1.2.10 Alternative views of consumer behavior

Question 1

What is Behavioral Economics?

Answer 1

A method of economic analysis that applies psychological insights into human behavior to explain economic decision-making

Question 2

What are the 4 reasons why consumers may not behave rationally?

Answer 2

• Consideration of the influence of other people’s behavior
• The importance of habitual behaviour
• Inertia
• Consumer weakness at computation

Question 3

Explain the Consideration of the influence of other people’s behavior

Answer 3

• Much of a person’s behavior is affected and influenced by that of others
• It is argued that a person subconsciously learns from the behavior of others as a guide to their own behavior – a process known as ‘social learning’

Examples of how our behavior is dependent on others might include the clothes and smartphones we buy or the food we eat

Question 4

Explain The importance of habitual behaviour

Answer 4

• The frequency of our past behaviour influences our current behaviour
• Such behaviour involves little or no thought – it is just done automatically
• Habits are difficult to change if they are repeated frequently and if they are associated with rewards which arise quickly after the action
• Incentives may be required to change such habits

EXAMPLE:
charging for plastic bags has had a major impact in countries such as Ireland and South Africa

Question 5

Explain Inertia

Answer 5

Consumers might not make an active effort to change their behaviour for several reasons including:

• Information overload
• The complexity of the information available
• Too much choice available
• Inertia might arise because people are loss averse, i.e. they will put more effort into preventing a loss than winning a gain
• This could explain, for example, why a relatively small proportion of consumers switch their bank accounts or their energy suppliers

Question 6

Explain Consumer weakness at computation

Answer 6

• People tend to pay more attention to recent events than to distant events when they make decisions
• Linked with this, consumers find considerable difficulty in calculating the probability of something happening
• They are also influenced by how a choice is presented