Transcript Behavioralism Gelsie File

Behaviouralism
 Economics
assumes that humans always
act rationally.
 They
make decisions that maximize their
utility with the scarce resources/ income
they have.
 Remember
the basic economic problem?
Assumptions
 Basic
rule of price and demand.
 Diminishing
marginal utility
However
 Humans
are not all the same and they do
not always make the most rational
decision.
 That
is the decision that maximizes their
utility using the resources they have.
We need to challenge this
assumption of rationality
 1.
Consumers are poor at simple
arithmetic.
 You walk into a Starbucks and see two
deals for a cup of coffee.
 The first deal offers 33% extra coffee.
 The second takes 33% off the regular
price.
 What's the better deal?
 No difference
 In
fact, a 33% discount is the same as a 50
percent increase in quantity.
 Let's
say the standard coffee is $1 for 300
mls ($0.33 per 100 ml).
 The first deal gets you 400 mls for $1 ($0.25
per 100 ml).
 The second gets you 300 for 66 cents ($.22
per ml).
 Hotel
A and Hotel B both offer rooms for
$100 a night. If you stay at Hotel A for ten
nights, they give you the 11th night for
free. If you stay at Hotel B for 10 nights,
they give you 10% off? Which is the better
deal?
 Hotel
A: $1,000 for 11 nights is $90.90 per
night.
 Hotel B: $900 for 10 nights is $90 per night.
 So,
money off can be a better deal than
‘extra free’. But how many customers
really know that?
Warranties
 Warranties
make no rational sense,
Harvard economist David Cutler told the
Washington Post.
 The probability that the product will break
has to be substantially greater than the
risk that you can't afford to fix it or replace
it. If you're buying a $400 item, for the
overwhelming number of consumers that
level of spending is not a risk you need to
insure under any circumstances."
BestBuy
Goldilocks effect
 We're
terrified of extremes. We don't like
feeling cheap, and we don't like feeling
fooled. Since we're not sure what things
are worth, we shy away from prices that
appear too high or too low.
 Think
sleeping bags, wine, sports
equipment, parachutes, African safaris,
hitmen, etc.
Richard Kuklinski
 Kuklinski
took part in a number of
interviews during which he claimed to
have murdered from over 100 to 250 men
(his "recollections" varied) between 1948
and 1986.
Consumers like to feel valued
 Consumers,
due to a mixture of egotism
and insecurity pay premium prices for
goods and services even though their
utility would remain pretty much the same
with the cheaper good.
 According
to Moneytalknews.com, these
are the five stupidest things consumers
spend their money on:
 1.
Gym membership
 2. Extended warranty
 3. Life assurance for our children
 4. New cars
 5. Credit card interest
The Ikea Effect
 The
group that assembled the table
themselves estimated a higher value for
the table than the group which was given
the table already assembled.
 Consumers
place a disproportionately
high value on goods which they partially
created themselves.
The Bandwagon Effect
A
psychological phenomenon whereby
people do something mainly because
other people are doing it, regardless of
their own beliefs.
Consumer Inertia
 Consumers
are unable or unwilling to
change their provider for a good or
service even though they would be better
off if they did.
Examples

Not switching banks even though you could
get a better interest rate somewhere else.

Sticking with P.C. even though Apple
computers may be better.

Keeping your same health insurance even
though you could obtain better coverage
with another provider.