How limited are we in knowlege to make right choices?

Rationality is a basic assumption that comes into picture while studying the behavior of individuals. There are many more aspects such as social obligations, ethics, context, emotions, etc. which also determines the decision-making process of individuals. Most individuals have only finite amount of knowledge which draws boundaries while making decision. It cannot be said that every individual has the fullest possible information. People are limited in terms of their knowledge, information, time, and so on. This is where the concept of 'Bounded rationality’ occurs. In simple terms, bounded rationality states that it is not binding on the individual to gather all possible information while making decisions. We can say that the context in which the individual is to take decisions is very vital to his choice of decisions. The emergence of new ideas in behavioral economics has broadened the understanding of consumer decision making. 

 

 

Decision making under Bounded rationality.

 

Consumers have umpteen number of choices to decide which product they like to use. The market has wide range of brands for a single type of commodity. For instance, while we try to purchase a television-Sony, Samsung, LG, Panasonic, etc are some of the brands that strike our mind but if we have to choose between them, we have to understand the pros and cons of the products. Gathering information about two products itself is a hectic task and how is it feasible to gather and analyse all the products in the market. We can look for specifications such as display, size, features and narrow down choices. Keeping this in minded the corporates understand the presence of bounded rationality in consumer decision-making.

They feel there is a need to satisfy the consumers in accordance with their preferences  while making regular improvements and adaptations through environmental feedback in their future products. There is this famous concept of 'libertarian paternalism'  by Richard Thaler where he explores the practical implications of economic policies through the "nudge" technique.

 

Nudge- The nudge technique proposes positive stimulus, reinforcements, suggestions to influence the behavior and decision making of individuals and groups. This technique is in contrast to other methods such as education, legislation or enforcement.

 

Role of Nudges in decision making.

 

The nudge theory has changed the dimensions of economic thinking and started questioning the practicability of policies in the real world. Richard Thaler establishes a connect between psychology and economic decisions. Let us take simple examples of nudge,

when we visit a fast-food restaurant we are offered extra options in one meal like fries and coke in a burger meal. These up-sell options are the most profitable part of the meal. Customers largely prefer these meals as they attract them in terms of the add-ons provided along with the meal.

Another example is when there are medical appointments, people often forget them. In order to reduce the missed appointments, the hospital provides SMS to patients reminding them to attend their appointments. This might seem very common but the constant effort made by hospitals will encourage patients to continue their medication in the same hospital.

 

Commercial nudges are very common these days. Special offers are predominant among commercial giants.

In the picture above, amazon prime offers their customers free subscription for a month. We get access to thousands of movies and TV shows free in our first month. But the company insists on getting our credit card details before hand with the free subscription, saying that we can cancel anytime. We very often end up paying for subsequent months. The strong sales pitch nudges customers into not changing. They lure us into their vast world of entertainment and make us waiting for subsequent seasons and shows in future.

 

Conclusion.

 

The market is flooded with products and competition. In order to boost up sales, understanding the consumers and attracting them is very vital for business corporates. Understanding Consumer psychology is very important nowadays. Rationality has turned into bounded rationality. A consumer is limited in terms of knowledge but there is a common factor that attracts a certain target group. Marketing must focus on that particular group. We as consumers must try to be as rational as possible in finding the best product. The nudge is a very useful technique in luring away customers towards a particular brand. For this business magnets come up with innovative strategies for every new product. As a consumer we must me wise enough to make the better choice of products considering the fact that there are enticed traps drawn by businessmen to which we must not fall prey to.