Neoclassical argument for economic rationality says that an individual is rational in their decision making that maximizes their utility and minimizes the cost with the given resources and time constraint. However, individuals usually make choices in the realm of market that are not in their best interest. The free market system makes individuals prone to manipulation as their decision making is often guided by emotions, ethical concerns, heuristics and biases whose end result may not always be efficient.
The theory of economic rationality considers an agent’s preferences to be rational if they are complete and transitive; and an agent’s choice to be rational when he does not prefer any feasible alternative to the one he chooses. But the preferences made by the agent may not be complete because of the lack of perfect knowledge or information that is processed to create preferences and choices. Individuals cannot make calculative decisions that involves the evaluation of the gains and losses because of the lack of time and resources which leads to the emotional motivations towards decision making. They then use heuristics and biases which does not lead to efficient results and people may later regret it.
The real world market works on people heuristic and biases. It is also proved by researchers that when it comes to decision-making, people tend to rely more on emotions and less on rationality. Orman, a financial advisor, tells us that “people have emotional hang-ups with regard to money, and with regard to spending it. They are not honest with themselves; and, as a consequence, they do not engage in rational budgeting”. For example- in the real life, the rational budgetary failure leads to zero savings and in the modern times, it takes the form of adding to the credit-card bills. “This failure to deal cognitively and emotionally with the money, says Orman, leads to those unpaid bills”.
Akerlof and Shiller in their book “Phishing for Phools” argue that the bad decisions made by the individuals makes it possible for them to be phished for phools. The principle of equilibrium is generally applied to the economy, where unusual profits are quickly taken off the table by businesspeople resulting in a situation where such opportunities are hard to find. Similarly, the principle also applies to phishing for phools in a way that if an individual has some weakness or other, if they can be phished for phools for more than the usual profit, someone will take advantage of it. One example of bad decision making is of health clubs. When customers first visited the health clubs, they were overoptimistic about their exercise plans and signed contracts where they overpaid. They had the option of choosing among three different methods of payment, by the visit; a contract to pay by credit card with automatic monthly rollover, unless cancelled; or by annual contract. Most customers chose the monthly contract, but 80% of them would have paid less by the visit. They incurred significant losses from the wrong decision-making.
In the real world, Advertising and marketing also play a key role in influencing the decision of the people which further leads to people being prone to manipulation. Advertisers are supposed to boost up the sales of the companies that hire them irrespective of the fact that it is positively or negatively affecting the consumers well-being. Advertisers influence consumers in very subliminal ways and try to create an atmosphere through the ad’s where people can connect themselves with the narratives in the ad’s. For example- in the advertisement of beauty products, by presenting models, the motive is to make women look like them, paying little attention to whether the product actually works or not. People like to feel cherished, loved and cared and more than that, they want to believe that they are more than an ordinary person. Therein lies the opportunity with the advertisers and marketers to target the emotions of the people rather than convincing them with a rational idea. Ogilvy, an advertiser, confesses that many advertisers take the help of trial and error method. He presents an analogy with real fishing, wherein advertisers try a spot, drop their hook, and see if the fish (compared to consumers) bites. If that doesn’t work then they go to some other part of the lake (markets) and try the same procedure to attract consumers.
Another industry where people are being influenced to act irrationally is the food industry wherein it makes money by getting people to eat what it has to sell. In the modern era, neither food nor drugs are safe for consumption. The food industry tries to capture the consumers through its offerings loaded with sugar, salt and fat. Individuals do not often visit hospitals for food poisoning but they are diagnosed with food-induced coronary diseases and diabetes. For example- consumption of chicken by many people in the belief that it provides proteins and energy to our body but in actual, it’s a myth, chicken takes 3 days to digest and increases the body temperature followed by high blood pressure.
Other than the points mentioned above, the decision making process of the individuals are also guided by morality and norms. In reality, individuals are not always self-interested, they may take a decision which is not in their self-interest but benefits the other person. Individuals in this case are constrained by norms to choose something that they have not otherwise chosen. For example- Asha and Lata were walking back to their way from school to home and meanwhile, Asha found a lost wallet kept on the road.
Now, if Asha were to make a rational choice then she would have kept the wallet with herself and moved on, instead she gave the wallet to a beggar nearby because she was forced by the norms of the society to do so. However, had it been the case where Asha were alone, then she would’ve kept the wallet to herself as there was nobody around to judge her choice or preference. The social norms that individuals adhere to are shaped by non-market life like friends, family etc. The norms are evolved within the realm of the market and eventually does influence an individual’s preference.
Akerlof and Shiller, George A, Robert J, Phishing for Phools, Princeton, New Jersey, Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom, 2015
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