Don't underestimate the impact of fees on consumer behaviour

Imagine you are at an ATM withdrawing cash. Before you do, a message comes up reminding you that there will be a $2 fee for accessing your money through an ATM that is not part of your bank's network.  Do you proceed or do you cancel the transaction?

If you were an economist with the Reserve Bank of Australia (RBA), you would have predicted that most would proceed with the transaction. After all, it's only $2.  We lose that behind the couch.

Well, much to the chagrin of RBA financial wizards, they didn't count on the impact of consumer 'irrationality'.  Instead of consumers banking like they had in the past, when the fee for a foreign ATM withdrawal was buried in terms and conditions and you only found out when you looked at your account statement, consumers have turned away from using these ATMs. 

What can you learn from the behavioural economics of ATM fees?

Red rag to a bull
People are more likely to adapt to a new price if they are not constantly reminded of it - it's like a red rag to a bull.  In this case, there was no choice for the ATM owners - the communication of the fee was mandatory, but in your business you may have more flexibility.  If you can, parcel the fee in with the price point and/or change once and not every time the customer pays.

I'm buying the good not the service
In previous posts I've talked about delivery fees.  For instance, order through Amazon and you pay less for the book but get hit with shipping.  Order through Book Depository and you pay more for the book but shipping is 'free' (ie included).  

People hate service fees so much because they decouple the value of the good from the service in getting it to them. Why? Because you retain the product not the service. Your opportunity is to gain  advantage by offering to wipe the cost of service (ie offer "free delivery" or "free installation") because 'free' is extremely persuasive and 'free' on a hated cost of service even more so.

Choose your number 
Was the fact that the fee is $2 the issue?  I think it did have something to do with it.  A lower fee structure, say 50 cents or 90 cents and more customers would have proceeded with their transactions  because dollars and cents are psychologically different.  If I told you that you are entitled to a $2 discount after you've purchased $30 worth of groceries does that hold more or less appeal than me offering you 4 cents off a litre of petrol (which works out about $2 a tank if you are lucky)?  Judging by our slavish devotion to petrol vouchers, 4 cents is extremely persuasive.  As a business you therefore need to consider the number context of the fee or discount you are using.

The big lesson out of the RBA experience is that people's irrationality should not be underestimated. Where something looks inconsequential on paper, it can have dramatic behavioural impacts. Your job is to make sure irrationality works in your favour, and behavioural economics is your guide to knowing how. 

To find out more about what happened with $2 ATM fees, read Peter Martin's article "Banks' $2 fee has big effect"in The Age. 

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(Image from http://www.bikyamasr.com/69294/india-launches-first-talking-atm-for-blind/)

Decoupling cost and benefits to swing the sale

When we make a purchase it means we have made a judgement that the benefits of the transaction have outweighed the cost.  As businesses, we therefore spend a lot of time, energy and expense convincing our market that they are getting a worthwhile deal.  But have you considered how the payment process itself contributes to this equation?  Let's look at this with some help from a behavioural principle known as 'decoupling'.

De lowdown on decoupling 

Decoupling is our tendency over time to forget that the product has a cost. As you sit on your couch every night watching your flat screen TV, chances are you are not thinking how much you paid for these creature comforts even though they would have been significant at the time.

As a business, you can influence your chances of converting a sale by decoupling the cost from the benefit.

'Touch and go' to soften the blow

Credit cards are a potent example of decoupling the purchase from the payment.  The customer gets immediate access to the goods (benefit) whilst the cost is not recognised until their credit card bill arrives (cost) which can be days or weeks hence.  Further, the cost of the good is buried amongst multiple other purchases, reducing the impact of it as a standalone item.

On the other hand, due to its tangibility cash is extremely vivid and therefore more psychologically painful for the customer to part with.  For this reason, it is often recommended to people on budgets to cut up their credit cards and use cash just so they keep tabs on their spending.

So as a business, credit has the advantage of lowering the pain barrier of your customers.  This is being taken a step further by new "touch and go" payment terminals.  These payment systems benefit businesses by reducing the customer's cognitive and physical involvement in the payment process.  Remember the days of having your credit card swiped in triplicate before you signed on the dotted line? Ouch. These systems made you concentrate and therefore increased the impact of the payment compared with simply tapping a bit of plastic against a machine.  

