Alternative Views of Consumer Behaviour
Alternative Views of Consumer Behaviour
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
What is Behavioural Economics?
Behavioural Economics is a form of economic analysis which incorporates psychological insights into human behaviour to explain the decision making behind economic choices 
What are the implications of Behavioural Economics?
- It can be great way in achieving policies by nudging people to make more sustainable and cost-effective choices
- However, Behavioural Economics centres upon the beliefs each individual has. Therefore, when generalising this approach to a wider population, it can be difficult as every person thinks differently
What is Rational Behaviour?
Traditional neo-classical economists believe that consumers act rationally by making decisions that maximise their utility. They also believe firms act rationally to maximise their profits.
Reasons why consumers may not behave rationally
- Habitual Behaviour – Some behaviours are performed automatically as they are habits which has been learned through past influences and are therefore harder to change / unlearn. Incentives may be required to help change these irrational habits
- Influence from other people – the theory of ‘social learning’ explains that subconsciously humans base their decisions and choices through learning from the behaviour of others
- Inertia – people are loss averse and will therefore prioritise spending more time preventing a loss from occurring rather than gaining a win. They may struggle to change behaviour if there is an information overload, or if the information presented is too complex
- Presentation of information – Consumers’ decisions are influenced by how the choices are presented; they are likely to pick the choice which has can be interpreted most easily and effectively.
The importance of Habitual Behaviour
- Less time wasted – when a specific action becomes a habit, consumers do not have to think as much while performing it, and this reduces the amount of time taken to carry it out
- Withdrawal Symptoms – consumers are likely to experience withdrawal symptoms when breaking a habit, making them less likely to change their ways
- Limit consumers to explore other alternatives – habits prevent consumers from exploring other alternatives as they tend to stick to the scenario they are most familiar with, instead of re-familiarising with other options
Consumer weakness at computation
- Law of Diminishing Marginal Utility – sometimes consumers are unable to exercise self control and the Law of Diminishing Marginal Utility suggests that for every extra unit consumed, the benefit produced reduces
- Short Term vs Long Term – long term gains may result in a compromise needing to be made in the short term
Additional Content – AQA Spec
Choice Architecture
This refers to the way choices are laid out and presented to consumers. Choice Architectures which are well designed can encourage consumers to avoid making irrational decisions, possibly improving consumer welfare.
Framing
This refers to the way consumers are influenced by the context of how a choice is presented
Nudges
This aims to change the behaviour of consumers by persuading them, while ensuring their freedom is not depleted.
It can come under the category of Choice Architecture
Whilst using the ‘nudging’ technique, consumers’ behaviour is altered where they are encouraged to choose a healthier option, but still have the freedom of choice
Default choices, restricted choice and mandated choice
Default Choice – when a consumer is automatically enrolled into a system or scheme, so certain choices are already picked for them
Restricted Choice – the choice has the freedom of choice, but the options available are restricted
Mandated Choice – consumers have the choice of whether they want to participate in an action or not
Quick Fire Quiz – Knowledge Check
1. Explain what is meant by ‘Behavioural Economics’ (2 marks)
2. Explain two implications of Behaviour Economics (4 marks)
3. Identify and explain four reasons why consumers may behave irrationally (8 marks)
4. Explain the importance of Habitual Behaviour (6 marks)
5. Explain the consumer weakness at computation (4 marks)
Next Revision Topics
- Rational Decision Making
- Economics as a Social Science
- Positive Economics
- Normative Economics
- The Economic Problem
A Level Economics Past Papers
