Critique of Maximising Behaviour HL
Rational choice assumptions, behavioural economics, nudge theory, and alternative business objectives.
- State the assumptions of rational consumer choice
- Explain the behavioural limits to rational choice: biases, bounded rationality, self-control, and selfishness
- Explain choice architecture and nudge theory
- Describe alternative business objectives beyond profit maximisation
Assumptions of Rational Consumer Choice
Standard economics assumes a model consumer — sometimes called homo economicus — who is:
- Rational: makes consistent, logical decisions
- Utility maximising: always chooses the option that gives the most satisfaction
- Perfectly informed: knows all relevant prices, qualities, and options
Research on maximisers vs satisficers shows: maximisers search all options and get better outcomes, but are less happy. Satisficers set criteria, stop when "good enough," and tend to be happier. This raises a question: does maximising actually represent how people behave — or how they should?
Milton Friedman: models are still useful even if assumptions are imperfect — what matters is predictive power. Samuelson: a theory's validity is only as good as its assumptions.
Behavioural Economics: Limits to Rational Choice
Behavioural economics explores why and how people deviate from the rational model:
Biases
| Bias | What it means |
|---|---|
| Rule of thumb | People use simple mental shortcuts (heuristics) rather than calculating optimal choices |
| Anchoring | The first piece of information seen (an "anchor") disproportionately influences decisions — e.g. an original price shown alongside a "sale" price |
| Framing | How a choice is presented affects the decision — the same outcome described differently leads to different choices |
| Availability | People judge probability by how easily examples come to mind, overweighting vivid or recent events |
Bounded rationality, self-control, and selfishness
| Concept | What it means |
|---|---|
| Bounded rationality | People have limited brainpower and information — they make decisions that are "good enough" rather than perfectly optimal |
| Bounded self-control | People act against their own long-term interests — e.g. buying junk food, failing to save for retirement |
| Bounded selfishness | People are not purely self-interested; they show fairness, altruism, and generosity, sometimes at a cost to themselves |
| Imperfect information | Consumers often lack full information about quality, risks, or alternatives |
Behavioural Economics in Action: Choice Architecture and Nudge Theory
Choice architecture is the design of the environment in which choices are made. It influences behaviour without restricting options. Three types:
- Default choices: people tend to stick with the default option — e.g. opt-out organ donation
- Restricted choices: the range of options is limited to steer behaviour
- Mandated choices: a decision is required — people cannot opt out of deciding
Nudge theory: gentle steers in the desired direction rather than mandates. Nudges change the choice environment to make desirable behaviours easier or more likely, without removing freedom of choice. Example: placing healthy food at eye level in a cafeteria.
Alternative Business Objectives
Standard theory assumes firms maximise profit. In practice, firms may pursue other goals:
| Objective | What it means |
|---|---|
| Profit maximisation | The standard assumption: produce where MC = MR |
| Corporate social responsibility (CSR) | Firms consider ethical, social, and environmental outcomes alongside profit |
| Market share | Firms aim to grow their share of the market, sometimes accepting lower short-run profit |
| Satisficing | "Good enough" — achieving an acceptable level of profit rather than the maximum; reduces stress and conflict |
| Growth | Firms aim to expand in size — managers may benefit from running larger organisations even if shareholders do not |
Practice questions for this topic will be added here.