Critique of rational consumer benefits

We have assumed that:

1. Consumers are rational and think through every decision carefully.

2. Consumers are relentlessly self-maximising and always aim to maximising utility.

3. Consumers have perfect information and can predict accurately how every decision will impact their utility.

In classical economic theory, this rational consumer is known as homo economicus.

The demand curve assumes that consumers are rational. In reality, consumers are not rational. Therefore, the demand curve is useless at achieving its purpose.

Homo economicus (Econs):

• Are rational

• Have perfect information

• Are extremely intelligent and can perform complex calculations quickly.

• Maximise their own (selfish) utility.

• Have consistent preferences over time.

• Have no self-control problems

• Are unbiased

Humans:

• Have bounded rationally

• Have incomplete information

• Are not that intelligent and often cannot perform complex calculations.

• Make decisions in a social context.

• Change their tastes over time

• May have self-control issues and be biased towards immediate gratification.

Behavioural economists propose that there are two systems that people use to make decisions.

System 1 (automatic system)- immediate, impulsive, fast-thinking.

System 2 (reflective system)- calculating, logical, slow-thinking.

Human economics make all his decisions using the reflective system but sometimes humans decide using the automatic system.

Bias 1: rules of thumb

Rather than using their reflective systems to consider all the options, consumers often use their automatic systems to make ‘good enough’ (rather than maximising) decisions based on rules of thumb.

Rule of thumb: special offer = more worth buying. Decision: more likely to buy things on a special offer, even if the price is the same. E.g.