Rational Consumer Choice and Behavioral Economics (HL)

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Rational Consumer Choice refers to the idea of consumers always making the choices that seem the most rational to themselves. Their decisions will benefit them the most, and is a founding principle of many economic theories.

Assumptions

• Consumer rationality: Consumers always make the choices that are best for themselves.

• Utility maximization: Consumers always want the goods and services that give them the most utility.

• Perfect information: Consumers know everything about the market, including the quality and price of every product. 

It is clear that this is not how markets actually work. This is where behavioral economics comes in:

Behavioral Economics

Behavioral economics is the study of how economic decisions are actually made, by studying human behavior. It explains why the rational consumer choice theory does not really work:

• Biases: 

  • • Rule of thumb: Some consumers use rules of thumb instead of comparing every good in a market

    • Anchoring and framing: What goods a consumer sees first may affect what they think about new goods they see

    • Availability: Some consumers overestimate the likelihood of an occurrence, and make decisions based on that 

• Bounded rationality: Consumers are never perfectly rational, and will make irrational decisions sometimes

• Bounded self-control: Consumers often let other people influence their decisions

• Bounded selfishness: Consumers are not always selfish, and will sometimes make economic decisions that help others more than themselves

• Imperfect information: Consumers don't know everything about the market and all products, and may even be misled to purchase things