alternate views of consumer behaviour

• Neo-classical theory


  The assumption that economic agents will act rationally and aim to maximise their utility and economic welfare
• Economic welfare


  The level of well-being or prosperity of living standards of an individual or group of individuals such as a country
• Economic agents


  • Producers
  • Consumers
  • Governments
• Producers aim to


  Maximise profits
• Consumers aim to


  Maximise their utility
• Workers (within consumers) aim to

  Maximise their income
• Governments aim to


  Maximise social and economic welfare
• Some economists argue that the picture of homo-economicus offered by neo-classical economists is wrong, as not all consumers act rationally
• Rational behaviour


  Economic agents act individually in a way that will maximise their own benefits
• Irrational behaviour


  When people make systematic and persistent deviations from rational choice
• Reasons why consumers behave irrationally

  • Influence of other people's behaviour
  • Habitual behaviour
  • Consumer weakness at computation
• Influence of other people's behaviour

  • Evidence suggests that individuals often do not make free and independent choices due to societal pressures / norms eg, drinking during a night out
• Habitual behaviour


  • Consumers often don't gather together all the information they need to make a decision and often go of habits, which firms tend go exploit e.g. supermarkets know that shoppers tend to concentrate on products at eye level on the shelves and they therefore keep high-profit items at eye-level
• Consumer weakness at computation

  • Consumers are not always willing or able to make price comparisons between goods. Prices and offers are often presented in ways where consumers find it difficult to do the maths required for comparison
• Explaining departures from rational choice (according to behavioural economists)

  • Have a limited capacity to calculate costs
  • Are often influenced by social networks
  • Act altruistically (caring for others) can overtake pure self-interest
  • Lack self control and seek immediate satisfaction
  • Are loss averse (their losses matter more than their gains)
  • They make different choices in cold and emotional states (emotion overtakes logic)
  • They fall back on simple rules of thumb
  • Stick to default choices