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Bounded Rationality And Consumer Choice Theory

2283 words - 10 pages

Introduction

The theory of bounded rationality is one that been a cause for discussion in economist circles around the world for many years. The theory, originally coined by Hebert Simon surrounded the limitation of humans to process the amount of information available to make a logical, economic decision and the consumer would therefore, settle for something that satisfyingly sufficient, or ‘satisfice’(Simon 1955). Furthermore, the theory expanded over time to also include mans use of heuristics to simplify cognitive effort in the decision making process (Simon and Newell 1972) and it was argued that ‘logical and economic’ decisions were never reached by humans due to emotions and ...view middle of the document...

Rationality in reference to the rational consumer choice theory is not defined the same as the colloquial definition of ‘sanity’, rather is termed on a much narrower spectrum; a rational act is one whereby the individual acts to benefit their personal advantage or utility by weighing up potential costs and the associated utility.

However, rational choice theory has had its fair share of criticisms. One such criticism is that rational choice theory operates in a static environment. That is, decisions are made with only one consideration taking place; which option will maximise utility? In reality, this notion is considered to be untrue. For example, in the consideration of a consumer transaction, the marketplace is operating in a constant state of change and uncertainty as new competition enters and information is available to the purchaser.

A second criticism of the rational consumer model is that the analysis of human behaviour occurs in the form of mathematical models and in the simplification of real-world contexts (Snidal 2002). The first issue surrounding this criticism is through the manipulation of results obtained through mathematical models enabling them to employ ‘tricks’ to control the data to prove support their argument (Stein 1999). Along similar lines, also considered is the easiness that predictions made by rational choice theory are often of little valued and are considered vague to the questions they are actually answering. It is however, considered easier to note that the manipulation of of mathematical models could be easier to identify than that of verbal arguments and discussions (Snidal 2002).

Another criticism surrounds the notion of rationality. Critics contend that people are often irrational in their decision making and rarely have a clear set of preferred goals and will not always follow a ‘pursuit of maximum utility or benefit’ (McCubbins 1996). In everyday society, it can be seen that people make decisions that are not the best for them examples including the consumption of alcohol or cigarettes of which are degenerative to their health. Furthermore, it can be seen that individuals rarely make decisions with all the facts and accurate knowledge that of the resulting utility gained from such decisions. However, this is where the benefits of bounded rationality can be discovered, of which are discussed below.

Bounded Rationality

Like rational choice theory, bounded rationality stems from the ideal that reason underlies every individuals decision making process. However, unlike the previously described rational choice theory, bounded rationality tends to observe that consumers will opt for the satisficing purchase rather than the utility maximizer. This is due to the lack of information available to the individual at the time of the decisions. There is no unified theory of bounded rationality (Aumann 1997), rather, a collection of ideals shared by a number of learned economists. Bounded rationality...

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