THE ROLE OF BEHAVIORAL ECONOMICS ON CONSUMPTION AND CONSUMER CHOICE BEHAVIOR

Abstract

This paper aims to analyze how behavioral economics theories and practices play a crucial role on consumption and consumer choice behavior. Behavioral economics great purpose is to obtain deeper understanding of human behavior and interactions, thus to understand how they interact both as individuals and as a group. Furthermore, by observing how an individual chose its precious time, income or even assets we can assume how that individual shall make the choices. Among many important theories of behavioral economics, prospect theory and its loss and gains aspects are mostly and widely studied, thus applied aspects on consumption. Otherwise called status quo bias, (Kahneman et al, 1991) consumers tend to focus and rely on status quo as a reference point, and consider that any deviation from this course could led to their loss. Prospect theory show that individuals are loss-averse, hence they more dislike losses rather than counterpart gains, therefore they are more willing to take risks to avoid a loss. Consumer behaviors towards losses or gains may also lead towards endowment effect – an attachment feeling towards valuing and paying higher price for an item that is already in possession, rather than owning a new one (Thaler, 1980). In behavioral economics consumer choice is influenced also by mental accounting, where according to Thaler (1985) is used as a cognitive bookkeeping tool that consumers use in order to keep records of financial activities and to control consumption. Application of behavioral economics theories and examples illustrated in this paper aim to show that BE and its principles have been applied in many consumption and consumer choice domains like product choice and product value, consumer spending and behavior. Keywords: rational choice, status quo, consumer behavior, bounded rationality, consumption, behavioral economics.