1.3.2.1 rational decision making

Question 1

rational behaviour

Answer 1

when consumers and firms make choices that maximise their utility/ net benefits

Question 2

irrational behaviour

Answer 2

when consumers and firms make choices that fail to maximise their utility because they fail to forecast their future feelings correctly or fail to understand their current choices

Question 3

behavioural economics

Answer 3

believes that people do not always act rationally. irrational instincts can often overrule rational choices

Question 4

assumption of rationality

Answer 4

people make decisions independently of each other

Question 5

habitual behaviour

Answer 5

habits that present shortcuts in decision making or prevent one from gathering all necessary information
—> conflicts with utility maximisation
- consumers may tend to underestimate the addictive nature of some consumption decisions
- consumers may be very loyal to a supplier and not change

Question 6

inertia

Answer 6

consumes may consider that it takes too much effort to search for a new supplier and/ or to switch brand/ supplier

Question 7

poor at computation

Answer 7

• some consumers are unable or unwilling to make comparisons between prices and different goods on offer
• they might find it difficult to calculate accurately the costs of a decision and may end up choosing items that are more expensive

Question 8

consumers needing to feel valued

Answer 8

consumers may pick particular brands of product to feel valued by their existing supplier or to ‘fit in’
- they may not wish to change despite it being a rational choice

Question 9

framing and bias

Answer 9

framing: by careful wording when presentation,
bias: the consumers’ perception and behaviour can be influenced
- information provided is manipulated so as to alter decision making
- positive framing: elicits positive feelings/ actions and proactive behaviour
- negative framing: elicits negative feelings/ actions and reactive behaviour and risk aversion
—> all these may cause consumers to make irrational choices

Question 10

information gap/ asymmetric information

Answer 10

consumers may not have sufficient/ accurate information t make a rational decision

Question 11

nudge theory

Answer 11

proposes ways to influence the behaviour and decision-making of groups or individuals

Question 12

causes of irrational behaviour

Answer 12

1. herding/ influence of other’s behaviour
2. habitual behaviour
3. inertia
4. poor computational skills
5. consumer feels valued by current supplier
6. information gap
7. framing and bias
8. ignoring external benefits that arise from switching because these accrue to 3rd parties

Question 13

evaluation points of rational decision making

Answer 13

1. magnitude of savings
   - smaller magnitude, less impact
2. ability to measure
   - difficult to measure size of external benefit
3. time-frame: short run vs long run
   - more people are likely to switch in the long rn
4. other costs
   - process of switching may not be easy and have hidden costs
5. in the future, advancement in technology maybe result in more people switching

Question 14

influence of other people’s behaviour (herding)

Answer 14

consumers sometimes make choices based on social norms and how their friends and family act