Let your customer forget

If you've purchased anything on Apple's iTunes you will have noticed the delay in having your purchase documentation confirmed.  Around two or three days after your purchase, Apple sends an email confirming what you have bought, which is an obvious strategy to decouple the benefit and pain. Obvious but flawed.

Apple have botched the decoupling process because they have interfered with the principle of 'adaptation' where we get over things faster if we are not reminded of them.  Downloading a track only to be alerted a few days later that I paid for it tends to remind me of the cost rather than benefit.  After all, chances are I am not listening to the track at the time the email arrives.   It would be better for Apple to process the receipt at the time of download, particularly because the payment is already decoupled anyway through electronic banking.

Averaging the pain

Whilst both credit card statements and Apple's email delay the notification of purchases, they are different in a key aspect.  Credit card statements are an itemised account of multiple purchases whereas Apple specifies individual items.  As a result, the pain of the credit card statement is averaged over the whole month's purchases whereas each Apple purchase sticks out to be scrutinised on its own.

The key lesson from decoupling is that your customers will forget the cost of their purchase over time. However, you can enhance your chances of getting them to commit to the purchase by minimising the impact the payment process itself has on their assessment of the deal, tipping the balance in favour of benefits over pain. 

Image from http://www.buynowpaylateruk.co.uk/

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Pricing pain at the petrol pump: Why $1.60 hurts

Petrol prices are on the rise and so too hysteria about what this means to Aussie households.  So why does petrol fuel such intense consumer reaction? Let's see whether Behavioural Economics can provide an answer.


Price sensitivity but demand inelasticity

In Melbourne, petrol moved from around $1.40 to $1.60 overnight last week which is a 14% increase. Some media outlets are joyfully speculating that we'll be paying $1.65 over the Easter break, stirring outrage amongst their readership. The price hike means that a car with a 60 litre tank will be paying around $12 more for one fill.  Ouch.

According to ANOP research cited in the 2007 Australian Competition and Consumer Commission (ACCC)'s review of petrol pricing, 70% of consumers are price sensitive when it comes to petrol.  The 30% who are insensitive are largely those with company vehicles, meaning the rest of us are paying attention to whether petrol is higher or lower than it was yesterday.  

Our sensitivity comes despite petrol being a largely inelastic purchase; we have to buy when the tank is empty regardless of price.  It is this sense of powerlessness that I believe drives our desire to try to 'beat the system" by trying to anticipate price rises, and slavishly handing over our 4 cents off a litre shopper dockets.

Petrol is like the stock market; we think it's about knowing when to buy 

In some ways, buying petrol is like the stock market.  There is unforeseen variation brought about by mysterious offshore forces, and inevitable speculation about the right time to buy. And just like those in the stock market, we all have theories on when the price will move (school holidays, long weekends, Thursdays etc) because we can't help but look for patterns in things. And yet, as Nassim Taleb writes in his book The Black Swan, we fool ourselves into thinking we know more than we do.  There really is no pattern to petrol pricing, and even if for a time Tuesdays seem to be cheaper, the following week that may change.

Here's are some of the behavioural forces at play with petrol pricing.

Adaptation

Consumers generally cope best with undesirable change like price rises when it is done quickly, we can adapt and life can move on. The challenge with petrol pricing is that it seems to change day to day, keeping us guessing.  But here's the peculiar thing; we are so used to price fluctuation that we have adapted to not adapting.  Just like the price of fruit and vegetables, consumers expect there to be change in petrol. 

But, it seems consumers adapt to petrol price variation within a certain tolerance range. Changes a few cents up or down seem fine, and incremental price changes are tolerated, but leaping $0.20 is beyond the usual cycle. 

Anchoring
An anchor is the information on which a consumer relies to establish a sense of value for a product or service.  In the case of petrol, the huge price signs are blatant anchors, and drivers scan these as they assess whether they should stop to buy. In Melbourne we had been anchored around the $1.40/litre mark for a few weeks.  When $1.60 suddenly appeared, it interfered with our sense of value and created newsworthy confusion about why it had changed so significantly.


