Consumer Choices Don’t Always Make Sense

Consumer choices are supposed to be based on rational self-interest. Find out how a new study explains why we often make sub-optimal decisions that barely meet our needs.

As the pandemic winds down, it’s nice to be out browsing around in local shops again. Like most people, I’d gotten into the habit of buying most things online over the past couple of years.

One thing I’ve noticed is the number of deals, discounts and virutal coupons online retailers issue. Just about everything that arrives in the mail from an online vendor comes with some sort of passcode offering a discount on my next purchase.

Economists who study how we respond to these offers call their field behavioral economics. Traditionally, it’s been based on the principle that individuals make rational consumer choices based on logical calculations.

Should Align with Self-Interest and Personal Objectives

Traditional economists assume the spending choices people make align a transaction’s outcome with their self-interest and personal objectives. Adam Smith was probably the first economist to raise this idea as part of his idea of the “invisible hand.”

Smith argued that the invisible hand of self-interest acts like an invisible hand guides individuals to make optimal decisions. Through this rational process, the free market comes to an optimal equilibrium for all concerned.

Yet, we also know that things don’t always work out that way. Everyone loves a deal.
However, not everyone understands economics or finance well enough to recognize their self-interest.

Consumers Don’t Always Have the Information They Need

Herbert Simon won the Nobel Prize in Economics for pointing out that we don’t always have all the information we need to make sensible consumer choices. Another economist named Richard Thaler went on to show that we humans have a peculiar kind of mental accounting.

Every merchandiser knows there’s a lot of psychology involved in the way we make purchasing…