<2.4 CRITIQUE OF CONSUMER & PRODUCER BEHAVIOUR>  

"So if those are the characteristics of an irrational consumer, what would be the characteristics of a rational consumer?"

• If you said "Yes" then you are being rational,  

• The COMPLETENESS ASSUMPTION states that a rational consumer should always be able to RANK THEIR PREFERENCES and say, 

• “I prefer A over B,” “I prefer B over A,” or “I’m indifferent.” 

• "Why is this assumption necessary?" Well, if someone can’t decide—e.g., “I have no idea if I prefer going to the gym or staying home,” or “I can’t compare apples to oranges at all”—then their preference system is incomplete, meaning they cannot fully construct a rational demand pattern because without clear preferences, you cannot optimise satisfaction (utility)—which is the whole point of rational choice theory.

• Real-world example: "I always prefer Coke to Pepsi"

• The TRANSIVITY ASSUMPTION states that a rational consumer should always be able to KEEP THEIR PREFERENCES CONSISTENT and say, "If I prefer A over B, and B over C — I should logically prefer A over C."

• "Why is this assumption necessary?" Well, how could a reliable demand curve exist if consumers kept changing their minds—preferring A over B one moment, B over C the next, and suddenly C over A?” 

• Real-world example: "I always prefer Coke to Pepsi, and I'd rather have a Pepsi over a Sprite, so I definitely prefer Coke to Sprite."

• The NON-SATIATION ASSUMPTION states that a rational consumer should always be able to say, "I prefer more of a good rather than less."

• "Why is this assumption necessary?" Well, how could a demand curve slope downwards if consumers actually preferred less of a product rather than more of it?”

• Real-world example: "If the price of Coke falls, I would prefer to buy more"

"When we consume a good or service, we not only know its full cost and benefit, but we also know when our satisfaction is maximized and will buy the exact quantity when that occurs, right?", "But what if you are buying for someone else?", "Are we fully rational and never overeat, drink too much, or buy more than we actually need.", "Our demand curve is perfectly accurate in every way right!" 

--TASK--

"Look at the infographic above and explain the rule-of-thumb that this customer is using when deciding to buy goods. Then decide whether choosing a product that contains the word "international" over others would be considered a rule of thumb?'

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• "In my opinion, buying an iPhone is like choosing a restaurant just because the sign outside looks fancy. You don’t check the menu, read the reviews, or ask how good the food actually is—you just assume that if the logo is shiny and the name is popular, it must be good. In reality, the no-brand alternative might last longer and have more functionality at half the price, but you’ll never know because your brain took the irrational shortcut."

"BOUNDED RATIONALITY refers to how in reality a person is either not able or not willing to seek information that would help them understand the true value and worth of a decision. This could be due to lack of access to the information, lack of mental capacity to comprehend it or simply lack of time available to gather, learn and process it."

"AVAILABILITY BIAS refers to how we often BASE OUR DECISION-MAKING on RECENT INFORMATION or IMAGES rather than look at a choice in its entirety."

"How do you feel about deciding to study the IBDP economics course after hearing these two statements?"

"Unfortunately, 20% of all IBDP economics students fail!"

or

"A whopping 80% of IBDP econ students pass, whoop, whoop!"

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"That's right, the way the statement is 'framed', can 'bias' or 'prejudice' your desire, and utimately, your demand for the good or service will be sub-optimal."

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"ANCHORING BIAS is a cognitive bias whereby an individual's DECISIONS ARE INFLUENCED BY A PARTICULAR REFERENCE POINT or 'ANCHOR'."

--BOUNDED SELFISHNESS--

"BOUNDED SELFISHNESS refers to a cognitive bias that counters the assumption that rational consumers will, out of self-interest, always choose the least cost/best value option, stating that in reality their level of 'selfishness' is bounded by their human desire for social approval, fairness, and moral purity, which often causes them to act against their own financial best interest."

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"MY APPLE DUO STORY"

Highlight the sections you think illustrate each of the seven biases covered so far:

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"Alex had been saving for months to buy a new phone. One afternoon he saw an advert for the new Apple Duo, a package containing the latest phone and smartwatch. The advert immediately caught his attention because it displayed a large crossed-out price of $2,500, followed by a special offer price of $1,999. Although Alex had never thought about how much the Apple Duo should actually cost, the original figure stuck in his mind and made the new price seem like an incredible bargain."

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"Later that day, Alex visited another retailer's website. Interestingly, the package cost exactly the same amount, but the promotion was worded differently. Instead of focusing on the total price, it stated, "Own the Apple Duo for less than $55 per week." Suddenly the purchase felt much more affordable. Alex barely thought about the total amount he would eventually pay and focused instead on the smaller weekly figure."