The interesting thing of course is that $1.60 is the new anchor, so if petrol drops back to $1.40 or even $1.50 it will seem like a better deal.   Remember it was only 2005 that we punched through the $1/litre psychological and price barrier, and from there on we have been continually re-anchored to higher price points. If you were visiting from New Zealand, by the way, $1.60 would seem like a bargain because they are paying nearer to $2/litre.



Loss aversion
Consumers hate the possibility that we will drive past the bowser only to see the price jump up when we need to fill the tank.  If only we'd stopped in the morning!  The sense of having 'lost' the lower price torments us because it reflects a poorly made decision. In the case of normal price variations, this may mean the difference of only a couple of dollars on a tank, so intellectually we should not be concerned.  But emotionally, we feel like we've lost.


Loss aversion is why price guarantees are such a popular behavioural device; they make us feel comfortable about committing to the purchase without fear of finding the product cheaper elsewhere. Loss aversion is also behind the success of fuel discount vouchers.  It is too painful to give up the fuel discount so we instead drive with purpose to particular outlets to save around $2.  


Lessons for businesses

Petrol pricing reminds us that pricing is as emotional as it is intellectual. As fuel discount dockets have shown, consumers will change their behaviour to save a couple of dollars.  Whilst this may not make rational economic sense, Behavioural Economics shows that we are all subject to forces that influence us to act in irrational ways.  For your business it means you must consider how your price is anchored, how you will help your customers adapt to a price rise and methods of supporting your customers to overcome their aversion to loss.  You have the power to positively control the response to your pricing with help from Behavioural Economics. Happy driving.

PS If you like my blog, I'd love you to consider supporting my fundraising trek of the Larapinta trail. Many have supported the trek already so to find out more, visithttps://www.gofundraise.com.au/page/BriforICV Thank you!

How to introduce a charge for a free service

SmartCompany's exploration the other week week of News Limited's introduction of a paywall included my thoughts on how the newspaper giant could use behavioural economics to transition their service from free to paid.

To round out this discussion, I thought it was worth looking at what makes "free" so alluring in the first place, so that you can consider whether and how to give away products or services without charge.

So let's start by looking at chocolate.

The persuasive power of "free"

In an experiment outlined in Dan Ariely's Predictably Irrational, participants were given the choice of two chocolates: higher quality Lindt or Hersheys.

Through the course of various experiments, the price of each brand was manipulated to see how consumer rationality was affected. In other words, what was the point at which price changed our judgment of what we were willing to experience from our consumption of chocolate. When the Lindt was 15 cents and Hersheys one cent, 73% chose Lindt. Makes sense. We are willing to pay more when we receive a quality experience.

But then life got interesting. Prices were dropped by on cent. Lindt was therefore 14 cents and Hersheys, free. Suddenly Hersheys gobbled up 69% of the custom, reversing the earlier trend. Was it the one cent price drop? No. It was the impact of "free". The majority of participants were now willing to act in spite of the lower level of anticipated pleasure just because the chocolate was free.

It seems that "free" dramatically impacts our assessment of what we are willing to experience.

Ariely goes on to speculate that the reason we are so swayed by "free" is that there is no downside. In most transactions, we weigh up the pros and cons, rewards and risks, but when something is "free", there is only upside.

This is the behavioural principle of loss aversion, where we are wired to avoid loss more than seek gain. In the case of chocolates, participants were unwilling to trade Hersheys for Lindt even when they had only to pay one cent for the lower quality brand. The risk was still too great. Take away that risk by making Hersheys free, and the game changed.

Introducing a charge for a free service

That's fine for chocolate, but what does it have to do with a paywall where News Limited are trying to introduce a fee? After all, it's a bit like charging for Hersheys when we are used to pigging out for free.

It shows how difficult a task News Limited have ahead of them because "free" is one of the most persuasive of forces. So here are some thoughts on how to reverse engineer free in order to transition to a paid service:

1. Differentiate the product – if a brand wants to charge for something that they have previously given away for free, they need to change the product. For chocolate, it may mean changing the ingredients or packaging, or emphasising something new about the product that people didn't know (eg. now from sustainably managed cocoa suppliers). For News Limited, it means re-skinning the online experience, introducing new content and/or features, and new marquee journalists.

