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Great Lakes Institute of Management

Organizations want to make consumer more rational. It helps them

Assignment Submission 1.

Punit Nema FT142109 Section-B

Organizations wants to make consumer more Rational. It helps them

Introduction: Consumer behavior can be described as psychological processes that consumers undergo in recognizing their needs, finding ways to fulfill these needs, building purchase decisions, deduce information, make and implement plans. It is how they allocate their money incomes among goods and services for consumption. Consumer choices can be factored as a result of behavioral attributes such as Rationality, Preferences, Budget Constraint and Prices.

Rationality Explained from consumer and Organizational perspective.

Rationality: The conception that people formulate decisions based on their desire to obtain the greatest amount of satisfaction. This means that people prefer more to less. Presumption of rationality underlies most economic analysis especially that concerns consumer demand theory. Predictability of consumers behavior results in development of rationality in consumers they become more rational when we can predict their behavior or other important outcomes prejudiced by their behavior perfectly. Perfect rationality results when we achieve accurate predictions. Consequently, many consulting and analytics firms on the basis of experimental data do believe that accuracy in

prediction of consumer behavior will result in rationality. However some marketing science article on the basis of statistical data finds it find the opposite.

Consumer Rationality can be understood using four basic principles: Completeness: Out of two combinations of given goods X and Y, a buyer can decide which one he chooses. So X > Y, Y > X, or X = Y (But he can get the same degree of satisfaction from both combinations, hence he is indifferent). Transitivity: As per the principle of transitivity applied to consumer behavior If X is preferred to Y, and Y is preferred to Z, then X is preferred to Z. Satisfaction: More is always preferred to less, as in if 20 grams of X is available for rupee 5 and 100 grams of Y is available for rupee 5 and customer is forced to choose X. Convexity: As defined by the principle of marginal utility, the marginal utility achieved with every rupee spend on buying the commodity and the marginal utility a consumer experiences from each commodity decreases with every additional units consumed.

But are consumers really rational or is it a myth for an organization to consider consumers rational in their buying and consumption behavior. To prove this a lot of studies have been done in the areas of psychology, biology, neurology and economics, which illustrates that, human beings are anything but rational.

Theory of Irrationality
As per the old economic theory of consumer behavior "people should relish choice and so we do. However other fields of sciences have something much more complicated to explain. Firstly, making a choice is physically strenuous, literally, so that someone forced to make a number of decisions back to back is likely to get boggled, which is to a greater extent exploited by stores by placing candy near the check-out aisle, they suspect consumer brain too tired to resist. Secondly, having too many choices can make us more confused to come to a conclusion. Study of "paradox of choice" by psychologists Mark Lepper and Sheena Iyengari proved that the rate to buy in much more higher in consumers presented with six jam varieties than the consumers offered a choice of twenty four. After reading the work of Dan Ariely or Daniel Kahneman, we know exactly how far from perfectly rationality we are when faced with a choice. Many of our mistakes start with a central "availability bias." Taking instances of neurology to explain: Our brains are computers, and we like to access most recent files, although many decisions require a deep body of information that might require some extended search. The third check against the theory of the rational consumer is the fact that we are social animals. Some of our key personal decisions are left over for our friends, family and relatives to deicide. Quoting examples from India where marriages are much more social affair than personal, and

much of the wisdom about the partner comes from word-of-mouth rather than knowing them personally.

As seen from the literature study on the subject a couple of things can be noted. Firstly, that human behavior is highly unpredictable. Considering various examples seen it is quite evident that human decision making process is a complex affair and varies from person to person. When put under a situation seemingly as simple as choosing a product from a set of five given commodities they are contrastingly different results obtainedii. It can be put in other words like, expecting consistent behavior out of highly variable humans that live in a very complex world is Baloney.

Another conclusion that can be seen is that, because humans have such complex personalities, the theory of the rational consumer is extremely scarce when explaining human behavior, if not completely inadequate.