methods. Katona lamented the dissatisfying extent of acceptance of behavioural economics in the early 1970s “on the part of the economics profession”. Our contemporary (‘new’) era of behavioural economics was apparently initiated with the leading research work of Daniel Kahneman, Amos Tversky, and Richard Thaler (late 1970s — early 1980s), and yet it took nearly two decades later for behavioural economics to rise in acceptance, up to the status of popularity it enjoys these days (i.e., over a span of forty years).

• Is the descriptive behavioural better fitting than psychological in relation to economics? There is not a straight ‘textbook’ answer to this question. It might be said that behavioural economics evolved from psychological economics. It was actually suggested by Eric Wanner, a champion and founding funder of behavioural economics, to name this domain ‘cognitive economics‘ because in the greater part it applies concepts from cognitive psychology as it also builds on the relatively new field of cognitive science [2].

Katona introduced new lines of thought on economic activity and the behaviour of economic agents (e.g., consumers, businesspeople, investors). He not merely suggested to include consumer perceptions, evaluations and attitudes in economic models, but also developed methods for collecting data and measuring them, thereof implementing them in his research. He especially contended that researchers have to ask consumers about their expectations (e.g., on inflation, recession) and not rely only on the expectations of professionals in economics (e.g., when their predictions are based primarily on past trends). Katona had a particular interest in human decision making which he saw as the centrepiece of research in behavioural economics — the behaviour of human economic agents in contrast to the concern of economic theory with the behaviour of markets [3].

Katona considered as an achievement of behavioural economics the recognition (to which he contributed) that consumer purchase decisions of durable goods and other discretionary products are contingent not just on consumers’ ability to buy, gained from their income, but also on their confidence or willingness to buy. Another important argument advanced by Katona states that it is misguided to look for a uniform response to a set of stimuli; instead, the behavioural scientist considers that in some conditions the set of stimuli (e.g., change in income, price or interest rate) would evoke a certain response whereas under other conditions the same set of stimuli could elicit a different kind of response [1]. Katona advocated the view that a focus on prediction is lacking without deeper understanding of the processes underlying the economic phenomena one seeks to predict [3].

Furthermore, Katona played a key role in emphasising the importance of psychological factors as intervening variables and accounting for their possible impact on a behavioural response [2,3]. The more renowned intervening variables he proposed and studied are optimism or pessimism and expectations (he also related to aspirations and social influence). For example, consumers’ reactions to their current income with respect to consumption are influenced by their expectations of future changes in income [3]. In the context of contingent differences in response cited above, Katona suggested: “Attitudes and expectations, which as intervening variables modify the response, are subject to change according to time and circumstances” [1].

Katona was especially critical of the predominance of rationality in neoclassical economic theory. He did not reject that consumers can act in a rational way but he neither assumed that they must indefinitely be rational. His approach was that we should identify any kind of human (consumer) behaviour, whether rational or non-rational, as we find it. The key is rather in distinguishing between conditions under which more, versus conditions under which less, rational forms of behaviour occur. Katona’s sharp critique on the view of rationality in neoclassical economics seemingly falls behind only his fundamental critique of the ignorance in economics of the importance of intervening variables in the psychological processes driving economic behaviour (e.g., spending, saving, investing) [2]. George Katona held a view shared with Herbert Simon on types of rationality: He gave priority to the rationality of decision processes (termed procedural rationality by Simon) over the rationality of decision outcomes (termed substantive rationality by Simon). This distinction reflects a key difference in perspective or focus between psychology and economics [3]. Simon likewise suggested that procedural theories are superior, because they can better predict and explain the decisions actually reached while also, independently, are able alone to shed light on the decision-making processes [2].

Katona expressed a very sober perspective on the rationality of consumer choice behaviour in the chapter on ‘Rational Behavior’ in his book Psychological Economics (1975, [4]). He proposed some principles in describing consumer decision making, whereby he claimed, as noted above, that the question whether the consumer is rational or irrational is inappropriate. Firstly, one has to recognize that consumers rely on their past experiences and maintain habits through time. Secondly, there can be various factors that a consumer takes into account which external observers may not be aware of (e.g., socio-cultural norms and influence by the opinions and behaviour of surrounding people, satisfaction with previous brand choices or habits, thinking of the good of others). The consumer will try to do what he perceives is better for him or her (even if it seems irrational to someone else). Therefore, adaptive may be a more appropriate expression than rational for describing consumer behaviour.

Katona described concisely his conception of rationality in consumer choice beheviour as a matter of discretion according to circumstances — the consumer is “apt to prefer shortcuts, follow rules of thumb, and behave in a routine manner. But he is also capable of acting intelligently. When he feels that it really matters, he will deliberate and choose to the best of his ability” (p.218).

He further suggested situations or circumstances wherein consumers might deliberate on a decision problem (e.g., the expenditure is very high or occurs once in several years, purchase of a new product, dissatisfaction with the previous purchase, exposure to salient information either from general news on the economy or specific to the product from advertising, and when the consumer is more personally or emotionally involved). Katona clarified that an extensive problem solving process takes place much less frequently than the economic theory of rational behaviour expects it to occur — it requires more effort in searching, learning and processing information by the consumer [4]. (Note: The distinction between extensive problem solving, limited problem solving and routinized or habitual behaviour was pivotal in the models of consumer decision making by Howard and Sheth, or Engel, Kollat, and Blackwell in the late 1960s.) In the Information Age of the Internet where huge volumes and varied types of information are accessible to consumers with ever more intelligent search tools to help them, extensive processes of problem solving may look much less demanding. But there would still remain essential actions consumers will need to perform, especially in screening, evaluating and critically scrutinising the information they retrieve on any aspects regarding product or service options.