2. Reframe the pricing – News Limited customers will be paying between $2.95 and $7.95 instead of zero. These are small amounts relative to most things, but not relative to free, so News Limited needs to contextualise the price for its customers. For example, less than a gym membership, less than a zone two train ticket, less than what you spend on lunch per day to get 24/7 access to real-time Australian news.

3. Introduce decoys – Pricing decoys are a very effective behavioural technique because we assess prices relative to others. At the moment on News Limited's subscription page for The Australian they are offering a digital pass for $2.95/week, digital plus weekend papers for $4.50 or digital plus Monday-Saturday papers for $7.95. Here it would have been helpful for them to also offer a "decoy" seven day print subscription on the same sign up page. Why? It sets a value for the print subscription that makes the print and digital bundles look more attractive. (On The Australian's offers page which is buried a few clicks in they have moved in this direction but made the mistake of making print look the better deal at $2/week).

4. Get it over quickly – the behavioural principle of adaptation means we get over bad news more quickly if we are not reminded of it. News Limited will have to be careful how it treats its customers throughout the sign-up, sign-in and billing process, with the aim to have the pricing recede in the customer's consciousness. They are currently offering a digital pass three month trial. My suggestion would be that the pass defaults to payment as part of the terms and conditions rather than reminding people at the end of that period that they have to pay up.

5. Demarcate the process – anyone who has used iTunes may have noticed that the payment is confirmed a few days after your purchase. Apple are effectively disconnecting the process (purchasing music) from the pain (payment), which means we are less likely to remember that our downloads have cost us. News Limited should likewise consider how it finalises the payment process with the customer.

6. Guilt – don't underestimate how guilt can turn freeloaders into paying customers. Of course there will always be some people who take without giving, but most of us are susceptible to contra-free loading. This is our innate desire to work for reward rather than just get rewarded. Don't scoff. A recent move by the Indiana Museum of Art to move to free entry resulted in a 3% increase in paid memberships.

The key lesson to take away from this discussion of chocolates and paywalls is this; offering something for "free" changes the game. It comes with significant behavioural implications that can work well for your business to stimulate volume, but can also change how your product is perceived. While not impossible to reengineer a free service as paid, it is extremely tricky and therefore should be used with due consideration to your longer-term and competitive goals.

This article was originally published by Smartcompany, 

http://www.smartcompany.com.au/behavioural-economics/20111031-how-to-introduce-a-charge-for-a-free-service.html

Image from http://cdn.besttechie.net/wp-content/uploads/2010/07/paywall.jpeg

Tips for introducing a service fee

Debating whether you should introduce a fee of some kind to cover a service you provide? There are obvious financial advantages to your bottom line, but is it worth the negative reaction you may get from customers? Here are three behavioural principles that will help you consider your options.

Social contract

Charging for something shifts it from social to commercial transaction, and this means that the service will be viewed differently. In a case study profiled in “Predictably Irrational” by Dan Ariely, a childcare center imposed a fee on parents who were late in collecting their child. Sounds like a sensible idea, motivating those parents prone to tardiness to make more of an effort to get there on time.  But what happened? Tardiness became worse!  Why? Parents felt less guilty about being late because they were now “paying” for it.  The arrangement had shifted from a social to financial transaction, and expectations shifted in kind.  In your business, take note of how social norms are influencing the behaviour of your customers before you shift it to entitlement territory.

Adaptation

We adapt to something faster if we are not interrupted and reminded about it (think ‘quick like a Bandaid’).  By introducing a service fee you will be drawing attention to that service every time you charge for it.   If it’s great service, it can be a good move to charge every time so that you can showcase the value and prevent customers taking it for granted (adapting to it). But if your service is not that hot or not easily understood, better the charge is either infrequent (like annual) or deemphasised (don’t provide long-winded explanations on every bill) so that customers have a chance to forget about it after initially being annoyed. 

