6- Rational Decision Making and Consumer Behaviour Flashcards
What is the key assumption economists make?
Economic actors/agents act in a rational way (logic/with reason) a way to maximise their net benefits.
- Producers want to maximise profit
- Consumers want to maximise utility
- Governement want to maximise welfare of their citizens
Why are these assumptions simplistic?
Some economic agents don’t act rationally. For example, managers might make decisions to benefit themselves and not shareholders who employ them. Some governments are corrupt.
Neo-classical theory
Developed in the 1870’s- theorises that economic actors make decisions at the margin. They argue their theory will be correct if actors act rationally for most of the time. And which develops how resources are allocated in markets and at what prices through the forces of supply and demand.
Marginal Analysis
Examination of the additional benefits of an activity compared to the additional costs incurred by the same activity.
Economic Welfare definition
The level of well being or prosperity or living standard of an individual or group of individuals such as a country.
Reasons why consumers may not behave rationally
- Bounded rationality
- Heuristics
- Default bias/ habitual choices
- Choice architecture
- Choice influenced by social norms
- Herd behaviour
- Anchoring
- Priming
- Framing
- Availability bias
- Commitment
- Consumer weakness at consumption- struggle to compare goods (mathematical comparison of multi-packs)
What is Bounded Rationality?
Most consumers don’t have sufficient information to make decisions especially when things are complex so people opt for rule of thumb in different markets. People sacrifice rather than maximise.
e.g. pensions- most people don’t understand pensions
What is Heuristics?
They are mental shortcuts or rule of thumb to make decisions. It’s quick, satisfactory but not perfect to answer complex questions. Gerd Gigerenzer argues that heuristics are used when we lack information. People develop heuristics through experience.
e.g. buying the same as last time, the 5 a day principle
What is Default bias/ Habitual behaviour?
People prefer to carry on as they’ve always done. Repeat choices often become automatic because default choices involve no cognitive/mental effort.
e.g. Choice of daily cereal/ sandwich choices
Political preference
Preferring the status quo
What is Choice architecture?
Describes how the decisions we make are affected by layout/sequencing/range of choices available.
e.g. getting students to eat healthily by the design of restaurants
Smart building designs to make it more attractive to use to stairs rather than the lift.
What is meant by Choice influenced by social norms?
Our day to day behaviour is strongly influenced by what we understand to be prevailing social norms or social customs. These social norms are rules by how we behave (unwritten). They’re accepted by the majority of the community.
e.g. queuing in shops
observing white lines in car parks
giving to charity
impact of people’s behaviour of smoking in public
What is Herd Behaviour?
We are herd animals and we often make decisions based in part on who is around us and what choices they make. It is often seen in financial markets.
e.g. choosing the same items off a menu in a restaurant
Binge drinking going on holiday with others
What is Anchoring?
Value is often set by anchors or imprints in our minds which we use as mental reference points. Some anchors establish in our mind a low price, others help to establish a higher basic price that we should be prepared to pay.
e. g. big price drops in supermarkets
- referee decisions may be anchored by size of home crowd
- price anchors used in menus at restaurants and in coffee shops.
What is priming?
Our behaviour by cues that work subconsciously and prime us to behave/ chose in certain ways.
e.g playing of certain types of music in a shopping mall.
subliminal cues in film/tv adverts
students signing an honor code at university
What is framing?
Framing a question or offering in a different way often generates a new response by changing the comparison set it’s view in. Assymetric framing involves including an obvious inferior 3rd choice rather than a simple expensive/cheap choice.
e.g. framing of privacy settings on social networks
presumed consent for human organ donations
framing of referendum questions
