The questions below related to Managerial Economics - Essay Example

Theory of Consumer Behavior – Rational Consumer It has largely been believed that we humans are rational animals and that we act rationally with fullknowledge of the consequences of his actions. Economics suggest that a person will not go into any transaction which can not provide monetarized benefits to him or her. In this piece of writing, however human beings are essentially not rational in their behavior and approach and that he sometimes behaves in ways which defy the set rules of logic, economics and psychology that essential advocate the rational behavior of the humans.

The expected utility model which is essential model which is based on the rational behaviors however it is not the case in all conditions. Through anchoring people are often overly influenced by outside suggestion. People can be influenced even when they know that the suggestion is not being made by someone who is better informed. (Kahneman & Tversky, 1999). Besides Expected Utility theory also do not seem to be in conformity with the rationality. The famous experiments conducted by Tversky and Kahneman suggested a revolutionary shift from the expected utility theory and clearly suggested than we humans are not essentially rational.

These experiments were:If only asked to decide between (A) or (B), Most people prefer (A).(A) Saving 200 lives.(B) Saving all 600 lives with 1/3 probability.If only asked to decide between (C) and (D),Most people prefer (D).(C) Losing 400 lives.(D) Losing all 600 lives with 2/3 probability.We don’t always seem to be behaving according to rationality. The deviation from the rationality seems to be due to Satisficing and heuristics effects. The use of heuristics as a cognitive framework can lead us to errors and similarly satificing seems to be denying the rationality also.

The phenomenon of self deception under which a person seems to be acting against what is expected. (Kakures, 1996)Thus the notion that whether a consumer is rational or not is little bit arbitrary in nature as consumers show both tendencies of rationality as well irrationality. Rationally in the sense that consumers considering their limited income, choices, risk appetite, take decisions so that utility is maximized however on the same hand consumers tend to involve themselves into impulse buying and all related activities which potentially point towards the irrational behavior of consumers.

Rational thinking can define behavior like impulse buying etc due to the fact that consumers perceive value. There is also a phenomenon called framing effect which basically outlines that we decide differently depending on how we frame the decision based on the losses and gains. (Wang & Fischbeck, 2004). Thus if consumers perceive any gain or loss from making the purchase whether that purchase is rationally made or not is based on how she frames her decision therefore the question that theory of rational behavior does not hold true is not correct in its entirety.

Thus consumers act both rationally and irrationally based on the way they frame their decision of purchase made.BibliographyKahneman, D., & Tversky, A. (1999). Choices, Values and Frames. Cambridge University Press.Kakures, D. S. (1996). Self Deception and internal irrationality. Philosophy and Phenomenological Research , 56 (1), 31-56.Wang, M., & Fischbeck, P. (2004). Framing Effect. Journal of Risk and Uncertainty .