Loss aversion

The power of fees is often in what you do not charge.  “We’ll waive normal joining fees” or “We’ve scrapped fees” are popular techniques amongst banks and gyms because they placate our aversion to loss – we feel like winners because we’ve avoided the pain of a fee.  For the reason alone of customer motivation it is worth having some sort of fee that you can waive as you need.

From your own experience as a consumer it should come as no surprise that service fees are often resented.  The opportunity for your business is to know how and why you can use fees to influence customer outcomes and overcome potential resentment, and to proceed knowing that it’s not as simple as cost recovery.  Until next time, happy charging.

This article also appeared in Smartcompany.com.

Image from http://www.itnews.com.au/News/245014,industry-in-uproar-over-austrac-cost-recovery-proposal.aspx

Buying a vote for 20 cents

What can you buy for $0.20 vs $10?  A vote at the local bushwalking club.

Two scenarios are outlined below, both with the objective of securing a $10 increase in the annual club membership, from $40 to $50.  The story illustrates how the positioning of a price increase can impact much more than whether it goes through or not.

Scenario 1

"Welcome to our monthly meeting, I am Jane Smith, your club president. As you know, you are one of over 500 members, 200 of whom are here tonight to discuss and vote on the plan to adjust annual membership fees by $10.  As you also know, what brings us together is our love of the outdoors and bushwalking, so I am really looking forward to sharing our plans on how we can do even better than last year.  Our plans mean that we can support up to five different walk locations every single week rather than the current three, we can continue to provide our monthly newsletter via your choice of post and email, but most importantly, we are all protected through accredited safety training and our insurance policy. It also means we can at last buy 2 satellite phones to use on our most remote walks. And to make this the best year yet, all it will take is one of these (holds up a 20 cent coin) per week. But let's go through the detail so you know why it's 20 cents and not say 10 or 50 cents, and then I can open the floor to questions."

Scenario 2

"Welcome everybody.  Now tonight as you know we need to vote on the proposed increase in membership fees.  These were outlined in the newsletter. We've got the figures in a spreadsheet up on the screen behind me (gestures to excel file that is a bit too small to read from the back of the room). It's $10 for individuals, from $40 to $50.  Does anyone want to say anything before we vote?"  (Member takes the microphone and asks what the financial health of the club was and whether a sizable sum should be used to offset the fee increase rather than sit untouched. President hands over to Treasurer and it quickly resolves into a discussion on the detail of how much a newsletter costs to print, including paper, printing and post. 30 minutes later the President calls for a vote. I meanwhile had plenty of time to work out that $10 on $40 is 25% increase which was much steeper in relative terms than the $10 on top of the $60 family membership).

What are the key differences between how the fee increase - the price rise - was positioned? 

The first scenario used the principles of behavioural economics and change management to motivate the affirmative vote. Let's step through the principles;

• Shrink the change - $0.20 a week seems a lot less burdensome than having to pay $10. The mere mention of $10 conjured in my mind all the things I could spend it on, so by visually holding up a 20 cent piece the president was bumping an abstract image from my mind with a tangible representation. I couldn't even remember the last time I had used a 20 cent coin, so of course 20 cents a week wouldn't be a problem.
• Adaptation - don't assume your customers are consciously aware of the benefits they already receive, so the president in scenario 1 was right to remind me of our common love of bushwalking and all the services the club provided.  The Adaptation principle tells us that people get used to good things and can forget the value they extract along the way. The joy of a pay rise quickly fades as it becomes the usual.  And Adaptation also helps us get over the pain of a price change. Remember the last interest rate rise?  I certainly remember the media hype but I can't remember what it has meant to my mortgage because I have adapted. So Adaptation also tells us that the club was right in both scenarios to charge the amount as a once-off rather than by instalment.  We get used to prices rises as long as we are not reminded of them (aka the 'quick like a band-aid' rule).
• Executive Mind - a fee increase engages the executive mind which looks for logic and value - it's provoking the Rider when the Elephant has been happily trotting along*. Don't engage this type of processing with a price rise unless you couple it with the value argument, otherwise the Rider will yank the reins and march that elephant right out of your shop. However, the big trick here is to not just base it on logic.  Like me, I'm sure you have seen many logical arguments fail because they did not appeal to the Elephant as well as the Rider.  In scenario 1 the president not only illustrated the scale of change (Rider) but why we needed to contemplate this.  Safety, shared love of bushwalking, the number of members which illustrates the thriving nature of the club all got our Elephants stampeding for the affirmative vote.  In scenario 2, instead of reminding us of why we were members in the first place, it was inferred we were an insurance risk and communication burden that had to be covered.   The unhappy Elephant was thinking 'Yes, I logically get why you need to put up fees but I really resent it. Why am I part of this club again?'
• Clarity - Detail is great as long as its accurate and meaningful, but clarity is much more important.  In scenario 1, the president was clear in the amount of increase ($10) and what this meant (equivalent of $0.20 per week). She also cleverly introduced it as an anchor (20 cents rather than 10c or 50c) so we inferred that it was not too little or too much. In scenario 2, the $10 was clear but not in terms of why - what was the context around the amount, and what was it paying for? 

