What Is Rational Behavior?
Rational behaviour refers to a decision-making process that is based on making choices
that result in the optimal level of benefit or utility for an individual.
Rational behaviour is the cornerstone of rational choice theory, a theory of economics that
assumes that individuals always make decisions that provide them with the highest amount
of personal utility. These decisions provide people with the greatest benefit or satisfaction
given the choices available.
The following are some challenges to the idea of rational behaviour:
Individuals have limited capacity to accurately calculate the costs and benefits of a decision,
individuals may choose a decision that is not optimal due to social norms, and Individuals
do not always act in their own pure self-interest.
The law of diminishing marginal utility assumes that consumers act and behave in a
rational way in their purchasing decisions. This is a big assumption to make.
Empirical evidence consistently shows that there are other actors apart from just utility
that determine what we purchase. To understand the behavioural factors involved requires
‘getting inside people’s heads’ to determine and then model such psychological influences.
A few examples will show why consumers often act in an irrational way.
■ In the case of special offers such as ‘buy one get one free’. Consumers may have no
intention of buying the product until they enter the shop. Seeing the offer produces an
impulsive cognitive response to buy.
■ Where payment can be deferred. This allows consumers to purchase beyond their ability
to pay outright at the time of sale – they may use a credit card to obtain what they want.
■ Where a consumer is emotionally attached to a brand or where there is a prejudice
against a brand, so influencing consumption. This type of behaviour cannot be represented
in a rational economic model. Interestingly, if consumers were rational, firms would have
little need for marketing. Advertising that is designed to influence consumer choice would
appear to be irrelevant. Behavioural economic models explore why consumers make
irrational decisions, against what might have been predicted by conventional economic
theory. It is therefore useful to bear these points in mind when evaluating the effectiveness
of conventional economic models like that of utility.
Rational behaviour refers to a decision-making process that is based on making choices
that result in the optimal level of benefit or utility for an individual.
Rational behaviour is the cornerstone of rational choice theory, a theory of economics that
assumes that individuals always make decisions that provide them with the highest amount
of personal utility. These decisions provide people with the greatest benefit or satisfaction
given the choices available.
The following are some challenges to the idea of rational behaviour:
Individuals have limited capacity to accurately calculate the costs and benefits of a decision,
individuals may choose a decision that is not optimal due to social norms, and Individuals
do not always act in their own pure self-interest.
The law of diminishing marginal utility assumes that consumers act and behave in a
rational way in their purchasing decisions. This is a big assumption to make.
Empirical evidence consistently shows that there are other actors apart from just utility
that determine what we purchase. To understand the behavioural factors involved requires
‘getting inside people’s heads’ to determine and then model such psychological influences.
A few examples will show why consumers often act in an irrational way.
■ In the case of special offers such as ‘buy one get one free’. Consumers may have no
intention of buying the product until they enter the shop. Seeing the offer produces an
impulsive cognitive response to buy.
■ Where payment can be deferred. This allows consumers to purchase beyond their ability
to pay outright at the time of sale – they may use a credit card to obtain what they want.
■ Where a consumer is emotionally attached to a brand or where there is a prejudice
against a brand, so influencing consumption. This type of behaviour cannot be represented
in a rational economic model. Interestingly, if consumers were rational, firms would have
little need for marketing. Advertising that is designed to influence consumer choice would
appear to be irrelevant. Behavioural economic models explore why consumers make
irrational decisions, against what might have been predicted by conventional economic
theory. It is therefore useful to bear these points in mind when evaluating the effectiveness
of conventional economic models like that of utility.