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"As he continued researching, Alex remembered seeing countless social media posts about the Apple Duo. Several YouTubers he followed had praised its features, and many of his friends had been talking about it all week. Because these examples came to mind so easily, Alex began to assume that the Apple Duo must be the best device on the market. He rarely noticed the reviews discussing competing products because the positive stories about Apple were much easier for him to recall."

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"Alex knew there were many alternatives available. Several other brands offered similar phones for lower prices, and there were hundreds of reviews comparing different models. However, after reading a few articles and watching several comparison videos, he became overwhelmed by the amount of information. There were simply too many specifications, prices, contracts, and warranty options to compare. Eventually he thought, "I've spent enough time on this already. I'll just choose something that seems good enough."

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"As he walked past an Apple Store the next day, he noticed a large sign describing the Apple Duo as the company's newest flagship product. Without carrying out any further research, Alex reassured himself by thinking, "Apple products are always high quality. Whenever I buy Apple, I never regret it." This simple rule made his decision feel easy and saved him the trouble of analysing all the remaining options."

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"Alex had originally planned to wait another three months so he could pay for the device in full. He knew that delaying the purchase would leave him with more savings and avoid any extra costs. However, the salesperson explained that he could take the Apple Duo home immediately by signing up for a payment plan. Alex imagined showing the new device to his friends at school the next day. Even though he knew waiting would probably be the wiser financial choice, the excitement of owning it immediately was too difficult to resist."

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"Just before paying, the salesperson showed him a premium protective case that cost far more than similar cases available online. The salesperson explained that part of the purchase price would be donated to a charity supporting children's education. Alex realised that a cheaper case would leave him with more money, but he liked the idea that some of the money would help others. He purchased the expensive case anyway, feeling pleased that his choice might benefit someone else."

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"When Alex arrived home with his new Apple Duo, he believed he had made a carefully considered decision. Yet if someone examined his decision-making process closely, they might notice that he had relied on the first price he saw, been influenced by the way the offer was presented, focused heavily on examples that were easy to remember, stopped searching when information became overwhelming, depended on a simple shortcut based on past experience, given in to the temptation of immediate satisfaction, and even sacrificed some personal financial benefit in order to help others."

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"For an economist, Alex's purchase raises an interesting question: did he choose the option that truly maximised his benefit at the lowest possible cost, or was his judgement influenced by predictable patterns in human behaviour?"

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"Highlight the sections they think illustrate each of the seven concepts and then write the concept name plus a one-sentence definition in the margin. This works well as a behavioural economics starter activity before introducing the theory."

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--TASK--

"Now that you have correctly identofied the biases, choose three and explain how the story illustrates this bias: For example: 

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"The story illustrates the impact of anchoring bias as Alex was influenced by the initial price of $2,500, which became a reference point and made $1,999 appear to be good value, it also illustrates the impact of...."

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"CHOICE ARCHITECTURE refers to the way/method in which choices are presented and structured to consumers in order to influence their decision-making while maintaining freedom of choice."

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A 'SLUDGE' refers to a way of INFLUENCING CONSUMER'S CHOICES with the aim of MAKING IT INTENTIONALLY HARDER FOR PEOPLE TO MAKE CHOICES THAT ARE IN THEIR OR SOCIETY'S BEST INTERESTS WITHOUT using the following:

1) FINANCIAL REWARDS for compliance.

2) SANCTIONS for non-compliance.

3) LIMITING CHOICES.

• READ EACH OF THE ARTICLES BELOW and write a brief explanation of how 'NUDGE-THEORY' has been used in each scenario to manipulate behavior. 

• Nudge theory in negotiations—Gale, A. (2020). Nudge theory in negotiations. Management Today. www.managementtoday.co.uk/nudge-theory-negotiations/food-for-thought/article/1689854/.

• Group 2: Nudge theory in workplaces—Agarwal, M. (2020). ‘Nudging’ to create a better workplace: Nudge theory in practice. Inc42. https://inc42.com/resources/nudging-to-create-a-better-workplace-nudge-theory-in-practice/.

• Group 3: Nudge theory as a public policy tool—Lokeshwarri, S. K. (2020). Is ‘nudge’ a desirable public policy tool? The Hindu Business Line. https://www.thehindubusinessline.com/opinion/columns/is-nudge-a-desirable-public-policy-tool/article33126549.ece.

• Group 4: Nudge theory to prevent vaccine hesitancy during Covid-19—Jain, S. (2020). Vaccine to vaccination: Using nudge theory to prevent vaccine hesitancy. Observer Research Foundation. www.orfonline.org/expert-speak/vaccine-to-vaccination-using-nudge-theory-to-prevent-vaccine-hesitancy/.

• To what extent can manipulation and deception ever be good for individuals and societies?”