Behavioural Economics Assignment: Business Consumer Decision-Making & Consumer Surplus
Question
Task:
Behavioural Economics Assignment task: Essay “A nudge in the right direction?”
Behavioural economists study how people’s buying, selling and other behaviour responds to various incentives and social situations. They don’t accept the simplistic notion that people are always rational maximisers. As the Livemint article (2016) states, “According to behavioural economists, the human brain neither has the time nor the ability to process all the information involved in decision making, as assumed by the rational model.” Instead, rationality is bounded: people use simple rules of thumb in making decisions – rules they have developed over time in the light of experience.
Livemint (2016) New frontiers of human behaviour. Available at: https://www.livemint.com/Opinion/msLH0h4tUX9qqkMp99M6LN/New-frontiers-of-human-behaviour.html
Instructions:
You are expected to produce an essay and answer the following question.
Should we abandon models based on the assumption of rational maximising behaviour (e.g., attempts to maximise consumer surplus or to maximise profit)? Find out some other examples of how people might be nudged to behave in ways that are in their own interest or that of society. Include examples from the coronavirus crisis.
Tips: How to start an essay?
A good plan of attack is necessary to achieve a successful essay. Your essay will normally consist of an analysis which presents a series of points, in the form of an argument. Avoid a narrative or chronological approach. It is important that you present appropriate evidence and detailed case studies, but make sure that these support substantive points of your analysis. Do not include a description just to fill space.
Think about the relevance of all parts of your essay to the question, and the logic of your conclusion. Sustained argument is essential to a successful essay. While showing awareness of different points of views, you should be able to do more than just present the opinions of others; you need to be able to show that you have developed your own view on the topic. Your essay should not consist simply of quotations and paraphrases from your reading.
In general terms, your essay will have an introduction, a ‘body’, and a conclusion: The introduction is where you explain why the set question is worth studying. Perhaps the period is one of significant change, whose impact is uncertain; or perhaps this is a question historian disagree about; or there may be a particular event (for example, a revolution) whose causes need explanation. These are just a few examples, but there are many others. Your introduction may be the place to state a hypothesis you will test, or even the thesis which you intend to prove. Alternatively, you may prefer to save your conclusions until the end. In the introduction, you may also: introduce key definitions; summarise historical debate; and define your approach. Your introduction should not be too long, however — one to three paragraphs is a very rough guide.
The body of the essay is where you present your analysis and evidence. The conclusion is usually a single paragraph stating what you have contributed to the historical problem you introduced on the first page. If you defined a hypothesis, say whether you disproved or confirmed it. Do not repeat all of the points you have made in the essay but concentrate on the larger question. What are the implications of your findings, and what new questions arise from your findings?
You need to demonstrate critical analysis. A good analysis typically involves breaking a problem down into its component parts. This can be done in a variety of ways but comparing and contrasting often work well. Whatever comparison you choose, your analysis is likely to involve presenting evidence which supports an argument and other evidence which challenges it. (Hint: it is usually best to introduce contrary evidence first, before countering it with evidence in support of your argument).
Answer
1. Introduction
Consumer Surplus and Profit maximization are two conflicting areas of economics that affect the decision-making process of the business. According to the views of Colombo, and Labrecciosa, (2018, p. 191) considered within this behavioural economics assignment, this helps to explain customer behaviour and the decision-making process within the traditional economic theory. The main element within behavioural economics is described within the decision-making. These are according to the theory that is within the actual human behaviour that is less rational and stable than the traditional normative theory. Within the increase in the interconnected world, the existence of opportunities is created with a closer relationship that is between the customers and organization. Hence, behavioural economics provides valuable insights to marketers to provide help for the identification of behaviours and then adapt to the “customers irrational biases” and also “emotional demands” and requirements (Zhu et al., 2020, p. 2614).
2. Should we abandon models based on the assumption of rational maximizing behaviour (e.g., attempts to maximize consumer surplus or to maximize profit)?
2.1 Consumer Surplus Theory and its application
According to the view of Wang et al. (2019, p. 1784), consumer surplus theory focuses on the willingness of consumers to pay for a specific product. The difference between the price paid by the consumer and the price wants to pay is called consumer surplus. Based on the application of this theory, it can be stated that consumer welfare is important to enhance social values. Hence, the theory deals with neoclassical economics where risk is not considered. On the other hand, from a business perspective, it can be stated that profit maximization is an important matter to ensure business expansion. Therefore, the need for the consumer surplus has been based upon the economic theory that is involved within the marginal utility and signified to interpret the additional satisfaction of a consumer (Dominic, 2021). This allows the customer to gain satisfaction from one more unit from products or services.
