1.2.1 rational decision making
framing = highlighting certain aspects to influence decision making
Neo-classical economic assumption: economic agents = rational
- consumers: maximise utility from consumption (satisfaction gained from consuming a
product)
○ Rational Consumer Behaviour: make choices independently/ fixed and consistent
preferences/perfect information
○ Irrational Consumer Behaviour: humans = emotional, impulsive, lack self-control
with limited time and strong sense of loss aversion
○ bounded rationality = when individuals have limited cognitive abilities to process
information and make decisions
- workers: maximise wages & work benefits & job satisfaction/security
- firms: maximise profit
- government: maximise social welfare
Economic agents (individuals, firms, govt,) do not always have the information necessary to act
rationally and consumers do not always make calculated decisions.
Irrational behaviour can be due to: Information gaps = lack market information/knowledge = market
failure
- suppliers (weather / climate / time lags)
- firms (predicting household demand / changing tastes, trends and fashion / changing
population and migration / impact of competitors
- consumers (uncertainty on storing good / use by dates / prices of other substitutes and price
comparison sites/lack of awareness of competitor prices and packages)
1.2.10 alternative views of consumer behaviour
satisficing behaviour = tendency to accept satisfactory outcomes instead of aiming for perfection
- e,g to buy a new laptop, an optimal decision mainframe approach is to research every
laptop available in the market (specs, prices, reviews) but lack of time, patience and
complex information leads means buying a convenient option
- Eval! Econ agents are satisficing, not maximising
Irrational behaviour
- Computational -> weakness at computation = lack of understanding of prices = quick,
emotionally made decisions due to limited time = expected demand exceeds actual demand
= cannot accurately assess full costs and benefits
- anchoring = bias where people rely too heavily on first piece of information they
receive
, - Peer pressure: fashion trends & social media/social norms & celebrity endorsements
= social pressure = herd behaviour -> purchasing goods they don’t need or want =
emotional decisions < rational decisions
- Habitual = default bias & brand loyalty -> consumer tendency to repeat purchase same good
over time = less time-consuming to choose familiar products as a routine (BUT, limits
considering substitutes as info used to make habits becomes outdated)
- Consumer inertia: tendency to buy a product even when superior options exist (e,g
broadband account) due to convenience as consumers do not have the time or
motivation to switch to better deals
- status quo bias = tendency to stick with default option when making choices even if
it’s not best option
- Impulse buying = time preference: apparent goods > real goods / advertising &
marketing influence creating inelastic demand
- Risk aversion: humans prefer certain rewards over risking such for a bigger reward -> size of
savings may not be significant enough to go through switching to cheaper substitute
- Loss averse: a consumer who values losses more than gains
EVAL
1. whether it is rational to assume that consumers seek to maximise utility in allocating their
expenditure
2. whether it is rational to assume that firms seek to maximise profits in making production
decisions
3. information overload -> wider range of choice makes it harder for consumer to gather
information and choose offer with highest net benefits
4. misleading advertising = excess demand = wasted resources
5. if long run information gaps narrow, irrational behaviour may reduce
- e,g if price plans information for consumers improve
- e,g if firms provided advice to consumers
- e,g if regulators take greater action = increased regulations
Behavioural nudge = soft policies from firms to prevent individuals from consuming a certain good
using behavioural insights without a change in price -> small changes to consumer default option +
choice architecture
● e,g positioning small cheap snacks round checkout tills
● e,g redesigning cafe layouts to priorities healthier food choices
● nudges individuals towards selecting them without having to make an active decision
Behavioural nudges - the EAST framework
- Easy - easy to sign up (e,g pure gym membership flexible payment options)
- Attractive - colourful, visually appealing
- Social - encourage recycling
- Timely - sending text reminders
framing = highlighting certain aspects to influence decision making
Neo-classical economic assumption: economic agents = rational
- consumers: maximise utility from consumption (satisfaction gained from consuming a
product)
○ Rational Consumer Behaviour: make choices independently/ fixed and consistent
preferences/perfect information
○ Irrational Consumer Behaviour: humans = emotional, impulsive, lack self-control
with limited time and strong sense of loss aversion
○ bounded rationality = when individuals have limited cognitive abilities to process
information and make decisions
- workers: maximise wages & work benefits & job satisfaction/security
- firms: maximise profit
- government: maximise social welfare
Economic agents (individuals, firms, govt,) do not always have the information necessary to act
rationally and consumers do not always make calculated decisions.
Irrational behaviour can be due to: Information gaps = lack market information/knowledge = market
failure
- suppliers (weather / climate / time lags)
- firms (predicting household demand / changing tastes, trends and fashion / changing
population and migration / impact of competitors
- consumers (uncertainty on storing good / use by dates / prices of other substitutes and price
comparison sites/lack of awareness of competitor prices and packages)
1.2.10 alternative views of consumer behaviour
satisficing behaviour = tendency to accept satisfactory outcomes instead of aiming for perfection
- e,g to buy a new laptop, an optimal decision mainframe approach is to research every
laptop available in the market (specs, prices, reviews) but lack of time, patience and
complex information leads means buying a convenient option
- Eval! Econ agents are satisficing, not maximising
Irrational behaviour
- Computational -> weakness at computation = lack of understanding of prices = quick,
emotionally made decisions due to limited time = expected demand exceeds actual demand
= cannot accurately assess full costs and benefits
- anchoring = bias where people rely too heavily on first piece of information they
receive
, - Peer pressure: fashion trends & social media/social norms & celebrity endorsements
= social pressure = herd behaviour -> purchasing goods they don’t need or want =
emotional decisions < rational decisions
- Habitual = default bias & brand loyalty -> consumer tendency to repeat purchase same good
over time = less time-consuming to choose familiar products as a routine (BUT, limits
considering substitutes as info used to make habits becomes outdated)
- Consumer inertia: tendency to buy a product even when superior options exist (e,g
broadband account) due to convenience as consumers do not have the time or
motivation to switch to better deals
- status quo bias = tendency to stick with default option when making choices even if
it’s not best option
- Impulse buying = time preference: apparent goods > real goods / advertising &
marketing influence creating inelastic demand
- Risk aversion: humans prefer certain rewards over risking such for a bigger reward -> size of
savings may not be significant enough to go through switching to cheaper substitute
- Loss averse: a consumer who values losses more than gains
EVAL
1. whether it is rational to assume that consumers seek to maximise utility in allocating their
expenditure
2. whether it is rational to assume that firms seek to maximise profits in making production
decisions
3. information overload -> wider range of choice makes it harder for consumer to gather
information and choose offer with highest net benefits
4. misleading advertising = excess demand = wasted resources
5. if long run information gaps narrow, irrational behaviour may reduce
- e,g if price plans information for consumers improve
- e,g if firms provided advice to consumers
- e,g if regulators take greater action = increased regulations
Behavioural nudge = soft policies from firms to prevent individuals from consuming a certain good
using behavioural insights without a change in price -> small changes to consumer default option +
choice architecture
● e,g positioning small cheap snacks round checkout tills
● e,g redesigning cafe layouts to priorities healthier food choices
● nudges individuals towards selecting them without having to make an active decision
Behavioural nudges - the EAST framework
- Easy - easy to sign up (e,g pure gym membership flexible payment options)
- Attractive - colourful, visually appealing
- Social - encourage recycling
- Timely - sending text reminders
