Alternative Views of Consumer Behaviour

This section explains Alternative Views of Consumer Behaviour covering, Reasons Why Consumers May Not Behave Rationally, The Influence of Other People's Behaviour, The Importance of Habitual Behaviour and  Consumer Weakness at Computation.

Introduction to Alternative Views of Consumer Behaviour

Traditional economic theory assumes that consumers are rational decision-makers, always acting in their best interest to maximise their utility (satisfaction or benefit). However, behavioural economics challenges this view, suggesting that consumers often behave in ways that deviate from rationality. This can be due to various psychological, social, and emotional factors. In this guide, we’ll explore some of the key reasons why consumers may not behave rationally in the marketplace.

Reasons Why Consumers May Not Behave Rationally

The Influence of Other People's Behaviour

One of the key reasons for irrational consumer behaviour is the influence of other people's actions, which can lead to behaviours that are not driven purely by personal preferences or utility maximisation.

• Herd Behaviour:
  Consumers often make decisions based on the actions of others, rather than their own independent analysis. This phenomenon is known as herd behaviour. For instance, people may buy a product simply because everyone else is purchasing it, even if they don’t necessarily need it or if it doesn’t provide them with significant utility. A classic example of this is the bandwagon effect, where individuals adopt certain behaviours or trends just because they observe others doing so.
• Social Norms and Peer Pressure:
  Consumers may also be influenced by social norms and peer pressure. For example, people might buy luxury goods or follow certain fashion trends to conform to what is considered socially acceptable, rather than making a decision based solely on their own preferences and needs. This influence can lead to suboptimal consumption choices that do not maximise personal welfare.
• Status Quo Bias:
  People tend to stick with the status quo and follow traditional patterns of behaviour because it is perceived as safe or socially approved. This is often seen in situations where consumers continue to buy the same products or services simply because they are familiar with them, despite better or cheaper alternatives being available.

The Importance of Habitual Behaviour

Habitual behaviour refers to the tendency of consumers to make purchasing decisions based on routine or established patterns, rather than a rational evaluation of the options available.

• Path Dependency:
  Consumers often stick with the choices they’ve made in the past simply because it’s easier, or because they’ve developed a habit. For example, many people continue to shop at the same supermarket, purchase the same brand of products, or use the same services without re-evaluating if they are still the best options available. The decision-making process is less about new information and more about avoiding the effort required to make new choices.
• Brand Loyalty:
  Brand loyalty is another form of habitual behaviour. Consumers often stick with a brand because they’ve had a positive experience in the past, or because they’ve been using it for a long time. Even if there are better or cheaper alternatives, the consumer’s habit and emotional attachment to the brand may prevent them from switching. This leads to suboptimal decisions where consumers may not be maximising their utility or expenditure.
• Discounting New Information:
  Consumers may ignore new information that contradicts their established habits. For instance, even if a new product is available at a lower price or offers better quality, consumers may resist trying it because they are accustomed to their current habits.

Consumer Weakness at Computation

Consumers may also fail to make rational decisions due to their weakness at computation — that is, their inability or unwillingness to accurately assess all the available information and make optimal choices. This can happen due to cognitive limitations or psychological factors that influence decision-making.

• Limited Cognitive Resources:
  Consumers may not have the mental capacity, time, or energy to make fully informed decisions. This is often referred to as bounded rationality. In practice, this means that consumers simplify their decision-making process by relying on heuristics (mental shortcuts) or intuition, rather than engaging in a detailed, rational analysis of all available options. As a result, consumers may make decisions that are not fully optimal.
• Overconfidence and Misjudgement:
  Consumers may overestimate their ability to make accurate decisions or misjudge the value of different choices. For instance, they might miscalculate the cost-benefit analysis of a purchase, either underestimating or overestimating the utility they will derive from a product. This could lead to overconsumption or making poor choices, such as overestimating the value of a luxury item or failing to assess hidden costs (e.g., subscription fees or long-term costs).
• Difficulty in Comparing Complex Information:
  Many products and services involve complex information that consumers struggle to compare effectively. For example, when choosing between various insurance plans, consumers may find it difficult to assess the true value of different options due to complex terms and conditions, confusing price structures, or a lack of understanding of long-term implications. This can lead to consumers making suboptimal choices simply because they are unable to properly process and compare the relevant information.
• Present Bias:
  Another form of weakness at computation is present bias, where consumers disproportionately favour immediate rewards over long-term benefits. This often leads to impulsive purchasing behaviour or the delay of important decisions (e.g., saving for the future) in favour of short-term gratification (e.g., buying something now). This is commonly seen in spending on credit cards, where the immediate satisfaction of buying is given more weight than the long-term cost of debt.

Key Takeaways:

• The Influence of Others:
  Consumers are often influenced by the actions of others, whether through herd behaviour, social norms, or peer pressure, which can lead them to make decisions that are not fully rational or optimal for their individual preferences.
• Habitual Behaviour:
  Consumers may continue to make purchasing decisions based on past habits or brand loyalty, rather than re-evaluating available options. This can prevent them from maximising their utility and leads to suboptimal consumption choices.
• Weakness at Computation:
  Many consumers struggle with making fully informed decisions due to cognitive limitations, difficulty processing complex information, overconfidence, or present bias. This can result in poor decision-making, such as overconsumption or failing to properly assess the true costs and benefits of a product or service.

Summary

The concept of bounded rationality and behavioural economics suggests that consumer behaviour is not always driven by rational decision-making. Instead, consumers may be influenced by psychological factors, social pressures, and cognitive limitations, which often lead to decisions that deviate from traditional economic models. Understanding these alternative views of consumer behaviour helps explain why markets sometimes fail to operate as expected, and why consumers may not always act in their own best interest.

This revision guide provides an overview of why consumers may behave irrationally in the marketplace, touching on social influences, habitual behaviour, and weaknesses in decision-making. It’s essential to recognise these factors when studying market failure and government intervention.