The customer surplus has always allowed the increase of the price when the profit falls and also decreases when the price of the product rises. Alfred Marshall has claimed that consumer surplus has followed the excess of the price that the customers have been willing to pay rather than go without the commodity that is over that is paid. Further, the consumers are within the marginal utility that is equal to the price. The consumer surplus is maximized in a competitive market arena, where the sellers are earning enough that can be earned to a normal profit. This is not maximized with the consumer surplus of the market as this ensures the continuation of production of the products. For the maximization of profit, there is always a downfall in the consumer surplus as the total economic surplus has been equal to the sum of the consumer and the producer surplus. Price initiates to define the consumer surplus, however, the surplus is maximized at the time the price is "Pareto optimal” or at “equilibrium stage” (Vuong et al., 2018, p. 9).
2.2 Rational Investment
This is the framework that is used for smart investments and to build around three performances that are "balancing and the exposure of the factors'', "efficiency in diversifying luck", and "having an advantage within the relation of mispricing within the financial markets (Hampton, and Adams, 2018, p. 223). Economists have believed that profit maximization is a short or long run over the process that is within a firm and helps to lead to the highest profits. Thus, the organization would produce extra output due to the revenue for the gaining of more than the cost for the payment. Behaviours of finance have been dealing with the investor and the behaviour which are the way for the gathering of the information that is based on the market and reciprocates within the investment. The study has been considered as the essence of rational investment to better decision-making behaviour for the investors.
2.2.1 Herding
The purpose of herding has occurred within the finance at the time of the investors that have followed the population on their analysis (Dominic, 2021). This is the history that has been started with huge, unfounded market rallies, and sell-offs that have often been based within the fundamental support to justify either (Blaga et al., 2018, p. 109). This is a behaviour of the investors that represents a major cause within the speculative bubbles. This has been implied that the investors are making similar kinds of trading decisions which have led to the deviations of the stock prices from the investor's fundamental values. Based on behavioural finance, herd mentality bias has been referred to as the investor’s tendency that is followed and copied with the other investors. These are largely being considered to influence the emotional and the instinct of the consumer rather than doing as independent analytics.
2.2.2 Noise trading
Noise trading has made investments and the trading decisions that are made within the incorrect perceptions or the analyses of the market. The perspective for the creation of the opportunities is for most of the sophisticated investors and also for the traders. Thus, a noise trader is in general a term that has been described with the traders or the investors that makes decisions that are related to the purchasing and the selling of securities in markets. These are without the support for the "professional advice" or the advances "fundamental" or the "technical analysis" (Lewis, 2018, p. 40).
2.2.3 Asset Bubbles
Asset bubbles are related to the existing within the marketing prices as these are some of the sectors that have increased over time. The trades are far higher than the fundamentals that are required to be suggested. As opined by Qizilbash (2021, p. 9), the expansion of the supply of price and the credits that are involved within the economy and those which are required to fuel asset bubbles. The asset bubbles are being indirectly identified to be affected by the economy due to the economic agents having altered with their behaviours with response to the change within the pricing signals. For example, it is noted that when a corporation's stock price rises. This is the response that has been increased within its physical capital investments for the spending of the higher.
2.3 Neoclassical vs. Behavioural approach
The theoretical models are classified with the financial economy that is not taken into account with the possibility of decision making rationally. These are often assumed that be irrational investors that are not coordinated and are therefore for their behaviours that are cancelled out. Neoclassical economics has been assumed to be all agents that have acted which are rationally being within the agent's self-interest. Within behavioural economics that has emphasis to "altruism" as this has occurred when humans have behaved with more "kindness" and the "fairness" that would accumulate with the case if these are "behaved rationally".
Figure 1: Neoclassical vs. Behavioural approach model
(Source: Dominioni, and Heine, 2019, p. 569)
3. How people might be nudged to behave in ways that are in their interest or that of society. Include examples from the corona virus crisis.
3.1 Application of Nudge Theory
The nudge theory defines the consumer behaviour that has been influenced by the “small suggestions” and “positive reinforcements”. Properties of the nudge theory have been suggested to be well-placed “nudges” that can be reduced with the emerging market failure in the pandemic situation (Dekker, and Chorus, 2018, p. 285). The critics have argued that nudges are misused and become one of the forms within the social environment. Some of the examples of nudge are “up-sell”, “product placements”, “default in the options'', “utilization of technology”, “displaying the social trust”, and “encouraging certain behaviours”. Evaluation processes of nudge that are involved within those business and finance sectors that are facing business losses much more due to the strike of the pandemic are "being transparent".
This makes the nudge obvious without hiding the costs as these have a certain choice to retain. Certain customers can make a final choice for having a good reason that is made to believe that the application of nudge theory is warranted (Miao, and Wang, 2018, p. 2627). Nudge theory is considered to be enough to cure the issues which are being caused within the upscale of the business. Thus, the nudge theory concept explains behavioural economics, political theory, and behavioural sciences. These provide a purpose of positive reinforcement and provide an indirect suggestion that provides different ways and reasons to influence the behaviour and to improve the decision-making of the team members of the groups and individuals.
