1.3.2 Rational decision making

Assumption of rationality in decision making

Consumers aim to maximise utility

Firms aim to maximise profit

Governments seek to maximise

Reasons why consumers may not aim to mazimise utility

• Herding/influence of other people’s behavior

• Habitual behavior

• Inertia

• Poor computational skills

• The need to feel valued

• Framing and bias

Herding/influence of other people’s behavior

Where consumers make choices based on the decisions of others

• consider social norms & are influenced by what others are doing

Habitual behavior

Repeating the same actions

• may not pick the most rational option out of habit, used to picking one option

Poor computational skills

Consumer weakness at computation, struggle with calculating best choice

• Firms take advantage by making information complex to encourage more impulse decisions

Inertia

Out of laziness, even if we know there is a better choice, we don’t pick it

The need to feel valued

Clothes, luxury goods are often a symbol of status/belonging, people make irrational decisions and purchases to feel in place

Framing and bias

People are influenced by intuition, emotions and social norms

• Firms present information in a way to influence people’s decisions