Organizations want to make

consumers more (ir)rational.

It helps them.
Aalok DM22101
Aman Pathak DM22108
Sajeev M Nair DM22159
Anant DM22212
Ankita DM22215
Rohith DM22290
Christina Jenifer DM22293
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Introduction

VS

“Rational beings we think we are, practical beings we claim to be, but all we are is a mere
bundle of emotions”
As human beings we like to think of ourselves as rational decision makers. As people who
follow a certain order, as people who put together information to arrive at a logically right
solution. But time and again research has proved that even the most rational human beings (if
such people do exist) behave irrationally more often than they would like to admit.
Lets take an example. A shopkeeper sells 1 watermelon for Rs.50 and 3 for Rs.200. Customers
buy three “individual” watermelons (while ridiculing the shopkeeper in their minds) and go
home satisfied on the rational decision they made. Would they have bought three watermelons if
the second sign wasn’t there?
Plato in his work on Phaedrus, talks about how the soul is conflicted by two forces- it’s
intellectual part and it’s irrational part. And successful marketeers take advantage of this conflict
of the human soul. Yes, consumers want to be rational. They want to only look at products for
their purpose. But they unconsciously continue to be influenced by several factors, more often
not within their control. The experiences that they’ve had, their beliefs, their active goals, the
fear of losing, the growing need for instant gratification, well the list could go on.
So, the question that organizations find themselves asking is, “Do we benefit from rational
consumers or irrational ones?” Rational consumers would be the thinkers, the ones who pay
attention to content and purpose and would like to get as much information as they could about a
product or service. They are focused on their self-interest and utility maximization. Such
consumers pay attention to advertisements to make informed decisions rather than impulsive
ones. They value quality and return of investment over other variables, and thus organizations
can be assured of their loyalty. On the other hand, irrational consumers would be the feelers, the
impulsive buyers. These are the risk takers, the drivers and riders. They are the people who care
about how a product/ service makes them feel. They also help increase the brand image and
awareness. In reality, the segmentation between rational and irrational people might not be that
easy. And this is why organizations find themselves at a dilemma- do they appeal to the intellect
in their customers or the emotion?
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The Irrational Consumer

Decision making based on feelings rather than on facts is what best describes an irrational
consumer i.e., Irrationality is cognition, thinking, talking or acting without the inclusion of
rationality. As much as rational consumers are easier to understand and cater to, they are highly
unlikely. So, organizations would rather benefit from understanding the causations for irrational
consumer behavior and by acting accordingly.

The idea of a rational consumer, according to most economists was put forth by the Scottish
philosopher Adam Smith. In his book, The Theory of Moral Sentiments, Smith talks about the
"Homo Economicus,"- a consumer who is focused and motivated by self- interest.

The characteristics of the Homo Economicus can be listed as follows,

• Preferences that are stable and well defined over a long period of time
• Usage of sharp analytical skills while making rational consumer choices
• Always aimed at maximization of outcomes

Our cognitive responses factor in intuition, emotion, color, norms, availability, and a whole host
of other biases that make it next to impossible to make a 100% rational purchase decision
instantaneously!

In line with this, Thaler investigates Nudges: small changes in how options are presented to us.
Most consumers are unaware of these nudges. Accordingly, where we attribute a rational choice
to something, it's possible that an incidental cue (or nudge) affects this choice and is, therefore,
more irrational.

From a psychology point of view, Draper puts aside all the technical qualities of the product (the
projector) aside, and he builds his case purely on the emotional benefits for the consumer. The
fixed image of the rational consumer was thrown out, making place for a new perspective.

Examples of Irrational Consumers

1. A 1993 study was conducted by four economists from Penn State, Temple University and
the University of Pennsylvania. In this study, a group of participants was offered two
choices of travel insurance worth $ 100,000 on a trip from the U.S.A to Thailand.

The first option was insurance that covers death caused by acts of terrorism while the
second one covers death for any reason.

