There are many areas of life where we could be getting a better deal by making what seems to be an easy switch. So why don’t we do it more often?
New figures out show that many of us could be saving money by changing our utility providers, but most of us don’t bother. A couple of weeks ago I spoke with Radio 4 MoneyBox’s Ben Carter about why we lack real motivation to switch providers (from 16m:15s).
First, and not unique to switching utility providers, behaviour change is hard. Inertia, or what behavioural scientists sometimes call the status quo bias, leads us to generally stick with whatever the current behaviour is. It takes cognitive effort to do something different (in this case compare tariffs and then switch the provider), so people are naturally reluctant to do so, in an effort to conserve our mental energy.
There are certain characteristics of this particular decision - to switch providers - that make it even less appealing, providing several different reasons why switching isn’t as easy as it sounds.
First is the distribution of costs and benefits, and how this relates to present bias - overvaluing what is happening now over what could happen later. In the case of switching providers, you have to spend effort upfront (which is a cost) and your benefit happens slowly over time into the future. Not only is it in the future, it doesn’t even feel like such a great benefit anyway: it's a reduction of a bill, so it’s still painful, just a little less so. To encourage action, the benefits should be upfront and salient.
Next, it may be important but it’s not urgent. There is no deadline to switch, so it falls down our list of priorities. If we think about ISAs, they have a defined year. This is one of the very few products that I shop around for, and I think it’s because I don’t want to miss out on a deadline. This taps in to anticipated regret aversion, or what is more familiarly known as Fear Of Missing Out. FOMO is a good motivator.
The pricing can be complex. We tend to focus on information that is salient and easily comparable. So sometimes people pay attention to one piece of information (say, an introductory offer) and hang on to only that, ignoring other information which may matter in the longer term. This means that they might not be getting the best value for their particular situation.
Switching accounts isn’t sexy. We learn from others and are very heavily influenced by what others do. No one really talks about switching providers. In the case of bank accounts this may be because money is so personal and relatively taboo to discuss. For utilities, maybe it’s just because they’re not very exciting! It’s the same product whether you get it from supplier x or y, delivered in the same way, so you wouldn’t compare it with your neighbour as you might with, say, a new car. The only time you really think about your gas and electricity is either when it’s not working (hopefully that doesn’t happened too often) or when you pay bills, but many people pay by direct debit so might not even notice. If no one is talking about switching, we’re less likely to do so ourselves.
And what about selecting the right provider? We don’t always try to get the very best, often times we are happy with what is good enough. Again this relates to the mental cost of comparing all of the different product attributes: the complex pricing, the difference in customer service, and so on. Research by Barry Schwartz and colleagues found that even if a ‘maximiser’ selects an objectively better product, a ‘satisficer’ reports being happier with their selection.
This throws up an interesting question in the context of switching providers: is it better (of more value to you) to save money on your bill or be happier about the provider you have? This will of course depend on your particular situation. But the point is that as long as what you have is good enough and meets some basic criteria, for some people it’s just not worth the hassle to switch.
It’s clear that switching accounts, despite the potential savings to be made, is often unattractive. So how then can switching be encouraged? We’ll share some thoughts on this in part 2 of this blog next week.