Life presents people with choices to meet their needs. Life itself is a series of choices. Consumers and businesses are faced with multiple choices where they have to choose one product against another. This brings in the concept of opportunity cost. One choice is made at the expense of another. People make choices depending on the value they attach to different things. The choices made are meant to accomplish goals for the consumer or the business involved. The best choice is defined as the one that results in greatest benefit with least cost. It is assumed that consumers and businesses make rational choices when faced with alternatives. On the contrary consumers and businesses do make a lot of irrational decisions. This paper is going to evaluate the rationality of the decisions that consumers and businesses make.
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Consumers are faced with a lot of choices to choose from and with very little information about them (Jones 72). Therefore though the basic rationale of having a market economy is to give consumers the freedom of choice, the consumers are not able to exercise this right because of lack of or insufficient information to guide them in making choices. The consumers therefore choose one commodity against another not on the basis of rationale but because of other reasons. Information is therefore a major constraint in making rational decisions and executing them.
The rational theory suggests that consumers buy products that present the lowest risk. This is not so. Consumers do buy things that are risky but whose risk they are ready to accommodate. For example skiing can be very dangerous but consumers do buy skiing equipment despite the risk involved. The same can be said about activities like parachuting, racing and diving. In these activities consumers are ready to withstand a considerable level of risks that is above normal. This can also explain why consumers continue to smoke even when they know that smoking is harmful to their health (Anderton 432).
The theory of rational decision is also challenged by the fact that human behavior is controlled by unconscious and not conscious factors. Therefore most psychological phenomena exhibited by humans are essentially automatic subconscious nature as opposed to being a function of conscious reflection. In such cases the consumer does not buy something out of rational thought but rather from other factors that are found in his subconscious like past memory or perception. Substantial proportions of the choices consumers make do not involve decision-making.
Consumers are also heavily influenced by advertising (Anderton 427). Much of advertising does not involve appealing to rational thinking. Indeed information from an advert contain that implies more than one meaning to consciousness. Some of the meanings exert their effect through symbolism or metaphorical allusions at less than conscious level. Consider for instance when a beautiful model, dressed for sexual appeal is used to advertise a soap. The image of the model may be sexually appealing to the customer to the extent of buying the product. The customer in that case has not acted out of reasoning.
Human behavior can be rational, emotional or both. Therefore many purchase decisions are made because of their emotional or symbolic value. For instance most teens do buy torn jeans. Clearly buying of torn jeans cannot be explained by rational theory. Similarly a woman that has painted her hair in extreme colors like pink, green or purple or a person who pays to be pieced on the nose, ears, lips or genitals or to be tattooed. The whole experienced is both painful and expensive. The motivating factor in this case is not rational thinking.
Most customers do buy from precedence even when given a more variety of choice. For such buyers they go for the product they have been using in the past even when there would be so many others that are on sale. The choice that the customer buys is not the choice that would maximize utility but rather a choice made out of convenience. The client intentionally avoids the bother of screening the hundreds of choices that are available and picks without much of a thought what he has been using in the past.
Consumers may also view some products as being riskier than they are.
This brings the idea of perceived and objective risk. This is brought about by psychological risks. The consumer may be worried of whether the product he is purchasing will make him acceptable to colleagues, friends or the general public. Purchase is therefore made with other people in mind other than personal considerations. Businesses like customers do also make irrational decisions. Among the things that bring about this scenario is of lack of enough information while making a decision. Decisions that are made out of information that is not complete or well researched ultimately do not meet the threshold of a rational decision.
Businesses end up making irrational decision due to escalation of commitment (Carlos, Conelly & Laszlo 113). This refers to continued investment on a project even when results indicate that the project is failing. Research has shown that managers are likely to allocate more money to a project that is showing signs of failure than the one that is indicating success. This is with the hope that the project can be salvaged even when all indicators are showing the project is bound to fail.
Businesses and consumers therefore do make irrational decisions many times. The notion that consumers make decisions out of rational considerations such as price and quality is therefore challenged. The assertion also that businesses make decisions depending on consumers' needs is also challenged as many businesses do make losses without considering the consumer but rather the ambitions of the executives and speculation about the future. While it is true that consumers and businesses do make rational decisions, this is not applicable to all instances; there are many instances where customers and businesses make decisions out of other motives.