Behavioural Economics (Alternate Views of Consumer Behaviour)
- Consumers don’t always act rationally and make decisions which result in optimal levels of utility.
- A reason could be consumer weakness at computation. Sometimes consumers are not able to process vast amounts of information and therefore may make irrational decisions. For example, people may underestimate the long-term health risks of eating fatty foods and so not make the optimal decision of eating healthy.
There are many biases which behavioural economists believe that individuals are influenced by:
- Rules of thumb
- Availability bias
- Social norms
- Habitual behaviour
Governments often use behavioural economic theory to create policies (this is called choice architecture). This is where someone's choice is influenced by changing the presentation of the choice.
This can be done using:
- Default options - the default option is likely to be what consumers often choose.
- Framing - presenting the choice in a different context to influence decisions.
- Nudges - making a choice easier without taking away freedom of choice.
- Restricting choice - limiting the available options.
- Mandatory choices - forcing people to make a decision.