Question

1. Using concepts from behavioural economics provide three criticisms of the standard economic theory of consumer choice – See Perloff section 3.5.

Answer 1

1.A first issue stressed in behavioural literature is that important “bounds” on human behaviour exist. This notion of “bounded rationality” refers to the very fact that individuals often take shortcuts in making decisions that regularly end in choices that fail to satisfy the utility maximization prediction.Footnote 24 Individuals engage in “satisficing,” being that they are doing not choose the choice that maximizes their utility, but rather the one that satisfies their aspirations. A related problem is that when the number of data provided is just too large individuals have difficulties to guage.

2. Another deviation from the quality model identified in behavioural studies relates to the very fact that folks pay more attention to absolute outcomes than to the probability that an adverse event may occur. In connection, people could also be highly adverse against relatively small risks (e.g., of exposure to toxic chemicals) albeit the probability of such hazard to occur is nearly negligible. People are particularly inclined to avert from any action that features a (personal) connotation of severe suffering or death. This is sometimes referred to as the dread factor .

3. A third bias, referred to as the status quo bias, describes how people have a preference for leaving things as they are. It is associated with the so-called “endowment effect” as a results of which individuals place a better price on items they own than on those they are doing not own yet.Footnote 25 The results from many experiments show that, all things being equal, individuals will prefer a standing quo outcome.