economics theme 1 : rational consumers

what are the 2 ways we process information

• automatic thinking (gut reaction, instinct - impulse buying)

• reflective thinking (consideration, thoughtful process)

3 reasons consumers may not behave rationally

• influence of other people

• importance of habitual behaviour

• consumer weakness at computation

influence of other people explanation

• we are greatly influenced by consumption norms within our social circles

• may be partially influenced by what other people do when making our consumption decisions

importance of habitual behaviour explanation

• tendency which individuals have of just sticking with their current situation

• often linked to individuals wanting to ‘play safe’ - not wanting to risk a change which might make them worse off

• this bias can cause consumers to lose out on possible utility gains

• could also be due to addiction (e.g. cigarettes)

consumer weakness at computation explanation

• humans are bad at mathematical computation

• e.g. we find it really hard to understand probabilities and to make forecasts about how we will feel in the future