<2.4 CRITIQUE OF CONSUMER & PRODUCER BEHAVIOUR>  

• STOP EVERYTHING!!!! Your mind is completely BIASED and manipulated! YOUR DEMAND DECISIONS ARE COMPLETELY OUT OF YOUR CONTROL and in no way based on PERFECT INFORMATION, you are INCAPABLE OF ESTIMATING the true level of SATISFACTION that you will receive from consuming a good or service. 

• Furthermore, you LACK THE KNOWLEDGE, and PATIENCE to make a truly informed decision ('Bounded rationality'). You take mental shortcuts based on experience and common sense ('Rules of thumb') because you like to simplify complicated decisions. 

• When buying a product you always focus on how much discount is being offered, rather than on the justification for the original price  ('Anchoring bias').  You rely on the most recent information and reviews to influence your choices ('Availability bias') rather than look at the 'whole picture', and you allow yourself to be fooled by aesthetics and cosmetic appeal to make your choices. !!!YOU ARE COMPLETELY IRRATIONAL!!!

• DON'T AGREE? THEN WATCH THE VIDEO BELOW

• A RULE OF THUMB refers to an approximate method for doing something, based on practical experience rather than theory. 

• BOUNDED SELF-CONTROL refers to how in reality a person is not able to control their consumption to the quantity that maximises their satisfaction Not only do people have trouble establishing this amount but they often exceed it.

• 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. 

• EXPLAIN HOW MR. BOUNOUS JUST USED ANCHORING TO INCREASE THE DEMAND FOR 15-MINUTE TESTS.

• BOUNDED SELFISHNESS, refers to how, the rational consumer theory assumes the consumer is making their buying decisions based on their own level of satisfaction, rather than others. Obviously when you shop for a gift for others or donate to charity the price you are willing to pay is usually based on how much satisfaction the other person will receIve and not you.

Read the extract below and IDENTIFY 6 COGNITIVE BIASES

"MY IRRATIONAL SAMSUNG STORY"

• "I've always been told that it was a good idea to have at least two working phones, and from personal experience, it has proved to be a good habit, however, did I really need a third? Well, I couldn't control myself and I went ahead and bought a new one last week. I had seen adverts promoting the latest Samsung, saying that it was the 'most advanced' phone on the market, with many life-changing features. There was so much information on the internet that it would have taken me weeks to read it all, so I decided to browse just a couple of tech-review sites, and they both gave it 5-stars, though I didn't really understand the technical stuff but, 5-stars on 'Mobilephonereviews.com' can't be wrong. As for other brands, I didn't want an I-phone as I was put off by a recent report that one of them exploded last week and killed the owner. I had also heard that there was another brand from China that had an even better phone, and it was cheaper, but I prefer to go with Samsung as I love Korean culture, plus the Samsung shop looked so modern and high-tech. In addition, the Samsung shop was also having a promotion and was offering a 10% discount on the $2000 price tag if I bought it within 10 days, so I was really tempted as I didn't want to miss out on this generous deal. And do you know what? After all that I gave it to my mum as a present, as truth be told I felt a bit greedy"

LINK

Create your own story featuring 6 COGNITIVE BIASES

• CHOICE ARCHITECTURE refers to the DESIGN OF DIFFERENT WAYS OF PRESENTING CHOICES to decision-makers in an attempt to influence the outcome.

• RESTRICTED CHOICES refer to how the choices the consumer can make are limited so as not to overwhelm them with options, which is proven to deter decision making. 

• The fact that there were only 2 phone plans was an example of this, as I wasn't overwhelmed with choice and therefore found it easier to make my decision. 

• MANDATED CHOICE is a situation or scenario in which people must make a decision (by law) in advance with respect to whether they wish to participate in a particular action

• In other words, they must decide to either 'opt-in' or 'opt out'– E.g. Organ donation.

• In the 'My Samsung story', the credit check was the mandated choice, I had no choice to take it, if I wanted to buy the phone.

Mandated choices

A mandated choice is a situation or scenario in which people must decide in advance to whether they wish to participate in a particular action – they are required by law to make that choice.

Mandated choice is a variant of default choice except that the choices are mandated through the force of law / statutory regulations – we are seeing a lively debate about the extent and scope of mandated choice during the current pandemic.

For example, the decision in the UK in the summer of 2020 to make mask-wearing compulsory in retail shops and on public transport (save for those with an exemption) replacing voluntary choices beforehand. Will the UK government bring in some system of mandated vaccination passport for those wanting to travel overseas? Will this be extended to those wanting to buy tickets to major sporting and cultural events? And debate has been fierce on the question of whether employers should have the right to insist on a valid vaccination certification as a condition of having a job.

How is presumed consent different from mandated choice?

Presumed consent is the idea that someone is believed to have given permission for something unless they say they do not.

Evaluating Mandated Choices

1.Some justification on collective public health grounds?

Need to change behaviours quickly and at scale to curtail pandemic risks

Softer behavioural nudges / information campaigns might not be sufficient – an example – mandated use of seat-belts in vehicles

2.Possible conflict between public good and individual liberty

3.Possible conflict between social good and inequality

An example – can people afford covid tests before & after travelling overseas?

What are default choices?

The default choice or default option is the option that a consumer “selects” if he or she does nothing. Studies have shown that consumers rarely change the default settings.

