1.2.10 Alternative views of consumer behaviour

Question 1

Reasons consumers may not behave rationally

Answer 1

The underlying assumptions for all rational decision making is that customers aim to maximise utility, companies aim to maximise profit and governments aim to maximise welfare of citizens. However, people do not always behave rationally and this occurs for three main reasons:
Influence of other peoples behaviour
Importance of habitual behaviour
Consumer weakness at computation

Question 2

Influence of other people’s behaviour - irrationality of consumers

Answer 2

Rationality assumes people act individually to maximise their own benefits but sometimes individuals are influenced by social norms, known as a bias.
- For example, someone may buy something to ‘fit-in’ or because everyone else has it, and so they are expected to too. Consumers become unwilling to change the bias, even if doing so will benefit them, if it goes against the norms of society.

‘Herding behaviour’ occurs when an individual copies the actions of a large group.
- One example is the stock market, and this causes huge market bubbles.

Question 3

Influence of habitual behaviour - irrationality of consumers

Answer 3

Most people have habits and these habits reduce the amount of time it takes to do something, because consumers no longer have to consciously think about their actions.
Habits create a barrier to decision making since they limit or prevent consumers considering an alternative.
- Habitual behaviour includes addictions and so this influences people’s decisions, for example consumers will buy more drugs/alcohol even though they know they should give up.
Another habit many consumers have is buying their products at eye level so supermarkets tend to keep higher priced products near the top and lower priced products lower.

Question 4

Consumers weakness at computation - irrationality of consumers

Answer 4

Many consumers aren’t willing or able to make comparisons between prices and so they will buy more expensive goods than needed, for example many customers buy multipack goods because they assume they are cheaper but this is not always the case.
Also, consumers are sometimes poor at self-control and so do things they know they shouldn’t. Similarly, consumers will make decisions without looking at the long term effects, and so make irrational decisions.
- One example of this is consumers saving up for their pensions: many put off doing this because they fail to look long term.