Consumer Rationality
Consumer rationality refers to the idea that consumers make decisions based on their preferences and available information in a way that maximizes their overall satisfaction. It assumes that consumers are logical and consistent in their choices, seeking to maximize their utility or well-being given their budget constraints. This concept is fundamental to understanding consumer behavior and is a key assumption in economic models.
8 Key excerpts on "Consumer Rationality"
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...The lessons begin with a study of rational behavior: the consumers’ counterpart of profit maximization. 7.1 Rational behavior Economic logic assumes that all human behavior is purposeful and consistent. The term Rational Behavior in economics is different from the dictionary definition of the term. The dictionary definition states that an individual’s rational behavior is “fully competent, or sane.” In economics, rational means that individuals do the best they can, given the constraints they face. Rational Behavior = individuals do the best that they can, given the constraints they face. Rational behavior is purposeful and consistent. Suppose that students seeking a good grade were to skip class in order to play a video game. Is this rational? It would be hard to claim this as “rational,” using the dictionary definition of the word, since it is counter to the students’ objective to perform well. However, according to the economic definition, this behavior would be rational if the benefits of the activity outweighed the costs. Any behavior is considered rational, as long as its benefits outweigh its costs. Another way to think about rational behavior is to imagine that individuals do the best they can, given the constraints that they face. Consumers maximize their own happiness given a budget. For example, a college professor gets a paycheck twice a month, and uses the income to purchase food, clothes, housing, water, electricity, toothpaste, etc., as long as each purchase adds to her satisfaction. In this way, consumers maximize their satisfaction given a budget constraint. Notice the similarities with how economists describe producer behavior: producers maximize profits given input and output prices, and technology...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...The lessons begin with a study of rational behavior: the consumers’ counterpart of profit maximization. 7.1 Rational behavior Economic logic assumes that all human behavior is purposeful and consistent. The term “rational behavior” in economics is different from the dictionary definition of the term. The dictionary definition states that an individual’s rational behavior is “fully competent, or sane.” In economics, rational means that individuals do the best they can, given the constraints they face. • Rational Behavior = individuals do the best that they can, given the constraints they face. Rational behavior is purposeful and consistent. Suppose that students seeking a good grade were to skip class in order to play a video game. Is this rational? It would be hard to claim this as “rational,” using the dictionary definition of the word, since it is counter to the students’ objective to perform well. However, according to the economic definition, this behavior would be rational if the benefits of the activity outweighed the costs. Any behavior is considered rational, as long as its benefits outweigh its costs. Another way to think about rational behavior is to imagine that individuals do the best they can, given the constraints that they face. Consumers maximize their own happiness given a budget. For example, a college professor gets a paycheck twice a month and uses the income to purchase food, clothes, housing, water, electricity, toothpaste, etc., as long as each purchase adds to her satisfaction. In this way, consumers maximize their satisfaction given a budget constraint. Notice the similarities with how economists describe producer behavior: producers maximize profits given input and output prices, as well as technology...
eBook - ePubConsumer Behaviour
Perspectives, Findings and Explanations
- John O'Shaughnessy(Author)
- 2012(Publication Date)
- Bloomsbury Academic(Publisher)
...Chapter 9 Microeconomics (Rational Choice Theory) RATIONALITY IN ECONOMICS The discipline of economics assumes people are highly rational in choosing means to satisfy self-interests. This is the perspective that rational choice theory (RCT) imputes to behavior, with consumers assumed to possess perfect information about alternatives and their consequences. The consumer arrives at his or her optimum choice via the rationality principle, interpreted as the maximization of utility or subjective value. RCT assumes that action is explained in terms of consumers seeking to get what they want in the most rational way. Consumers undertake practical thinking when wants and beliefs serve as reasons for an intention to buy: I want to get rid of this headache; I believe that aspirin will cure my headache; my intention is to buy aspirin and swallow two tablets. The contents of my want(s), beliefs and intentions cohere rationally. This is an instrumental view of rationality in that it focuses on rational means to achieve what one wants to achieve. Being rational in RCT is also instrumental rationality in being exclusively focused with choosing the best means for ends already in being. Standard economic theory views people as ‘utility’ maximizers who are rational to the extent that they select the most efficient means of achieving the goal of maximizing utility for them (Hollis 1996). The concept of utility equates with the notion of subjective value or subjective desirability. Utility does not equate with ‘satisfaction’, which is more of a feeling that comes from progressing towards meeting one’s goals. The most common explication of RCT is the notion of RCT explaining rational behavior in terms of maximizing expected utility. Expected utility applies to choices with probabilistic (uncertain) consequences...
