In this video we will explore the limitations of marginal utility theory by comparing rational
behaviour against the consideration of behavioural economic models.
By the end of this video you will better understand the limitations of marginal utility theory
and analyse why consumers do not always act rationally.
How do you measure satisfaction?
The assertion that we seek to maximise utility implies that we can accurately measure our
satisfaction in the consumption of goods and services.
If you’ve ever had difficulty completing a satisfaction survey then you already know
how hard it is to accurately measure your own satisfaction with a good or service.
Classical economic theory makes the assumption that consumers are rational beings.
The rational consumer is a model of behaviour that implies that consumers are able to make
complicated calculations in the pursuit of maximising utility.
In reality, there are many influences on the consumer that limit their ability to act rationally.
Understanding the influences on consumer behaviour is a significant part of economist Richard
Thaler’s work.
He recently won the Nobel Memorial Prize in Economics for his work in behavioural economics.
The field of behavioural economics looks beyond rationality to consider the other forces that
shape actual consumer decision making.
These can include social, psychological and emotional factors.
We’ll explore a few of these next.
The rational consumer as presented in classical economics is important to understand before
moving into the study of behavioural economics.
If we understand how the rational consumer would ideally behave, we can understand how
far from that model we are.
In order to understand why rational decisions are not made, we should consider the contributions
of behavioural economics.
In the next few slides I will present some of the arguments put forth addressing irrational
consumer behaviour.
First we should consider the influence of advertising and promotion.
Marketing and advertising is aimed at promoting and selling goods and services.
A successful campaign, should move the consumer towards the purchase of the good or service.This
persuasion could influence them to act irrationally.
For example, if I walk into a store and have no need for a certain item, the fact that
it is on sale may encourage me to buy it.
A rational consumer wouldn’t bother, but we have to understand why consumers do.
Second, we consider the influence of the decision of others.
We are often influenced by the decisions of those around us.
We may follow the actions of the crowd even if it is not in our best interest.
This can be seen in the effects of peer pressure.
Most teenagers will be familiar with the phrase, if your friends jumped off a cliff would you
jump too?
This is usually in response to the teenager having said but all my friends have one or
all my friends are going.
Here we can see the influence of the peer group.
It doesn’t just end with teenagers, it applies to adults as well.
This is the ‘keeping up with the Joneses’ mentality.
If my neighbour has purchased something nice, then I may be more inclined to buy it even
though it may not be a wise move financially.
Third we have to consider habitual behaviour.
Consumers exhibit a preference for the way things currently are, or the status quo.
An example of this would be the resistance to switching banks although a different bank
may offer a better deal.
I know this from my own experience.
Although switching to a different bank may benefit me, I am reluctant to do so because
it takes time to set up.
I’d have to transfer a lot of information and I’m ultimately not that bothered to
do it.
Fourth, we should consider consumer weakness at computation.
Consumers are not complicated calculation machines.
This can be seen in the number of people who are not saving enough for retirement.
It can also be seen in irrational fears of flying, thinking that you’ve got a high
likelihood of death.
If that same person feels safe riding in a taxi, then the fear is quite irrational as
the likelihood of dying in a car accident is much higher.
I hope this introduction to behavioural economics has proved insightful and that you’ve gained
from it.
If you have any questions, comments or contributions - leave them below or email me at enhancetuition@gmail.com.
You can visit me online at the website listed in the video information.
As always, that’s us done for now and I will see you in the next one!