1.2.10 Alternative Views of Consumer Behaviour

• Free markets are built on the assumptions of rational decision making
  
• In classical economic theory, the word 'rational' means that economic agents are able to consider the outcome of their choices and  recognise the net benefits of each one
  • Rational agents will select the choice which presents the highest benefits
    
• In many ways, the assumption of rational decision making is flawed. Consumers are often more influenced by the following than a rational computation of net benefits
  • The influence of other people's behaviour
  • The importance of habitual behaviour
  • Consumer weakness in computation
    
    

The Influence of Other People's Behaviour

• Peer pressure often prompts consumers to make purchasing decisions that may go against a computation of net benefits
• Producers influence consumers choices through various forms of advertising, including lifestyle, celebrity endorsement and influencer culture
  • This results in emotional decisions and not necessarily rational decisions e.g. consumers purchasing the branded Nurofen when they could purchase the much cheaper (and essentially identical) Ibuprofen
• Producers use advanced behavioural psychology techniques to influence consumer choices e.g. Neuro branding

The Importance of Habitual Behaviour

• Consumers make so many purchasing decisions that they often rely on habits to speed up the process
  • Using rule of thumb refers to a short cut that makes a quick estimation of benefits without gathering too much information
  • Consumers use information from the past, which may be outdated, as they habitually purchase the same products e.g. visiting the same sections in a supermarket for several years
• Consumer inertia often develops as convenience is prioritised
• Consumers make purchasing decisions that directly harm them and are usually addictive, for e.g. alcohol
• Sellers recognise habitual patterns and exploit them. for example, products placed at the checkout till to benefit from impulse purchasing (chewing gum)
  
  

Consumer Weakness at Computation

• The wider the range of choice, the harder it is for a consumer to gather information and compute which one offers the highest net benefits
• Consumers often lack the time or ability to consider the relative prices of different products and sellers will frequently make it difficult for them to do so
  • Products the seller wants to sell are often placed at eye level where computation is easy
  • Many products that would deliver higher benefits are placed below knee level or high on the shelf where computation is hard