I mentioned in the introduction that the positioning of a price rise can impact much more than whether it is implemented.  If you haven't already guessed, Scenario 2 was the situation I and my fellow club members endured.  Did the fee increase go through? Yes.  We voted for the $10 increase and the committee can say that it was a successful outcome.  I think many of us voted just to get it over with and we had justified to ourselves that $10 wasn't worth another 30 minutes of awkward discussion.  Instead of the fee change being viewed as a positive sign of growth for the club, we have come away with a nagging sense of incredulity, and that's a shame for a club with such hard working volunteer committee members. 

So when you are contemplating a price rise in your line of business, remember it's the customer churn resulting from your decision, the lost advocacy for your product, the Elephants that may have voted one way in the room but now walked out of it that you need to worry about.  We all know that prices rise - that's the easy part - it's how you get people to vote for it that is your job.

* For an explanation of Riders and Elephants, please refer to previous posts such as http://bri-williams.blogspot.com/2011/01/normalising-ethical-shopping-with.html

Price rises and salary reviews - how train tickets can show us how

I recently moved from an annual train ticket to a stored value, charge-by-trip system.  Where my previous experience had been that the annual cost was taken from my salary each fortnight (thanks to a system my employer provides), I now have to top up my card and see what value remains after each journey is completed.  The cost of course is the same as it's always been (and in fact a tiny bit less).  So what's the difference? After each trip I now have the personal cost brought top of mind.  If the trip has been bad, I'm resentful. If it's been a 'good' trip, I'm resentful because who likes paying for smelling unreliable service? 

The concept at play here is "adaptation", explored in Dan Ariely's Upside of Irrationality. We become desensitized to change - our emotions level out as the positive and negative perceptions of the change fade away.  Think about how excited you were when you bought that new TV, new car, new dress. The elation fades away as you adapt to the change.  Ariely describes this as the "hedonic treadmill" where we underestimate how short lived happiness through consumption actually is, and why 'keeping up with the Joneses' will only ever disappoint.

One of the lessons here is that when it comes to the annual pay rise, we'd be better off getting the increases in instalments. Why? So we can enjoy them more. Quarterly raises would mean you are reminded four times of your increasing worth to your workplace rather than just once.   (It would also benefit the business' bottom line just quietly....)

The converse is true and is why my train ticket has become very annoying.  Instead of me adapting to the annual cost and the pain receding to my memory, I am being interrupted every time I travel - I am not being allowed to adapt. 

The lessons for marketers? If you are increasing your prices, give serious consideration to larger rises less often - limit the number of times you remind them of what you are charging so that you give your customers time to adapt.  Think like an annual train ticket.

If you are rewarding your customers (Myer does this well with it's reward card), try doing so in instalments so the positive impact is felt more frequently. Think like a reward-per-trip ticket.

And if you are the new Victorian government, add this blog to the list of Myki ticket feedback!

Interest rates get a rise: A Behavioural Economics perspective

It's been two weeks since Americain won the Melbourne Cup and the Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points.  In both cases the result was unexpected.  The Commonwealth Bank (CBA) responded by lifting variable rates by 43 basis points with the other "big banks" following a week later with increases between 39 and 42%.  Public outrage was followed by political outrage as both major parties muttered about how to regulate the power wielded by the big banks. But what does Behavioural Economics tell us about the reaction to interest rate increases above the RBA rate?