For the insurance covering death by the act of terrorism, the participants were willing to
pay $ 14.12. In the case of insurance covering death for any reason, participants were
only willing to pay $ 12.03.

Although the insurance covering death for any reason also covered death caused by an act
of terrorism, participants were still willing to pay more for the insurance only covering
death caused by an act of terrorism.
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2. Starbucks introduced a medium cup size as part of the marketing strategy. Although this
seems to be a normal phenomenon, the impact on the consumer buying behavior to this
visibly normal strategy was immense.

Usually, the large cup size drink is often pictured to be overpriced in the mind of
consumers. So, most of the consumer opted to go for less expensive small cup size
drinks. The company noticed that the perspective of consumer to consider large cup being
expensive or overpriced come from the price difference between the drinks of two
different sizes. Consumers knowingly or unknowingly started to compare the drink from
a Large cup and a small cup. Thus, the price factor.

3. Consumers also behave irrationally when free services or products are priced even if it is
reasonable. One such example of consumer irrationality is seen during World War 2.

During World War 2, the Red Cross built comfort stations across Europe that served
doughnuts to soldiers. The station served U.S soldiers free of cost while charging the
British soldiers. This created a lot of tension between the soldiers of the two nations.
Although the charge was significantly small and fair, the tension grew so much between
the allied forces of World war 2

After the controversy, the Red Cross came back to its old policy. They provided free
service. But this did not change the perspective of the Veterans of the war towards the
Red Cross. They still hated the Red Cross for charging them.
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4. One of the most famous marketing stories is the A&W Third Pounder. A&W has been an
active player in the fast-food industry especially in Canada. The idea of a Third pound
burger was to compete against the quarter pound burger which was a common menu item
for the competitors. The idea was simple: add more beef to a burger and call it a third
pounder. So, consumers would ideally prefer a burger with more beef.

They choose an aggressive and expensive marketing strategy promoting the third
pounder. They also conducted blind taste tests for promotion.

But even after such a tremendous effort the third pounder was not selling much. After
some research they found the reason why the third pounder was not as famous or popular
among the customers. An average person couldn't understand fractions. This meant that
most of the customers thought the third pounder was smaller than the quarter pounder.
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Benefits of the irrational customers to the organization

In economics, we assume that every decision made by a customer is rational. As human beings,
we generally think that every decision we make is based on impeccable logic and analytical
skills. We think that we are choosing the best alternative from all the choices we have, whether
the decision is for buying a house, investment decision, purchasing a piece of cloth, etc.

In reality, however, we’re a lot more irrational. Throughout the years, studies have taught us that
our preferences and decision-making abilities are not rational which is causing a small revolution
in marketing and sales departments.

Marketing and sales departments of various companies believe that the consumers are irrational
and their purchasing decisions can be influenced by a bit of effort. Studies have shown that
feelings have long been known to shape our choices. Organizations try to market the product in
such a way that we think irrationally and buy a product.

Like anticipated regret convincing shoppers to act faster. The advertisements show to consumers
“Don’t wait too long, only a few items left!” is likely to trigger a person’s irrationality to buy a
product so he/she doesn’t feel left out. So, the consumer is more likely to buy that product by
feeling the urge to quickly order.

Marketers use humor in advertisements not only to increase people’s opinion about a product but
this helps consumers to remember the brand much better. For example, the Ambuja cement
advertisement has an iconic line ‘Bhaiya ye divar tut ti kyu ni hai’.

Thus, humour or fear of missing out, work in favor of an organization. Insurance companies try
to make the most out of it. For example, insurance companies show what will happen to your
family, their dreams, etc. if the earner/caretaker of the family met an unexpected death.
Consumers are more likely to buy an insurance policy even if they are getting low returns.

People care a lot about social status. Research indicates that respect and admiration from our
peers are even more important than money. Considering this, people behave irrationally to buy
luxury goods and services to show to their peers, social media, etc.

