Even when people have precisely the relevant facts at their fingerprints, they often fail to make decisions consistent with the rational choice model. Comment on this statement, focusing on the reasons why people sometimes behave irra

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“Even when people have precisely the relevant facts at their fingerprints, they often fail to make decisions consistent with the rational choice model”. Comment on this statement, focusing on the reasons why people sometimes behave “irrationally”. Choose and evaluate an alternative model that may be consistent with this “irrational” behaviour.

For over half a century economists have         argued about a model that fully describes consumer behaviour in relation to their buying habits. This has evolved from the very basic of assumptions to models like the rational choice model is widely regarded as the model the best describes consumer choice. However, as will be explained, the rational choice model cannot fully describe consumer behaviour, and as a result, other models have been put forward to try and correct these failures.

The rational choice model is a neo-classical economic model used to explain consumer purchasing behaviour. One of the main assumptions behind this theory is that consumers are well informed and rational beings, whose objective is to obtain the best feasible bundle of goods given their income. As a result of this main assumption we can conclude 4 other assumptions about their rational behaviour. These are Completeness, More-Is-Better, Transivity and Convexity.

This model can be used determine how consumers choose between certain bundle of goods. However in certain situations, the rational choice model fails to completely describe consumer behaviour. Here are a few examples which the rational choice model does not take into account:

The first situation where the rational choice model fails is with topic of sunk cost or historic costs. A rational consumer is meant to ignore any sunk costs. However, in practice, this does not always happen. In the example given by Thomas Kelly in his paper “Sunk Costs, Rationality, and Acting For the Sake of the Past”, he describes a situation where a consumer is pondering whether to go to a theatre production, or stay in and read a novel. They feel that they would gain more utility from staying in and reading the novel. A rational consumer would therefore choose the latter, as they prefer this option, and diagrammatically, they would be on a higher indifference curve. However, the consumer had paid for this theatre production, with no possibility of a refund or selling it on. Therefore, some consumers would then decide to change their plans and go to the theatre as consumers want to honour their sunk costs. This is because they would prefer to stay in, so in fact, as a result the opportunity costs outweigh the actual costs. However it is by honouring their sunk costs that they are behaving irrationally.

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Another way in which irrational behaviour dominates practicality is when consumers measure costs as proportions instead the absolute. This is best described by Robert Frank in “Microeconomics and Behaviour”, in which he describes two situations. The first being that a consumer could buy a clock radio for $20 at the shop near their home, or drive to the supermarket and get it for $10. In this situation, the rational consumer would choose to drive to the supermarket as they make $10 savings. However, if this consumer now wants a big television set, priced $1010 at the nearby shop and $1000 ...

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