eBook - ePub- Harlan M. Smith(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...It concluded that all life is not reducible to an economic problem. But does this mean that rationality is limited to choices of means, and is not applicable to choices of ends and objectives in life? Are values essentially matters of taste and is wisdom irrelevant in their choice? This opens up a deeper question for philosophy, and instead of suggesting how reason might be applied to value choices, the economist is more likely to leave an impression that no philosophical position has been taken in the economic discussion, when one may have been implied by or inferred from the textbook. The next section will return to the topic of want satisfaction, maximization, and rationality in a broader context. 8. The Dehumanized Utility Function and Rationality The consumer is said to allocate his income rationally among lines of expenditure according to the marginal principle so as to maximize his satisfaction. But individuals are often in no position to really know what would yield the best results. Economists’ concept of reason implies knowledge that is not really possible, according to Herbert Simon. 3 So consumer analysis is unrealistic from the beginning. However, let us examine it in further respects. To simplify economic analysis, certainly not to explain reality, the utility functions of individuals, as described in the textbooks, usually explicitly exclude any elements involving the utilities or disutilities of other individuals. Economists picture society as a collection of atomistic individuals who interact in markets and actually make economic decisions with neither beneficent nor sadistic impulses. One would think that at least the concept of “keeping up with the Joneses” would need to be recognized in analysis of economic behavior, and indeed it may be mentioned somewhere, but not when talking about the utility function where it is clearly relevant. The perverse preference of envy destroys the nice utility maximizing outcome of the market game...
eBook - ePubAquinas and the Market
Toward a Humane Economy
- Mary L. Hirschfeld(Author)
- 2018(Publication Date)
- Harvard University Press(Publisher)
...To the na ï ve versions of these objections, economists would offer the following sets of replies. First, while we cannot know about the future, we can have preferences over the various probable outcomes, and thus we can talk about expected utility functions. Second, lack of information can be modeled both in terms of models of optimal searching for information and in models documenting the effects of asymmetric information, situations in which the buyer and the seller are not equally well informed about the good being traded. In general economists have been quite creative in finding ways to expand their model of rationality to embrace a wide range of complicating factors. Finally, behavioral economists have studied decision making in laboratory settings and have found that, indeed, humans are not always rational in the way economists assume. There is a rapidly expanding literature on the sorts of biases that can lead to “irrational” choices and thus an attempt to accommodate the rational choice model to various myopias that are known to exist. 19 Although this last represents a shift away from the standard assumption that humans are rational, it is a rather modest shift. Rationality is still the default assumption, and the modes of irrationality are treated as discrete exceptions to the rule. In any case, the essential idea is that we can rationally approach decision making under uncertainty and can even fold certain persistent “irrationalities” into a general model that treats human decision making as an exercise in utility maximization. 20 A second set of common misconceptions cluster around the idea that economists falsely assume that human beings are purely self-interested. In point of fact, homo economicus is not identical to homo avidus. Essentially, if the utility function is just a representation of preferences, it is a trivial matter to insert our preference for the well-being of others into the metric...
