Incentives and Expert Behaviour: The Consumer’s Perspective

As consumers, we rely on experts to provide us with specialized knowledge and advice. However, we should also be aware of the incentives that experts face, which can influence the advice they give us.

In this blog post, we will discuss the economic concepts that help us understand the incentives that experts face, and how we can protect ourselves as consumers.

Information Asymmetry

One important concept in understanding expert incentives is information asymmetry. This occurs when experts have more information about a product or service than consumers do. This can lead to situations where experts take advantage of consumers’ lack of knowledge, by providing incomplete or biased information.

For example, imagine you are purchasing a car and the salesperson tells you that the car has a certain feature that you are interested in. If the salesperson knows that the feature is not actually included in the car, they may be more likely to say that it is, knowing that you do not have the same level of knowledge about the car’s features that they do.

We can represent this concept with the following equation:

Pr(expert outcome = Y | consumer information = X) ≠ Pr(expert outcome = Y | consumer information ≠ X)

In this equation,

• “Pr” represents the probability of a certain outcome,
• “expert outcome” refers to the advice or guidance that the expert gives,
• “consumer information” represents the information available to the consumer, and
• “X” and “Y” represent different levels of information and outcomes.

This equation shows that experts may provide different outcomes depending on the level of information that consumers have, which can lead to biased or incomplete advice.

Avoid High Pressure Sales Tactics

High pressure sales tactics can occur when experts have an incentive to maximize their profits, and can lead to situations where they push consumers to make decisions that are not in their best interests.

For example, imagine you are buying a computer and the salesperson tries to convince you to purchase a more expensive computer than you need by telling you that it is the only one in stock, or that the sale is ending soon.

We can represent this concept with the following equation:

Π = R – C – B

In this equation,

• “Π” represents the profits that the expert can earn,
• “R” represents their revenue,
• “C” represents their costs, and
• “B” represents any bonuses or incentives that they receive.

This equation shows that experts may have an incentive to maximize their profits by pressuring consumers to make decisions that may not be in their best interests.

Take an Active Role in Decision Making

As consumers, we can seek out additional information, conduct our own research, and ask experts to be transparent about their incentives and conflicts of interest.

For example, if you are planning to buy a car, you can read reviews and compare features and prices of different models online. By gathering more information, you can make a more informed decision and be less susceptible to high-pressure sales tactics.

We can represent this concept with the following equation:

Qc = Qex – I – P

In this equation,

• “Qc” represents the quantity of information that the consumer receives,
• “Qex” represents the quantity of information that the expert provides,
• “I” represents the cost of information gathering, and
• “P” represents the price of the expert’s advice.

This equation shows that consumers can protect themselves by gathering more information and being willing to pay for high-quality advice.

Seek Experts with a Good Track Record

This can help to ensure that we as consumers receive unbiased and trustworthy advice.

For example, if you are looking for a financial advisor, you can ask for referrals from friends or family, research the advisor’s credentials and experience, and ask about their compensation structure. By selecting an advisor who is honest and transparent, you can increase your chances of receiving trustworthy advice.

We can represent this concept with the following equation:

Uc = Uex – αI – βB

In this equation,

• “Uc” represents the utility that the consumer derives from expert advice,
• “Uex” represents the utility that the expert derives from providing that advice,
• “α” represents the degree to which the cost of information gathering affects consumer utility, and
• “β” represents the degree to which incentives and bonuses affect expert utility.

This equation shows that consumers can protect themselves by seeking out experts who are honest and transparent about their incentives, and who are motivated by a desire to provide high-quality advice.

Conclusion

As consumers, it is important to understand the incentives that experts face and the impact these incentives can have on the advice and guidance that they provide.

By being aware of these incentives, gathering additional information, seeking out ethical experts, and being willing to pay for high-quality advice, consumers can make more informed decisions and protect themselves from the negative effects of expert behavior.