The irrationality of the consumer also affects their eating habits. The advertisements on
television, social media, banners, etc. influences consumers eating habits. For example, to save
time people buy frozen food, junk food, etc. which is not good for their health. Consumers think
that they are making the right decision but, in a way, they are not.
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The Rational Consumer

Rational Consumers are often considered an ideal situation in practicality. This is mainly
because in the real scenario there are a lot of variables that come into play and hence a third
person perceives it as irrationality. However, the consumer while making a decision takes into
account all the variables that are important from his perspective. Hence, for e.g.: when we call a
consumer irrational for purchasing junk food or unhealthy drinks, the person is doing so based on
her belief or priority of taste over health and he might justify it with the thought process of
“living everyday as if it is the last day”. He has given more score to utility from the taste he gets
now as compared to the healthy body which he might get in future. However, a health freak
might call this behavior irrational from his perspective. So, let’s see more such examples and try
to understand the underlying theory or principle behind the same.

Examples of rational behavior of consumers:

1. All the consumers who prefer healthy products over unhealthy products show rational
behavior. Almost all the consumers know the ill effects of eating junk and packed food
but only rational consumers make the right choice of avoiding junk food and get
benefitted. Junk food contains chemicals that make them addictive and once people start
to eat them a few times, they get addicted to them. Rational consumers buy only those
products which are good for their health. They make wise decisions by choosing organic
products over inorganic products. They eat freshly prepared food rather than eating junk
food. They drink healthy drinks containing real fruit juice rather than high sugar-
containing unhealthy drinks. In this way, organizations selling healthy products get direct
benefits due to the rational behavior of consumers. Also, indirectly many organizations
benefit due to the rational behavior of consumers. For example, a rational consumer will
be very productive which will benefit the organization he works for.
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2. When the lockdown was imposed in our country due to the spread of COVID-19, rational
consumers followed all the COVID-19 appropriate behavior properly. They didn’t step
out of their houses knowing that they would catch the infection easily. In IANS-CVoter-
Gallup International Association Corona Tracker 1 survey, it was found that 45% of
people are staying home globally so that virus spread stops. They used online shopping
platforms to buy all the products they needed. They used Amazon, Flipkart and other
online shopping platforms to order what they needed. They used Zomato and Swiggy to
get food delivered to their home without going to the restaurants. This rational behavior
of consumers benefited all the online shopping stores and online food delivery services.

3. Another rational behavior shown by consumers can be observed during the stock market
corrections. Rational consumers will buy more stocks when the market is going down
because they know that it is the best time to buy the stocks as the stock prices are very
low. Rational consumers know that in the long run, their investments will give good
returns and the changes in the stock market are temporary and will not affect their
investment. In this way, all rational consumers help organizations listed in stock markets
sustain their market value.
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Reason for rational customer behavior

1.In the first example, consumers who prefer healthy food over junk food fall under the category
of rational consumers who want to maximize the benefit. The customers do so possibly because
they presume the value of this food to be more than that of the junk food by taking into account
quality and nature of ingredients. Because while modelling consumer behavior many economists
believe that they make rational well-informed decisions to maximize their own wellbeing. In
fact, this was the rationale behind government policies, which mandates mention of ingredients
in all edible products. Government believes that this information will help a rational consumer
make the right decision.

2.The second example talks about the rational behavior of the consumers who stayed at home
and followed Covid appropriate behavior during the time of Coronavirus pandemic. “A big
theme in economics is: How do people react to risk? “Even in the face of a well-publicized risk,
people might not always act rationally.” - Sergio Rebelo (Kellogg school). A research was
performed on the Portuguese consumers’ spending habit before and after the pandemic. They
found that people act in a way that is consistent with the models of risk-taking behavior
commonly used in economics. Model of risk-taking states that decision involves comparative
evaluation of alternatives that can be described by probability distribution of future return (libby,
R, Fishburn)
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3.Third example points towards investors who act rationally and make informed choices while
making investments instead of following the so-called rat race. In the words of Warren Buffett
“fearful when others are greedy, and greedy when others are fearful.” He clearly is one of the
best examples of the person who got yielded for his rational decision making. This is because of
the rational choice theory which states that regional calculation is used by individuals to make
rational choices and achieve outcomes that are aligned with their own personal objectives.
People using rational choice theory are expected to have the greatest benefit and satisfaction as
the outcome. This is the possible reason for people following the “buy low sell high” principle of
stock market trading.

