The Economics of Consumer Behavior: Insights from Behavioral Economics

Posted on Posted in 2014-2015
By Donald Jay Bertulfo, Jonas Josh Cabochan, and Bernice Halili

Most, if not all, economic models assume one big thing: that people are rational and that consequently, they would make choices that would maximize their utility or satisfaction, for reasons of simplification. The assumption of rationality has been so basic to economic thought that it has become undisputed, at least before another branch of economics – that is, behavioral economics – came about. Behavioral economics challenges the assumption of rationality, positing that we do not always make rational choices. The human brain, as unfaltering as it may seem, can be lured into making decisions that do not necessarily bring about personal optimal outcomes. To put it simply, while people seek to satisfy their insatiable needs and desires as driven by their self-interests, the complexity of real-life circumstances and the limitedness of their cognizance make purely rational decision-making arguably impossible.

Relativity: The danger of making comparisons

People nowadays are unknowingly facing a rather unique situation. At any moment, they can be bombarded with a multitude of choices. It could be as simple as comparing which pair of pants would be preferable to buy at the moment to something as weighty as deciding whether to wage war on another nation.

At the end of it all, people are expected to be capable of making the most rational choice or the most beneficial option for themselves when they’ve been presented with different choices. In reality, this isn’t necessarily true; people can be incredibly irrational at times. Though difficult to believe, it should be noted that rationality is very relative.

Take this hypothetical example: You are in a coffee shop and you are hungry but not thirsty. You have the choice of (a) a Double-Shot Espresso for 110 pesos, (b) a Bacon-Lettuce-Tomato sandwich for 250 pesos, and (c) the Double-Shot Espresso + BLT sandwich for 300 pesos. Most likely, you would prefer to have choice (c) because it seems like the best deal. In your head, even though you paid for the sandwich in full, it’s as if you got your coffee for free.

This would be the principle of relativity in behavioral economics, wherein a “decoy option” exists within a set of choices. It is presented to lure people to the preferred choice desired by the seller.

Human beings naturally search for patterns for the purpose of comparison. In the example given, the options with food were worth 250 pesos and 300 pesos. Of the two options, one was slightly better than the other. You’d think it’s a better idea to have the sandwich with coffee because the price of a coffee and sandwich is more than the combination. This “decoy” led you to opt for the one with the higher price and included a few more benefits, even if you didn’t need them.

Satisficing: We cannot always have the best option

As consumers, people are constantly enveloped in a state of insatiable desire. They are almost trapped in this cycle of consuming and purchasing, endlessly looking for the best, despite the undeniable reality of our eventual non-satisfaction. Ironically, this desire for satisfaction is the very engine that keeps the cycle going in the first place.

The whole idea of looking for an optimal solution to this dilemma, however, goes directly against the principles of strategy called “satisficing.” The word itself is a portmanteau of “satisfaction” and “suffice.” In satisficing, decision-making is based upon the concept of the “next best thing.” A consumer fixates on an acceptability threshold, which may or may not be met in reality. Thus, he is forced to settle for mere adequacy rather than reach for the highest quality, the latter being what human nature would normally desire.

It is interesting to note how relevant satisficing is in our everyday lives. As students, most of us live on perpetually restrictive tight budgets. This fact in itself becomes a massive basis for our decisions as consumers. And then there are our other limitations as human beings, such as the inability to evaluate outcomes precisely. Therefore, when faced with various options, we take into account numerous factors, often seen as costs. Clouded by our own biases, preconceptions, and emotions, we ultimately do find what we would consider to be the best.

For instance, a student from Ateneo would be more inclined to go to a fast-food chain, like McDonald’s, which is just across the school rather than to travel all the way to a nearby mall like Eastwood to dine at a restaurant, given constraints on budget and time. The quality of food and dining experience is compromised but when all costs are considered, grabbing a meal to-go reflects the best solution given all the limitations. Thus, satisficing becomes a form of optimization.

To sum it all up, not all our choices adhere to the economic assumption of rationality, at least in its most utilitarian sense. Understanding economic phenomena would be much more nuanced if we explored areas that challenged prevailing views and offered valuable insights about them. Such is what behavioral economics is currently doing, and more and more researchers have been looking into the field’s untapped potential.   

 

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