• Free markets?are built on the assumptions of?rational decision making
• In classical economic theory, the word 'rational' means that?economic agents?are able to consider the?outcome?of their choices and ?recognise the?net benefits?of each one
  • Rational agents?will select the?choice?which presents the?highest benefits
• In many ways, the?assumption of rational?decision making is?flawed.?Consumers are often more influenced by the following than a?rational computation?of net benefits
  • The?influence?of other people's behaviour
  • The importance of?habitual behaviour
  • Consumer?weakness in computation

The Influence of Other People's Behaviour

• Peer pressure?often prompts consumers to make purchasing decisions that may go against a?computation of net benefits
• Producers?influence consumers choices?through various forms of?advertising, including lifestyle, celebrity endorsement and influencer culture
  • This results in?emotional decisions?and not necessarily rational decisions e.g. consumers purchasing the branded Nurofen when they could purchase the much cheaper (and essentially identical) Ibuprofen
• Producers use advanced?behavioural psychology?techniques to?influence consumer choices e.g.?Neuro branding

The Importance of Habitual Behaviour

• Consumers make?so many?purchasing decisions that they often?rely on habits?to speed up the process
  • Using?rule of thumb?refers to a short cut that makes a?quick estimation?of benefits without gathering too much information
  • Consumers use information?from the past, which may be outdated, as they habitually purchase the?same products?e.g. visiting the same sections in a supermarket for several years
• Consumer inertia?often develops as convenience is prioritised
• Consumers make?purchasing decisions?that?directly harm them?and are usually addictive, for e.g. alcohol
• Sellers?recognise?habitual patterns?and?exploit them. for example, products placed at the checkout till to benefit from?impulse purchasing?(chewing gum)

Consumer Weakness at Computation

• The?wider?the range of choice, the?harder?it is for a consumer to gather information and?compute?which one offers the?highest net benefits
• Consumers?often lack the?time or ability?to consider the relative prices of different products and sellers will frequently make it difficult for them to do so
  • Products the seller?wants to sell?are often placed at?eye level?where computation is easy
  • Many products that would?deliver higher benefits?are placed below?knee level?or?high on the shelf?where computation is hard