1.2.10 Alternative views of consumer behaviour

Question 1

What are the key assumptions behind rational behaviour?

Answer 1

1. Agents choose independently of one another
2. An agent has fixed and stable tastes and preferences
3. An agent gathers complete information on all alternatives
4. Always makes an optimal choice with given preferences

Question 2

How do economic agents act in reality when faced with a decision?

Answer 2

• Have limited capacity to calculate all costs and benefits
• Are influenced by their own social networks
• Often act reciprocally rather than in pure self interest
• Lack self-control and seek immediate satisfaction
• They are loss averse (losses matter more than gains)

Question 3

What are examples of social norms?

Answer 3

Question 4

What is habitual behaviour?

Answer 4

• Most people carry on behaving as they have always done.
• Repeat choices / purchases often become automatic because default choices don’t involve mental
  effort
• To get people to change their behaviour may require compelling incentives or introducing a form of
  mandated choice (also known as a default rule)

Question 5

What are examples of habitual behaviour?

Answer 5

o Your choice of daily breakfast cereal / razor / sandwich preference
o Many consumers of energy, broadband stay with the same provider

Question 6

Explain bounded rationality

Answer 6

• Most consumers and businesses do not have sufficient information to make fully-informed
  judgements when making their decisions in markets
• The increasing complexity of products makes life difficult
• People have limited attention spans
• Many consumers and businesses opt to satisfice rather than maximise
• They will use rules of thumb and approximations when making their choices

Question 7

What is herd behaviour?

Answer 7

• We are herd animals and we often make decisions based on who is around us plus the choices they
  make

Question 8

What are examples of herd behaviour?

Answer 8

o Choosing items off a menu in a restaurant
o Herd behaviour in financial markets
o Binge drinkers going on holiday with each other

Question 9

What is the weakness at computation for consumers?

Answer 9

Irrationality arises when consumer’s decisions are dominated by computational weakness. This occurs when consumers find it difficult to calculate the probability of something happening when they make purchasing decisions. For example, people may underestimate the long-term health consequences of eating processed meats or relying heavily on prescription painkillers.