A) The reasons why consumers may not behave rationally:
It is taught in economics that rational consumers always maximise their utility when making decisions. For example, a rational consumer is likely to gather all the information they can, analyse this information and then come up with a decision that is most likely to maximise their utility. However, behavioural economics suggests that consumers may not always make their decisions based on which option will maximise their utility. Instead, emotional, social and psychological factors can result in consumers making a choice that seems at odds with what a rational consumer would choose. There are three main theories that Edexcel students need to understand in the decision making process of consumers.
Consideration of the influence of other people’s behaviour
People often are persuaded to make choices that they themselves would not make if it weren’t for the influence of other people’s behaviour. For example, if a person’s friends all smoked cigarettes then they may be pressured into smoking cigarettes themselves despite the fact that the consumer may be informed on all the health issues related to smoking cigarettes. Traditional economics would way up the pros and cons of smoking cigarettes and come to the conclusion that consumption of cigarettes should be 0 as it does not maximise utility and therefore is an irrational decision to make. However, behavioural economics would factor in addiction as well as influence of other people’s behaviour to explain the problem of excessive consumption of cigarettes.
The importance of habitual behaviour
Sometimes consumers pick up habits meaning causing them to make decisions that are easier, rather than those that are most likely to maximise utility. For example, commuters may pick up driving habits such as driving to work through the same route rather than one that is faster. This is because they would need to put in a lot of effort in order to switch routes. For example, a new route takes time to memorise and the likelihood of the driver getting lost on the way to work is increased. This may put them more out of their comfort zone which they may be uncomfortable with making it easier for them to drive the original slower route rather than the new one which is faster.
Another example of habitual behaviour can be shown when people are trying to save money. Those with bad spending habits may buy goods/services that they are unlikely to need or use in the future rather than saving that money.