Alternative Views of Consumer Behaviour

Question 1

Behavioural Economics

Answer 1

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 2

Computational weakness

Answer 2

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.

Question 3

Habitual consumption

Answer 3

Habitual behaviour occurs when people have strong default choices. Repeat choices / purchases often become automatic because default choices don’t involve much mental (cognitive) effort. To get people to change behaviour may require compelling incentives perhaps from government intervention through taxes and subsidies.

Question 4

Herd behaviour

Answer 4

When individuals in a group act collectively without centralised direction.