A) Why consumers may not behave rationally

A rational consumer is normally assumed to gather information, consider the available options and choose the option which gives them the greatest utility.

Behavioural economics questions this assumption. Consumers may make decisions which appear irrational because their choices can be affected by factors other than the benefits and costs of the options available to them.

B) The influence of other people’s behaviour

The behaviour of other people can influence the decisions made by consumers. This may cause somebody to make a choice which they would not otherwise have made.

For example, a person may be encouraged to smoke because their friends smoke, even though they understand the possible health costs. A traditional economic model may view this as an irrational choice because smoking does not maximise the individual’s utility.

Behavioural economics takes account of factors such as social influence and addiction when explaining why consumers may make these decisions.

C) The importance of habitual behaviour

Consumers can develop habits which make some decisions easier than others. This can cause them to continue making the same choice even where another option may provide greater utility.

For example, a commuter may continue driving to work using the same route even when a quicker route is available. Changing route requires effort and may involve uncertainty, so the consumer may prefer to remain with the familiar option.

Habitual behaviour can also affect spending. Consumers may continue buying goods and services that they do not particularly need rather than saving the money for future use.

What the full guide adds

For this topic, the full AS guide also covers:

• Consumer weakness at computation and why consumers may find it difficult to make choices which maximise their long-term utility.
• How addiction and a lack of self-control can lead consumers to continue consuming goods even when they understand the possible costs.
• The example of excessive consumption of sugary drinks and its relationship with diminishing utility.
• How procrastination and short-term spending can prevent consumers from making decisions which may provide greater utility in the future.
• Fuller examples of how social influence, habits and weakness at computation can result in apparently irrational consumer behaviour.