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  • Writer's pictureAlexander Matambo

The Case for Behavioural Economics

Why did you watch that series on Netflix? Why did you pick that meal on Uber Eats? Why is that your favourite shirt? Why do consumers behave the way they do?

Our everyday lives are a whirlwind of activities - rushing to work, going to the gym, the store, catching up with the latest new series, that sneaky snack. We are so absorbed in the routine that it may be challenging to be aware of what's influencing us and our decisions. In this case, behavioural economics is applicable because it can help explain some of the behaviours we don't think twice about.

In this post, we will explore the following question: what is behavioural economics? Why should you care?

What is Behavioural Economics?

Traditional economic theory is grounded in the assumption that consumers are always rational in their decision making, and will always look to maximise their utility when making consumption decisions. This implies that when making decisions, the consumers will gather all the available information, evaluate the information and weigh out the costs and benefits associated with each decision, and take the time to process this information and make a utility maximising decision.

Behavioural economics finds its roots in empirical observation of human behaviour as an interception between economics and psychology. Behavioural economics views that the consumer does not always consider the "rational" or "optimal" decision, even if they have all the available information and tools.

Bounded Rationality

Well, the natural question to this is: why would the consumer not make the most rational decision, right?

Behavioural economics has found several factors that would limit the consumer's utility maximising ability:

  • Time: The consumer may not always have the time to go through the rational decision-making process, as they need to act quickly. Think of the last time you dropped your phone and caught it in mid-air or when you touched a hot stove.

  • Choice: It could be that there are so many choices available that it would be too labour-intensive to evaluate the pros and cons of every possible option. Think of the last time you had to choose what to watch on Netflix/Amazon Prime.

  • Information: It could happen that the required information does not currently exist or is incomplete or asymmetric. On the other side, there may be too much available information that it would be challenging to process.

For these reasons, behavioural economists would say that consumers have bounded rationality in the real world that would stop them from making rational decisions all the time.

Bounded Self-Control

Consumers are also bounded by self-control, which can get in the way of making decisions that maximise utility. Even if the consumer has all the information and knows what to do consumption-wise to maximise utility, their self-control can get in the way.

An example is sugary drinks. A consumer knows that daily consumption of high-sugar beverages is detrimental to their health, with potentially rot their teeth, cause potential diabetes issues, and might relate to other health conditions further down the line. They want to cut down but can't because they might have low self-control.

The same argument can be made for nicotine, alcohol, drugs, and exercise. A rational consumer knows the benefits of exercise and healthy eating habits, but something stops them from doing it on a daily basis. Thus, they are bounded by their self-control, preventing them from always making utility maximising decisions.

The Role of Heuristics

Because of bounded rationality and bounded self-control, behavioural economics will say that consumers will sometimes follow heuristics. Heuristics are mental shortcuts that allow people to solve problems and make judgments quickly. These rule-of-thumb actions shorten decision-making time and allow people to function without constantly stopping to think about their next course of action.

An example is when getting dressed in the morning; rather than spending time deciding what to wear every day, you might default to wearing one of your signature outfits. Or, when you're out at a restaurant with too many options, you'll likely choose a dish you've enjoyed in the past.

Heuristics are not about making the "right" decision or judgement; they are about making a decision quickly. They are about making satisficing decisions.

In economics, a satisficing decision is one that aims for a satisfactory or adequate result, rather than the optimal decision. Instead of putting maximum exertion towards attaining the ideal outcome, satisficing focuses on pragmatic effort when confronted with tasks.

Think of it as the economics version of picking the vanilla flavoured ice cream when the flavour you wanted is unavailable.

Why Should You Care?

These behavioural economics principles have significant consequences on how consumers live their lives. By understanding the impact these principles have on consumer behaviour, you can actively work to shape their consumer journey.

Knowledge of the factors influencing consumption behaviour puts you in the driver's set and can help inform business and marketing strategies to optimise revenue and utility (see what I did there lol).


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