Sometimes rational behavior means nobody has any idea why they are doing something

The always-excellent Planet Money podcast recently did an episode on why milk is always at the back of the grocery store. It’s a fantastic piece, and well worth the 16-minute listen, but can be summarized pretty briefly. It turns out that there are two theories for the milk-in-the-back phenomenon: exploiting behavioral economics and cost minimization. The behavioral economics story is the one I was more familiar with: milk is an extremely common purchase, and it is placed in the back in order to force people to walk past a range of tempting items. Since consumers are prone to impulse purchases, this induces them to spend more.

The cost-minimization theory is one I wasn’t familiar with, but it rings true. Milk is extremely prone to spoilage and must be kept consistently cold to keep it drinkable. Keeping it in the back is the cheapest way to maintain the “cold chain” needed for this; moving it to the front would cause more losses due to spoilage and/or require.

That’s the debate, but the best part of the episode is that no one knows what the right answer is. They talk to a range of experts who voice various opinions on the subject, and get support for both theories. The first interview is with a guy who is the dairy buyer for a major grocery store chain. He voices support for the tempting-consumers theory, and literally says he “believes” that that’s why they do it. He is the guy that is doing this! And he believes that the reason why he puts the milk in the back is that it tempts the customer to spend more. The cold chain theory doesn’t fare a ton better either, getting barely more than half of the votes from people who are in the business of selling milk.

None of this implies that the people who run grocery stores are not behaving optimally, however. You don’t need to understand your own strategy to maximize profits, or even your own well-being. Imagine you run a big grocery store, or even just the dairy section of one: you make tons of decisions and face hundreds of constraints. And you observe what happens to costs, volumes sold, and profits, whenever you change something. So your process has ended up a certain way, and you can legitimately not know the exact reason why. You know that if you do different stuff with the milk, profits go down – from your own experience, from watching other stores, etc. You keep doing what you’re doing, because you are sitting at an optimum, but you don’t actually know why.*

My gut instinct is that this kind of rational behavior – where people are at an optimum but don’t know exactly why – is exceedingly common. I am reminded of the complex traditions around using one’s signals on unlit roads in rural Africa. If you approach traffic headed in the opposite direction, you have to lower your high-beams and turn on your right turn signal (the one closest the the approaching car). I’ve heard various of explanations for this: that it reminds people to dim their headlights, that it informs approaching cars about the location of the edge of your vehicle, etc. No one knows why they do it, they just do. Realizing that there has to be some good reason (or reasons!), when I drive on dark roads in Malawi, I do the same thing.

*And of course there might be multiple reasons – a reasonable model of dairy section location would involve the firm minimizing the costs of all its items and balancing that against the value of all its sales.

1 thought on “Sometimes rational behavior means nobody has any idea why they are doing something”

  1. So if I reply to this does it come to you? G’Pa Ted Kerwin would call milk a loss leader & agree with putting it somewhere in the store that was easily accessible to the delivery trucks & the people will get it wherever … And since “it’s always been that way” (my least favorite answer to anything) it still works today…and buy other stuff=silver lining to shop owners.

    Sent from my iPhone


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