A nudge theory is an application that has its aspects of choice that are the architecture that alters people's behaviour within a predicting that are without forbidding any options or have been significantly changing its “economic incentives” (Ikeda and Phan, 2019, p. 200). This theory has the initiative to offer small clues that are required to support to form better decision-making. These are about the penalizing of the people that are financially being limited with their freedom if they are not taken action in a certain way. It is referred to for making better decisions that are being placed to upgrade the level and the direction of instructions. Hence, the great application of nudge theory is the preservation through autonomy which is significantly being influenced by the behaviour of the consumers. The characteristics of nudge theory are being welcomed with the individuals that have liberties that are otherwise restrained.
3.2 Analysis with the example of Corona virus Crisis
The importance of the application of nudge theory is within the support of the public for the preventive policies that are being amplified through the "Covid-19 pandemic" (Standen et al., 2019, p. 267). With the representation of nudge theory, the aspect of the choice within the architecture has been altered with the behaviour of the predictable consumers. This is the way that is without the forbidding of three options that are significant and are involved within the economic incentives. Various studies have been investigated the effectiveness of the nudge theory that is across a variety of domains as these are being summarized within this study. Public acceptance of this application is a well-researched topic as these appeals to a less intrusive approach that makes the application where harsh measures are not tenable (Standen et al., 2019, p. 267).
The importance of the decision of this topic in nudge theory research is being further applied by the high pressing issues within the global pandemic that was involved within 2020 (Bouri et al., 2019, p. 220). The application of nudge is the preserve of the autonomy that is significantly influencing the behaviour. The behavioural changes are the core elements that are being contained within the spread of the Covid-19. The policymakers are needed to capitalize their results within the research that are at risk with the perception of “science communication”, “aligning of the individual” and the “collection of the interests” (Bouri et al., 2019, p. 220). These are amongst many of the other areas. Numerous large studies have been published within the covid-19 disease as these are the concerns that are used within the nudge theory and the majority of the endorsements of their applications. Hence, the finance within the organization is involved within the nudging as these are encouraged with the people as these are donated within microloans within the small businesses as been less developed countries. Nudge theory is the essentials that have been provided with the small clues that have been supported within the consumer decision-making process.
4. Conclusion
The study has been explained to view the areas of business consumer decision making and the consumer surplus. This study has highlighted that business economics is the combination of the elements of economics and psychology that are required to understand the reasons how and why the customers are behaving the way they do within the real world. This differs from neoclassical economics, which has the assumption that most people are well-defined with their preferences and they make well-informed, self-interested decisions that would be beneficial for the business.
References
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Bouri, E., Gupta, R. and Roubaud, D., 2019. Herding behaviour in cryptocurrencies. Finance Research Letters, 29, pp.216-221.
Colombo, L. and Labrecciosa, P., 2018. Consumer surplus-enhancing cooperation in a natural resource oligopoly. Journal of Environmental Economics and Management, 92, pp.185-193.
Dekker, T. and Chorus, C.G., 2018. Consumer surplus for random regret minimisation models. Journal of Environmental Economics and Policy, 7(3), pp.269-286.
Dominic, B., 2021. New frontiers of human behaviour. [online] mint. Available at:
Dominioni, G. and Heine, D., 2019. Behavioural Economics and Public Support for Carbon Pricing: A Revenue Recycling Scheme to Address the Political Economy of Carbon Taxation. European Journal of Risk Regulation, 10(3), pp.554-570.
Hampton, S. and Adams, R., 2018. Behavioural economics vs social practice theory: Perspectives from inside the United Kingdom government. Behavioural economics assignment Energy research & social science, 46, pp.214-224.
Ikeda, D. and Phan, T., 2019. Asset bubbles and global imbalances. American Economic Journal: Macroeconomics, 11(3), pp.209-51.
Lewis, D., 2018. Behavioural economics and economic behaviour in Classical Athens. Ancient Greek History and Contemporary Social Science, pp.15-46.
Miao, J. and Wang, P., 2018. Asset bubbles and credit constraints. American Economic Review, 108(9), pp.2590-2628.
Qizilbash, M., 2021. Reconciling the liberal tradition in normative economics with the findings of behavioural economics: on JS Mill, libertarian paternalism and Robert Sugden’s The Community of Advantage. Journal of Economic Methodology, pp.1-10.
Standen, C., Greaves, S., Collins, A.T., Crane, M. and Rissel, C., 2019. The value of slow travel: Economic appraisal of cycling projects using the logsum measure of consumer surplus. Transportation research part A: policy and practice, 123, pp.255-268.
Vuong, Q.H., Ho, T.M., Nguyen, H.K. and Vuong, T.T., 2018. Healthcare consumers’ sensitivity to costs: A reflection on behavioural economics from an emerging market. Palgrave Communications, 4(1), pp.1-10.
Wang, J.C., Wang, Y.Y. and Lai, F., 2019. Impact of power structure on supply chain performance and consumer surplus. International Transactions in Operational Research, 26(5), pp.1752-1785.
Zhu, X., Wang, M., Pei, J. and Pardalos, P.M., 2020. Investigating remanufacturing competition with yield uncertainty on market share, profit, and consumer surplus. International Transactions in Operational Research, 27(5), pp.2584-2615.