Taking the perspective of consumers, through their perceptions, attitudes and expectations, can provide researchers more realistic insights on consumer behaviour, and as demonstrated by Katona, can especially lead researchers to understand and anticipate response behaviours that are different from those predicted or expected based on economic theory [1]. Consider for example the development of price inflation, an issue that greatly concerned Katona: The rational consumer according to economic theory is expected to hurriedly buy and stock up products to catch the prevailing lower prices. However, when considering the resentment consumers feel towards steady, inflationary price increases (how they adversely affect their personal finances), and a pessimistic notion that “bad times to buy” are ahead, one may find that consumers lose confidence and prefer to postpone expenditures on purchases of discretionary (less necessary) products; uncertainty induces consumers to save and to keep reserves for products they are likely to need later. Katona identified two conditions when consumers do purchase discretionary products earlier, before prices are seen to climb: (1) consumers believe that a price freezing is temporary, giving them a short-term window of opportunity to make a purchase; (2) during or following more dramatic events (a war) and acute crises (sharp increases in food prices) [1]. The events Katona studied are long past, but these kinds of events reoccur as the last four years have taught us.

Consumers look forward to improving their quality of life whenever they can and upgrade their standard of living. The wants or desires for consumer goods and services are nourished by their aspirations, Katona suggested, but aspirations are reality-bound. After more urgent wants of consumers for some goods have been satisfied, they are likely to develop rising aspirations for new (and even better) goods or services. Therefore, consumers may not get locked in a state of saturation with consumer goods but try to move forward. However, if consumers feel they have not made progress in their standard of living as much as they expected, or not as much as their peers have succeeded, their new aspirations may be stalled. Also, if they foresee impediments to future progress imposed by (external) circumstances, it may dampen their aspirations and make them feel saturation. In other words, inability felt by consumers to improve their situation dampens aspirations, which Katona claimed could happen not only to poor people but also to well-to-do people [1].

We can identify in the conditions described above the potential for adverse effect of loose-based expectations on aspirations, such as when over-optimistic expectations cause disappointment and unwarrantably dampen further aspirations to improve one’s standard of living. Katona argued that expectations and aspirations are interrelated but not identical. Katona posed to respondents these two questions in his surveys: (1) whether they were financially better off or worse off than five years ago, and (2) whether they expect to be better off or worse off five years from now. He found that those answering Better-Better to this couple of questions “have purchased and intended to purchase long lasting durable goods to the largest extent, […], to have continuously upgraded their possessions, and have striven more actively for higher income”. [1, p. 7].

The Better-Better combination represents consumers who often expect past progress to continue in the future or that it gives rise to their optimistic expectations. It was additionally found that these consumers tended to attribute their income gains to their own efforts. Katona concludes: “Thus, the Better-Better answers indicate a feeling of accomplishment which results in new wants and in the absence of saturation with consumer goods” [1, p. 7]. In his work on expectations Katona helped establishing a vital branch of consumer research: the measurement of Consumer Sentiment (or Confidence) in relation to economic developments (at both the personal and national levels).

Katona believed that subjective data are meant to supplement rather than supplant traditional economic data. The use of data on psychological, mental constructs is designated to help in clarifying the antecedents of consumer behaviour. He also acknowledged the implications of attitudes and expectations of individuals for macroeconomic developments: “Changes in the attitudes and expectations of individuals can be measured and such micro-data obtained from surveys with representative samples can be transformed into macro-data which are useful for understanding of what has happened, and also of what is expected to happen in the entire economy” [1, p. 7].

George Katona contributed immensely to forming an integrated (sub)field of psychological economics by adopting and applying psychological concepts in reference to economic phenomena and affairs, subsequently also becoming a co-founder of behavioural economics. Regretfully, Katona is not recalled, cited and credited enough for his achievements and contributions to the development of theory as well as methodology in these domains, inter-relating psychology (behavioural or cognitive) with economics. Policy makers, in government as well as in business, would be wrong to disregard the attitudes, expectations and sentiments of consumers about economic developments because consumers often follow on their expectations, even if in a lag of time, and they play a major role in making up the economy (e.g., through their spending, saving and investing).

Ron Ventura, Ph.D. (Marketing)

References:

[1] Psychology and Consumer Economics; George Katona, 1974; Journal of Consumer Research, 1 (1), pp. 1-8

[2] Behavioral Economics; Eric Angner and George Loewenstein, 2012; in Handbook of Philosophy of Science: Philosophy of Economics (Vol.5), Uskali Maki (editor)[pp. 641-690], Amsterdam: Elsevier [this chapter originated in 2007 online].

[3] George Katona: A Founder of Behavioral Economics; Richard Curtin, 2016; in Routledge Handbook of Behavioral Economics, Roger Frantz, Shu-Heng Chen, Kurt Dopfer, Floris Heukelom, & Shabnam Mousavi (editors), 20p.

[4] Rational Behavior; George Katona, 1975; Psychological Economics (Chapter 14), New-York: Elsevier