Rational Consumer Choice and Behavioral Economics Flashcards
What is Rational Consumer Choice?
It’s the idea that consumers always make choices that benefit them most, based on rational thinking and perfect knowledge.
What are the 3 key assumptions of Rational Consumer Choice theory and what are they?
Consumer rationality – consumers make the best choices for themselves
Utility maximization – consumers aim to get the most satisfaction
Perfect information – consumers know all product info (price, quality, etc.)
What is Behavioral Economics?
The study of how people actually make economic decisions, often influenced by psychology, emotions, and cognitive biases.
What are common biases in behavioral economics?
Rule of thumb – using simple rules instead of comparing everything
Anchoring and framing – first impressions affect future choices
Availability – overestimating the likelihood of vivid or recent events
What is bounded rationality?
The idea that consumers can’t always be perfectly rational and may make irrational choices.
What is bounded self-control?
Consumers may struggle to make choices in their best interest due to influence from others or lack of discipline.
What is bounded selfishness?
Consumers aren’t always self-centered — they sometimes make choices that benefit others.
What is imperfect information?
Consumers often don’t know everything about products or may be misled, leading to poor decisions.
What is choice architecture?
It is the deliberate design of how choices are presented to consumers in order to influence their decisions (e.g., how cookie pop-ups are framed online).
What are the 3 types of choice architecture?
Default choices – Users are automatically signed up unless they opt out
Restricted choices – Limiting the number of options to guide decisions
Mandated choices – Forcing consumers to make a decision
What is nudge theory?
The idea that people can be gently guided (“nudged”) into making better economic decisions without being forced.
Give an example of nudge theory.
Placing healthy food at eye level in a store nudges people to choose it more often — without removing other options.
What is the traditional main objective of a business?
Profit maximization — increasing revenue while lowering costs.
What is Corporate Social Responsibility (CSR)?
When firms commit to acting ethically and responsibly for society and the environment.
What is the market share objective?
Firms aim to increase their percentage of total market control, even if it doesn’t always maximize profit immediately.
What is satisficing?
When firms aim to earn “enough” profit, rather than maximizing it, to avoid sacrifices like overworking or losing values.
What is the growth objective?
Firms aim to expand operations, scale up production, and eventually earn more profits in the long run.
What are the 3 alternative business objectives rather than profit maximization?
Corporate Social Responsibility (CSR)
Market share
Satisficing
Growth
