Alternative View of Consumer Behaviour
Economics: Edexcel A A Level, topic 1.2.13
Behavioural Economics - Are People Rational Agents?
Behavioural economics challenges principles of traditional economics that are unrealistic.
Traditional vs behavioural
- Traditional economists assume that economic agents act rationally and want to maximise utility.
- Behavioural economists recognise that these two premises are unrealistic. They consider how emotional, psychological and social factors can affect decision-making.
Theories of irrationality
- Behavioural economists say consumers can't act perfectly rationally because of:
- Lack of available information.
- Limits on time (for decision-making).
- Computation weakness - when people can't properly process all the data they need to make an informed decision.
Fairness
- Our perception of what is fair in competitive games is often irrational.
- We tend to prefer games that have more equal outcomes.
Irrational Agents - Bounded Rationality
For consumers to act rationally, they must have symmetric (perfect) information. So asymmetric information limits our ability to make rational decisions.
Lemons example
- Marvin is in a car dealership. He has a choice between two cars with similar features: one is £4,000 and another is £4,600.
- In a world of perfect information, Marvin would choose the cheaper car.
World of asymmetric information
- In a world of asymmetric information, Marvin's decision becomes more complicated.
- Sellers know the flaws of the car and have an incentive to hide these flaws.
- His limited decision-making ability is an example of bounded rationality.
Bounded self-control
- Traditional economists assume that people have perfect self-control.
- Behavioural economists recognise that individuals have limited self-control (bounded self-control).
Irrational Agents - Psychological Biases
There are a number of biases that exist when we make decisions. They are often based on our social norms.
Anchoring
- Anchoring occurs when we use a reference point from a previous decision to form the basis of another decision.
- This reference point is normally irrelevant to the current decision, and so is a form of bias.
Availability bias
- This occurs when we attach an emotional connection to an event in our head.
- This can make the likelihood of a similar event occurring more or less likely in our head.
- E.g England beating Panama 6-1 in the FIFA World Cup makes it seem more likely they will win the tournament.
Rules of thumb and habits
- Rule of thumb is a guide of rules that ease the process of decision-making.
- E.g always going for the least expensive option.
- Habitual behaviour is where someone repeats their decision-making actions many times.
Social norms
- Social norms are the generally accepted modes of behaviour. So we often make our decisions to conform with these.
- These change over time.
- E.g 40 years ago drink driving was seen as acceptable; today it isn't.
- The social norm has changed.
Test yourself on Alternative View of Consumer Behaviour
In what way can consumers be irrational in competitive games?
Which of the following is a contributing factor to bounded rationality?
Which of the following is an assumption of traditional economists?
'It rained all last summer; I'm going to book a holiday to Spain to escape the bad weather this year.' What is this an example of?