Benefits of the rational customers to the organization

The world is evolving and so is technology. The modern world has seen a tremendous
improvement in technology with an adequate flow of information to every individual. Even the
rural parts of the world are advancing and are consuming information from the televisions,
newspapers and several other media sources. This medium of information has proven beneficial
for the consumers while making any purchase decision.
The customers have gained analytical capabilities which help them take the purchase decisions
on their own. The factors which organizations used to be influenced by earlier like the prevailing
word of mouth, or by recommendations to make a purchase decision has diminished to a great
extent.
The advertisements that are used by the organization to make the consumers aware of the
different products the companies have in their portfolio becomes effective if the consumers are
rational by nature. The rational customers perceive values from the advertisements and make an
informed decision rather than an impulsive one. This tends to diminish the factor of losing trust
on the companies when the product the consumers buy turns out to be faulty after a few
months/years down the line.
The 4P strategies that the marketing team of the organizations tend to strategize before launching
any product in the market turns out to be beneficial for the rational customers. The customers
being rational the companies can focus on making the product more cost effective, improve the
quality of the product. Since rational customers would be buying valuable products for the price
they pay, well strategized marketing approaches tend to work beneficial for the organizations.
Rational consumers tend to have stable preferences. If a particular consumer is using a particular
product he tends to stick to his choice for a long time. This enables the organizations to utilize
this for retaining the consumers for a longer duration.
Rational consumers tend to value the product quality and ROI more than any other feature.
Thus, the companies can save a lot of money on the consumer research practices that the
companies tend to do to get an overview of the customer segment they are aiming to get into.
Moreover, with the consumers being more rational, the idea of being attracted by the external
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attractiveness of the product tends to decline to a great extent. This proves to be a cost benefit for
the organizations since the companies would rather focus on making the product beneficial and
valuable for the price charged for the product than focusing on hiring the salesmen who would
prove to be beneficial in selling the product by manipulating the consumers. This would bring
about a change in the hiring process as well as the costs for hiring would reduce as well.

Conclusion
So, to answer the question, do companies prefer rational or irrational consumers is, “it
depends”. It depends on the product/service that the company is offering- whether it is high
involvement or low involvement, utilitarian or hedonic and so on.
However, it can be agreed, that organizations have learnt to benefit from both the rational
and irrational customers. Companies need to be aware that customer preferences are dynamic
and can change from situation to situation. Consider the iPhone as an example. Iphone’s
customer segment can be split into two -customers who value it as a status symbol (and are
hence more irrational) and customers who value the new iOS features and security (and hence
are more rational). Thus, this brand was able to target the intellect as well as the emotion of its
customers. The food industry on the other hand would prefer rational customers if they focus on
health and irrational customers if they focus on taste. A balance between the two is needed to
retain and satisfy both groups of customers. The challenge would be to identify where the value
lies for each group. Once the value is discovered, marketeers can formulate appropriate strategies
that appeal to both the cognition and the emotion in customers.
If human beings by nature have both rationality and irrationality, organizations need not work
hard to make consumers rational or irrational to be beneficial. Consumers desire to be rational
and so all that organizations need to do is, lead them to believe they are.
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Dan Ariely – My Irrational Life

The enduring impact of transient emotions on decision making (duke.edu)
Voice of customer
Resources – Dan Ariely
https://blog.xyplanningnetwork.com/advisor-blog/what-makes-a-rational-consumer-and-why-
financial-advisors-should-care