1. Pricing irrationality
Have you moved your home loan as a result of the interest rate policy change? Let's take a minute to consider the scale of what CBA did.  On an average $300k loan the increase of 43 basis points (CBA) vs 25 (RBA) is a difference of 18 cents per dollar.  Over 30 years this is $54,000 or $34 or week.  $54,000 must be worth consideration, right?

Remember when petrol was less than $1 a litre?  Not that long ago, but now that the psychological barrier has been broken, we find ourselves paying $1.29 and beyond on a regular basis. Where's the outrage now?  Around the same time, Woolworths and Coles introduced their petrol docket savers where you can knock off $0.04 per litre.  On a 40L tank that's $1.60.  100L tank, $4.   For around the price of a coffee the petrol savers have been an outrageous success for the grocers because they have changed behaviour in their favour - people shopping in their outlets so they can save on petrol.

$54,000 vs 4c a litre.  I'd hazard a guess and say that more people have changed their grocery shopping than changed banks.  Why? We have different scales of pricing in our minds due to the effects of priming and consideration of one activity (petrol) does not means reconsideration of another (mortgage).

2. Revenge
I'll take my loan elsewhere!  I won't put up with this treatment! Revenge is a powerful emotional reaction and Behavioural Economics has illustrated it can cause irrational responses.  In the example of interest rates the revenge would be withdrawal of your business and it would be irrational because of the financial detriment through exit fees and the inevitability of rate changes across all loan providers.

3. Adaptation
Dan Ariely covers Adaptation in "The Upside of Irrationality".  Pretty simply, we underestimate how quickly we become desensitized to change.  And that's why two weeks after the interest rate shift it has faded to the background and I imagine very few people are still contemplating a change of bank. Of course this is exactly what the banks prey on - we get used to the higher rates, we get used to the standard of service and we adapt to paying more for our mortgages.

An interesting aside with adaptation- we are more likely to adapt when the change is less frequent.  In this case, an annual interest rate hike would in theory be less inflammatory than the monthly expectation-teasing RBA announcement.

4. Identifiable victim
The concept here is that we respond to individual suffering rather than the suffering of masses.  World Vision apply this principle when they ask that you sponsor a child rather than support a community. What do interest rates have to so with this?  Two things - from the bank's perspective they treat us as a mass and so do not see the suffering of individuals for whom a rate rise is devastating. And from our perspective, we would probably cope better with the behaviour of banks if they presented themselves as individuals who are making decisions in the best interests of their community ie shareholders.  And given many of us are bank shareholders (through Superannuation and managed funds), personalising the benefit may soften the blow.

5. Self herding
This is not the first time the banks have exceeded the RBA's official increase.  Can you remember the dates of other changes?  I can't. Although I can remember I was outraged. And I can remember I didn't switch banks. What that leads to is repeatable behaviour - in other words, I remembered I was annoyed but didn't do anything.  Therefore this time I am more likely to follow the same (inert) path.  Self-herding suggests that we recall our actions, apply them to a more general principle, and then follow the same path when a a similar situation happens.  Again, the banks rely on the pattern of inertia when they increase rates - much like insurance companies and utilities providers who increase prices.

6. Priming
Priming is where our pricing expectations are set in relation to a particular context. In this case, the RBA has primed our expectations of what is a "fair" increase at 25 basis points.  When the banks move in line with this, people get on with life because there is no one really to blame.  It is only when the banks "price gouge" by moving beyond the RBA rate that it becomes a story. 

Where does all this leave us when it comes to interest rate increases beyond the official cash rate?  It's an understandable reaction to get angry when the banks breach our sense of fair play, but I think a large part of the issue is that we get mad at ourselves for not acting the last time it happened.  It's our irrational selves at play - expending more energy looking for discounted groceries than the best loan.  So before the next rate change there are a couple of things you can do - check which banks you have shareholdings with because it may ease the pain if you ultimately profit, and of course, if you are not satisfied with your bank, take action in anticipation of another inevitable rate increase.