What are Consumer Rationality Limitations
- Limitations on consumer rationality contradict the idea that all consumers make rational decisions.
- They apply to normal human beings and thus aren't expressed in economic diagrams and models, which are constructed based on econs.
- However, it is vital to consider these limitations as they play a significant role in economics.
- There are several categories for consumer rationality limitations: cognitive biases, bounded rationality, imperfect information, bounded self-control, bounded selfishness
Cognitive Biases
- Thinking patterns that result in limited consumer rationality.
Rule of Thumb
- Mental shortcuts (heuristics) for decision-making.
- Helps people make quick and satisfactory, but imperfect, decisions to complex choices.
Anchoring
- When people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.
Framing
- The way choices are presented as a simple change of the "frame" that may affect the choice made.
- For example, if you asked what kind of fruit someone would want, there is a large variety of possible answers.
- However by changing the framing and asking, "Do you want an apple or a banana?" most people answer with either an apple or a banana, instead of asking "Do you have any other fruits?".
Availability
- Recalling examples of similar events their available memory to make a current decision.
Bounded Rationality
- The idea is that consumers and firms are bounded by their knowledge, information and ability, and therefore cannot be ideally rational.
- The notion of bounded rationality is connected to the notion of imperfect information.
Bounded Self-Control
- The idea that individuals, even when they know what they want, may not be able to act in their best interest.
- For example, you probably don't want that ice cream, it's quite unhealthy and you're not even especially hungry. But it does look really tasty...
Bounded Selfishness
- The idea that people do not always maximize utility or self-interest, but also have concern for the well-being of others.
- For example it's why I'm writing these notes even though I don't even take HL economics. I'm just the best aren't I <3
Choice Architecture
- The design of environments is based on the idea that the layout, sequence and range of choices available affect the decisions made by consumers.
Types of choices
Default Choice
- When a choice is made by default, meaning that when given a choice, it is the option that is selected when one does not do anything.
Restricted Choice
- When the choice of a consumer is restricted by the government or other authority.
Mandated Choice
- Choices made by consumers who are required to state whether or not they wish to take parts in an action.
- The choice must be made by law.
Nudge Theory
- Nudges (prompts or hints) are used to influence the choices made by consumers in order to improve the well-being of people and society.
- Nudges and choice architecture are often used to guide behavior.
- Nudging is very reliant on psychological phenomena.