The rational model
Definition
Rational consumer model: the assumption that people weigh up all the options to maximise their utility.
Utility: the satisfaction or benefit a consumer gains from consuming a good or service.
- A benchmark, not a description: the model is a useful starting point, but in practice consumers fall short of it in predictable ways, which is what behavioural economics studies.
Influence of others
Definition
Influence of other people's behaviour: the tendency to copy others rather than choose independently, through herding and social norms.
- Why the crowd wins: a consumer buys what is popular or approved of even when it is not their best choice, because following others feels safer and saves the effort of deciding.
Example
- Supermarkets display popular lines prominently, using the influence of others on what shoppers buy.
- Seeing a long queue outside a new bakery convinces more passers-by to join it.
Habitual behaviour
Definition
Habitual behaviour: making purchases out of routine rather than fresh comparison.
Inertia: the tendency to stick with a familiar or default option and not switch.
- Why habit blocks better choices: inertia keeps consumers with a familiar or default brand, so they do not switch even when a better option exists, which firms exploit through defaults and auto-renewals.
Example
- Automatic pension enrolment relies on habit and inertia to raise how much people save.
- Many people stay with the same bank for decades out of inertia, even when rivals offer better rates.
Weakness at computation
Definition
Weakness at computation: the inability to process all the information needed to identify the best choice, so consumers rely on rules of thumb and settle for good enough.
- Rules of thumb take over: faced with complex prices or too many options, consumers pick a satisfactory rather than an optimal option, because full comparison is too costly in time and effort.
- Complex energy tariffs are hard to compare, so many UK households never switch supplier.
- The departures are systematic: these slips are predictable rather than random, so firms and governments can anticipate and even use them, for example through nudges.
Example
- A sale tag reading 'was £100, now £60' anchors shoppers to the higher figure, so the £60 price feels like a bargain worth grabbing.
- Because comparing every rival deal is too costly, the anchor stands in for a full calculation and nudges the purchase.
How far does behavioural economics undermine the rational model?
- It holds because the departures are systematic, not random, so the rational model mispredicts real choices in areas like saving, switching and health, and well-designed nudges routinely outperform it.
- But for many high-stakes or repeated decisions consumers do compare costs and benefits, so the rational model remains a good first approximation and still underpins standard demand theory.
- But behavioural effects are hard to quantify and vary between people and contexts, so they tend to supplement rather than fully replace the standard model.
- On balance, how far the rational model is undermined depends on the decision: weak for complex, one-off or emotionally charged choices where nudges work well, but still powerful for straightforward, repeated purchases.
Exam technique
- Name the three reasons: the influence of others, habitual behaviour and weakness at computation.
- Link each reason to a concrete consumer decision.
- Stress that the departures from rationality are systematic, not one-off mistakes.
Common Mistake
- Do not treat these as occasional errors, as they are systematic and predictable.
- Do not stray beyond the three reasons set out in the specification for this point.
- Do not assume consumers always maximise utility, since real behaviour often differs.
Self review
- What does the rational consumer model assume?
- How does the behaviour of other people affect consumer choices?
- Why does habitual behaviour lead consumers away from optimal choices?
- What does weakness at computation mean?
- Why are these departures described as systematic?
