Alternative views of consumer behaviour Flashcards
What is rationality?
An underlying assumption in economics is that economic agents are rational
What do economic agents aim to maximize when they are rational?
Consumers aim to maximize their utility from consumption
Workers aim to maximizes their wages and other work benefits
Firms aim to maximize profit
Governments aim to maximize social welfare
What is rational consumer behaviour?
A decision making process that is based on making choices that maximise utility
What are the assumptions of rational consumer behaviour?
Consumers make all choices independently
Consumers have fixed and consistent
preferences
Consumers have full information
Consumers always make the optimal choice given their preferences
What is irrational consumer behaviour?
When people make systematic and persistent deviations from rational choice
Why does irrational consumer behaviour exist?
Humans are emotional, implusive and can lack self control
Humans are social and belong tomany networks
Humans can be altruistic, generous and forgiving
Humans have limited time, energy and brain power
Humans have regrets and also have a strong sense of loss aversion
Why does irrational behaviour occur when influenced by others?
Peer pressure
Fashion/trends
Social networks
Social norms and herd behaviour
What are the cases of irrational behaviour occuring in the case of habitual behaviour or default bias?
Choosing the same dish off a restaurant menu
Rolling over the renewal on car insurance
Staying with the same bank account
What is risk aversion?
Irrational behaviour meaning humans have it in their nature to avoid risks
What is loss aversion?
Irrational behaviour meaning humans have it in their nature to emphasise losses more than potential gains
What is time preference?
Irrational behaviour meaning humans have it in their nature to prefer rewards earlier than at a later date