eBook - ePub- Nicholas Foskett, Jane Hemsley-Brown(Authors)
- 2002(Publication Date)
- Routledge(Publisher)
...Although we may perceive each small decision in isolation, in real life, decisions occur in sequences, and information available for later decisions is likely to be based on the nature and consequences of earlier ones. Preferences may well change over time, too, in response to the influence of others, or through the media and advertising, for in a situation where a decision-maker is not fully informed of all aspects of the choice being made, marketing may have a part to play in providing information which could have a bearing on outcomes. Within this context of a dynamic environment, though, traditional economic rational models make assumptions about the processes involved in the choice decision. Whether in the arena of business and trade involving goods and services, or in community and public sector fields, or within the bounds of an individual’s personal life, this view of choice and decision-making is based on four key tenets: 1 That individuals will seek to maximise the benefits they will gain from the choices they make – so-called, utility maximisation. 2 That individuals will make choices that are entirely based on self-interest. 3 That choices will be made after a process of vigilant information collection. 4 That the process of considering alternatives and making choice will be entirely rational. We shall examine each of these assumptions below. Utility maximisation Utility maximisation is the assumption that a decision-maker will seek to optimise utility or benefit from their choice. Choice relies on the notion of utility, which may be defined as ‘goods and services that have the power to satisfy the wants of mankind’ (Whitehead, 1981, p. 2). This perspective assumes that individuals are utility maximisers. This means that they make use of the most appropriate of the available means to pursue their ends, and that they exhibit a well behaved preference structure. (Downs, 1957, pp...
eBook - ePubPhilosophy, Politics, and Economics
An Introduction
- Gerald Gaus, John Thrasher(Authors)
- 2021(Publication Date)
- Princeton University Press(Publisher)
...Rational choice means acting on the basis of one’s sound beliefs in order to secure some goal. We also argued that economic or consumption rationality in the form of Homo economicus goes beyond the basic idea of a rational agent and includes additional assumptions. We also challenged the idea that Homo economicus is essentially selfish rather than non-tuistic. In the following several chapters, we will add more precision to this basic model of rational choice. Discussion Questions (1) Can it pay in business to be irrational? How? If it would pay, would it be rational after all? (2) Can a person who always fails to achieve her goals really be rational? (3) Hume writes, “’Tis not contrary to reason to prefer the destruction of the whole world to the scratching of my finger.” Do you agree? Would such a person be rational? (4) Can it be rational to desire pain over pleasure? (5) Rationality is often thought of as a special kind of consistency. Can one be entirely consistent in one’s choices, and yet irrational? Are there any cases in economics, politics, or ethics that you can think of? (6) Why do you think economists assume that more is always better than less when we know that sometimes more is worse—at some point one becomes ill from eating or drinking too much, or perhaps from having too much leisure time? (7) According to James M. Buchanan and Geoffrey Brennan, “Homo economicus offers a better basic model for explaining human behavior than any comparable alternative,” but it is a “useful fiction,” indeed a “caricature of human behavior.” People are not always consumptively rational, but a useful social theory employs Homo economicus as a generalization. Can a productive science rely on useful fictions? (8) What proportion of people do you think are basically selfish? What proportion of market participants? (9) Think about the market exchanges you have had in the last week...
eBook - ePub- Richard Harper, Dave Randall, Wes Sharrock(Authors)
- 2016(Publication Date)
- Polity(Publisher)
...If we choose to do one thing, we cannot do a different thing at the same time. That this is so is of course old hat in economics, and hardly needs any contemporary theoretical comment from economists or from us – it’s taken for granted. But while we have been noting the ease with which economists ride on this assumption, an ease that is bound to what they do with it, one should note also, and perhaps with more concern, how versions of this have been adopted and elaborated by other disciplines that want to ride in different directions. The goals of these other disciplines are often distinct from those of economics; some of the questions that slip out of view from the perspective of economics come back into sight and turn out to be important when these other directions are taken. In psychology, for example, at least by the 1950s, this notion of rationality, of preference, transivity, and so forth, what one might call a theory of rational action, though designed for economics, was gaining currency. Ward Edwards (1954), as a case in point, was one of the first to develop what he called a theory of decision-making for psychology – basically a renaming of rational action theory. Edwards intentionally echoed economists in saying that, if one can put the expectations associated with making a choice in some kind of order (‘if I do this, then that will result’) and then make a choice based on which result confers most advantage, then one can be said to be rational – psychologically rational. He is saying, in other words, that ‘utility maximisation’ – making the choices that produce the best outcomes, which in turn evokes a notion of the perfect market – has something to do with psychology. And the trick here is to move from the market to the individual. In Edwards’s view, it is the human that is a perfect decision-making entity, not the market (or, rather, whether the market is or is not no longer comes to matter)...
