Question
Economics assumes that people will act rationally, and in their own self-interest. However, there are times when consumers do not act rationally, and their actions
Economics assumes that people will act rationally, and in their own self-interest. However, there are times when consumers do not act rationally, and their actions end up resulting in either no economic gain, or with a greater economic loss. For economists, understanding the "why" is important. When creating an economic model, they need to understand where the variances are taking place; they need to explain the exceptions. In their attempt to model this "irrational" behavior, behavioral economics has become a large part of this understanding. It incorporates the psychology of the "irrational" actions. In Chapter 6, we learned about the determinants of "irrational" behavior (sunk cost fallacy and altruism, for example). For the following two cases, please answer the questions.
Case 1 - An employee receives a bonus at work of $2,500. They decide to purchase a bigger TV with the money, as opposed to saving part of their money for their retirement. What behavioral determinant causes this action? Explain.
Case 2 - A common practice at many supermarkets is to show the customer's "total savings" on their purchase at the bottom of their receipt. Such savings include the total discounts from goods purchased, along with savings from coupons used. How would listing the total savings on a receipt influence an individual's consumption habits? What behavioral determinant does this strategy take advantage of? Explain.
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