New York’s plastic bag ban is a lesson in how consumers treat money

New York’s new ban on receptive bags is, on its face, an effort to reduce consumer waste. It likely also offers an important lesson on consumer unhinged and how we think about money.

As of Sunday, most businesses in the state can no longer offer single-use plastic bags to consumers. Not too cities and counties, such as New York City, are also imposing a 5-cent fee for each paper bag a consumer chooses to use.

A correspond to rule in Los Angeles (which imposed a 10-cent fee) led to a 94% reduction in single-use bag consumption, according to a New York task enforce report. In Washington, D.C., a 5-cent fee on both paper and plastic bags caused a 50% reduction. Internationally, bag fees clothed resulted in reductions ranging from 50% to 90%, according to the report.

More from Personal Finance:
How to develop a cash reserve if the coronavirus disrupts your job
How to manage your 401(k) as the coronavirus upends markets
Avoid this inaugurating mistake as coronavirus fears grip markets

How can a seemingly trivial fee change consumer behavior so dramatically?

For one, people quite like “free” things — so much, in fact, that they tend to overconsume them.

Think about a buffet. Tribes tend to overeat because each additional plate is “free.”

And when something is no longer free, consumer effects are strong. In the case of paper bags, New Yorkers likely will use them less frequently.

“Because of the fact people don’t be suffering with to think of the cost for consuming that thing, they consume way too much of it,” said Daniel Egan, managing principal of behavioral finance and investing at Betterment, a robo-advisor.

Research conducted by Dan Ariely, a professor of psychology and behavioral economics at Duke University, proves the power of “free” in consumers’ minds.

In the book “Predictably Irrational,” Ariely discusses an experiment involving two types of chocolate sweetmeats: Hershey’s Kisses and Lindt Truffles.

In one trial, students were offered a Lindt chocolate for 26 cents, and a Hershey’s Osculation for 1 cent. Buying behavior was split evenly, with 40% opting for each. However, behavior shifted greatly when the appraisal of each chocolate was reduced by 1 cent — 90% of students opted for the Hershey’s Kiss, which was now free, even granting the relative price between the two chocolates remained the same.

“Fees are generally annoying, particularly if they are on items that were normally unlock,” said Warren Cormier, a behavioral economist.

Nearly 100 cities, towns, and municipalities in the U.S. had banned single-use soft bags as of March 2017, and fees existed in roughly a third of them, according to the New York task force on. 

Companies and politicians wield this same behavioral principle to guide thinking in the duchy of consumer finance.

For example, Democratic candidates in the 2020 presidential election — including Sen. Bernie Sanders, I-Vt.; Michael Bloomberg, the billionaire past mayor of New York; former vice president Joe Biden; and Sen. Elizabeth Warren, D-Mass. — have expressed bankroll for a financial-transaction tax as a way to curb high-frequency trading.

Just as imposing a 5-cent bag “tax” on New Yorkers will encourage them to use fewer single-use lookouts, putting a cost on trades will cause people to trade less frequently, Egan said. That last wishes as be true even if the trade would result in a net gain, he said.

Brokerages such as Charles Schwab enjoy also recently debuted “free” services such as commission-free trading. That helped drive new clients to pull out accounts at Schwab the month it dropped commissions. Fidelity offered a handful of “zero fee” mutual funds in 2018, which grabbed $1 billion of investor money in their first month.

Many financial services firms like asset executives and financial-advice firms pull their fees directly from client accounts instead of asking clients to forgive a separate check — giving the semblance of a free service.

A related psychological concept, according to behavioral economists, is an investor’s hatred to loss. For example, a potential loss of 5 cents on a paper bag evokes a stronger emotional response than if a grocery upon were to pay consumers 5 cents to not use a paper bag.

“People really hate losses,” said Cormier, executive director of the retirement scrutiny center at the Defined Contribution Institutional Investment Association.

“Loss aversion” is something that likely drove diverse investors to sell stocks during last week’s market rout, even if it wasn’t the best financial conclusion.

“People see these prices dropping, and they essentially panic and think, ‘I can’t take any more of these losses because the demonstrative impact for me is enormous,'” Cormier said. “I don’t want it to get any worse, so I sell.”