Not so Rational Consumers: Study on Behavioral Economics.

 

Behavioural economics is a psychological study as it considers the economic decision-making processes of individuals and institutions. Behavioral economics brings psychology and economics together to explore why consumers sometimes make irrational decisions, and how and why their behaviour does not follow the predictions of economic models. It helps to understand why we fail to buy the product we ideally are supposed to and end up buying another one. While the field of classical economics states that decision-making is entirely based on theoretical knowledge and rational logic, behavioural economics allows one to study the irrational decisions made by humans.

                                      

                                      

Behavioral economics consists of various theories by several Nobel Laureates who have done notable work in the field. In the 1950s, the concept of 'Bounded rationality' was developed by Economics Nobel Laureate Herbert Simon. This theory explains that rationality is limited by time frame, by the cognitive resources of people and by the difficulty level of the decision. It argues that we have restricted mental capabilities to make decisions.

 

Daniel Kahneman and Amos Nathan Tversky developed and published 'Prospect Theory: An Analysis of Decision under Risk' in 1979. Prospect theory assumes that losses and gains are valued differently, and thus people take decisions based on perceived gains instead of perceived losses. As stated by Adam Smith in 1759, 'Pain…is, in almost all cases, a more pungent sensation than the opposite and correspondent pleasure'. Hence, people normally tend to choose something where they are gaining even if it is less rather than losing even a tiny bit.

 

Richard H. Thaler, an American economist, was awarded the Nobel Memorial Prize in Economic Sciences in 2017 for his work in the field of Behavioural Economics. He is significantly known for his work on 'Nudge Theory'. In 2008, Richard Thaler and Cass Sunstein's book Nudge: Improving Decisions About Health, Wealth, and Happiness brought nudge theory to the world's attention. The term 'nudge theory' was coined by Thaler to explain how small interventions can encourage individuals to make different decisions. In this theory he explored how people's choices can be influenced (nudged) by individuals and organizations. It is a concept in behavioural science, political theory and behavioural economics which suggests indirect ways and positive reinforcements that could lead an individual's behaviour or decision to change. Here we understand that a “nudge” is a way to maneuver people’s choices to lead them to make certain decisions: For example, putting fruit at eye level or near the cash register at a high school cafeteria is an example of a “nudge” to get students to choose healthier options.

 

Behavioral economics studies how a customer’s purchasing choices are influenced by factors that are seemingly unrelated to the product itself. One of the most powerful and influential word you can use in marketing is “Free”. That’s the reason why you’ll see supermarkets advertising “Buy one, get one free”, not “Buy two products, get 50% off”.  While both of these deals are fundamentally one and the same, we will get a lovely hit of dopamine when they see the word “Free”, and that will be reinforced when they take advantage of that offer.

                                     

Social proof is one of the most dominant tools in behavioural economics, specifically in online marketing.  People are more likely to purchase products and services that are well liked by people to gain social standing amongst their peers, which explains why so many consumers read online reviews in order to gauge how reliable a company is – in fact, 81% of consumers trust a company with lots of positive reviews, and we know you do it too. We have all been there.

                                             

If you're already introduced with the term ‘limited edition’, then you’re probably familiar with the power of scarcity in behavioural economics. Put simply, people tend to put greater value on a product if they think there’s only a limited amount available. A piece of information for our Starbucks lover readers out there, do you know that Starbucks is the master of scarcity marketing. We’re quite familiar with the hype around Pumpkin Spice Lattes – and one of the leading reasons for this is that they’re only available for a few months every year. The coffee giant routinely introduces special holiday food and drinks that are only available for short amounts of time, with the marketing of these products revolving around the phrase “Enjoy it while it lasts”.

Have you ever signed up for free trials? offered by our favorites like Netflix, Spotify, Amazon Prime, Crunchyroll etc. By offering a free trial to you, they give you the feeling of ownership over that product or service, which develops an emotional attachment and we can’t disagree with that and this attachment is hard as rock. When the trial period terminates, consumers have to choose between losing the product or paying for continuing the service. And most of us end up continuing the service because no one wants to stop binging their favorite show.

                                            

Behavioral economics suggests that humans are irrational consumers. Just think about it: Did I really have to order takeout just because a refreshing strawberry slushy was free with it? Did I really have to buy those expensive new clothes because they were for a limited fall edition and will never come back? Your rational self might disagree, but your emotions are telling you: “Go ahead, you deserve this right now.

 

There you have it! The undeniable evidence that manifests there’s no such thing as a 100% rational consumer. And to be straight, let’s be glad there isn’t. Having to keep track of all beings' little quirks and imperfections is what forces advertisers and marketers to be more empathetic and develop their creative skills. Just think of the numerous memorable campaigns we’ve witnessed throughout the years as a result of companies acknowledging their clients as actual people rather than numbers. So let us say once and for all: Hooray for being irrational.

References - 

·      1) https://www.beastglobal.com/post/five-notable-nobel-prizes-in-the-study-of-behavioural-economic

2)  https://www.digivate.com/

 

-      Labhashree Shinde (SYBA)

-      Rutuja Kamble (TYBA)