1.Strong default choices can make demand price inelastic (PED<1)

2.Offers opportunities for some businesses to chargehigher prices and include default choices on services such as subscriptions

3.Defaults can make public policies to alter behaviourless effective

4.But using default choices / rules of thumb are notnecessarily irrational

5.Sticking to a default choice helps to reduce uncertainty / search costs

6.Small changes to defaults can have powerful effects – an example - changing default settings on household appliances

7.Consider working from home – an important change to the default for millions of people in the UK?

Real -world focus 2.3

• INTRO

• DEFINITIONS

• RATIONALE

• IMAGES

• https://mountain-puck-548.notion.site/A-Database-of-100-Nudge-Case-Studies-and-Research-Papers-538df3db3fa14627a099bba181be77fd

• ADAPT EACH OF THE 5 EXAMPLES ON PAGE 76 OF YOUR TEXTBOOK TO 'OFS NUDGES'

• 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?”

• PROFIT MAXIMISATION:- Standard economic theory of the firm assumes that RATIONAL FIRMS are solely geared towards maximising their profits, and that they will be willing to produce up to the last unit of a foot that yields even the smallest % profit (MC=MR). Do you think this is really the case? Do you think OFS's main goal is profit maximisation? 

• CORPORATE SOCIAL RESPONSIBILITY (CSR):- The self-interested behaviour of firms often leads to negative consequences for society. It is often the case that the well-being of firms is not consistent with the welfare of society. A prime example is the self-interested firm that pollutes the environment. In addition, firms can engage in actions that most consumers would consider to be ethically unacceptable, such as the practice in many developing countries of employing children who are extremely poorly paid and forced to work long hours, or employing labour that is forced to work under unhealthy or dangerous conditions. However, many firms are increasingly recognising that the pursuit of self-interest need not necessarily conflict with ethical and environmentally responsible behaviour. A negative image of the firm held by workers and customers (buyers of the product) can cut deeply into the firm’s revenues and profits by lowering worker productivity and the firm’s sales. Further, socially irresponsible firm behaviour may lead to government regulation of the firm intended to minimise the negative consequences of the firm’s actions for society, whereas socially responsible behaviour could instead result in avoidance of government regulation. Therefore, firms face strong incentives to display corporate social responsibility by engaging in socially beneficial activities such as art and athletics sponsorships, donations to charities. Many of these practices are the result of increased consumer awareness of social and environmental issues, growing consumer concern over ethical and environmental aspects of business practices, and even consumer activism that results in boycotts of offending firms. One indication of the influence and concern of consumers is the rapidly growing interest in investments in companies (through stock markets) that meet certain social, ethical and ecological criteria. Economists used to think that ethical and environmentally responsible behaviour of firms would reduce their profits. This was based on considering only the cost aspect of profits; for example, firms using cheap child labour face lower costs, and hence will make higher profits than firms avoiding such practices. Yet profits depend not only on costs, but also on revenues. If consumers avoid buying the products responsibility of offending firms, revenues will decline and profits will go down in spite of the lower costs. The same arguments also apply to firms that may be pursuing some strategy other than profit maximisation, such as revenue maximisation. SUSTAINABLE INDEX LEGO, COKE-COLA, SAMSUNG, STARBUCKS, APPLE, MCDONALDS

• SATISFICING:- All of the above objectives assume that the firm tries to maximise some variable, whether it is profit, revenue, growth or managerial utility. H. Simon, a Nobel Prize-winning economist, has argued that the large modern enterprise cannot be looked upon as a single entity with a single maximising objective; instead it is composed of many separate groups within the firm, each with its own objectives which may overlap or may conflict. This multiplicity of objectives does not allow the firm to pursue any kind of maximising behaviour. Firms therefore try to establish processes through which they can make compromises and reconcile conflicts to arrive at agreements, the result of which is the pursuit of many objectives that are placed in a hierarchy. This behaviour was termed satisficing by Simon, referring to the idea that firms try to achieve satisfactory rather than optimal or ‘best’ results.

• GROWTH MAXIMISATION:- firms may be interested in maximising their growth rather than their profits as the larger they grow the more economies of scale they can achieve and the lower it's average costs. Also as a firm grows it can diversify into the production of different products and markets which reduces its dependence on a single product or market, and finally with a larger share, it can yield greater market power and will have more control over the prices it can charge.

• RULE OF THUMB BIAS: The habit of having two working phones was not a rule-based on anything other than habit, and a personal preference, in other words a rational consumer would not see any sense in buying two phones rather than one.

• BOUNDED SELF-CONTROL: The fact that I was unable to control myself and bought a third phone shows how irrational I am as a consumer as it is very unlikely that the cost of all three phones reflected my total utility.

• BOUNDED RATIONALITY: I lacked both the time and the mental capacity to do thorough research on the true worth of the phone and instead just settled for the opinion of a couple of review sites.

AVAILABILITY BIAS: I dismissed the i-phone, due to the news that one had recently exploded, despite the millions of i-phones that haven't exploded.

FRAMING BIAS: I was influenced by the actual design of the Samsung shop, which 'framed' the brand as very hi-tech and reliable.

ANCHOURING: The $2000 price tag of the phone influenced my idea about whether the 10% discount was actually a good or bad deal, I immediately ignored whether the phone was ever worth $2000 in the first place.