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    Liu Zheying 2

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    刘哲瑛
    1) Traditional economic theories view consumers as rational actors who make choices to maximize utility, but behavioral economics challenges this by showing real-world suboptimal choices. 2) Understanding consumer behavior is important for evaluating policy impacts, and both traditional and behavioral theories provide insights into reasons for suboptimal choices in markets. 3) Governments can help reduce inefficiencies by improving information flows, using technologies like big data analysis, and encouraging online platforms that connect producers and consumers.

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    Liu Zheying 2

    Uploaded by

    刘哲瑛
    102 views5 pages
    1) Traditional economic theories view consumers as rational actors who make choices to maximize utility, but behavioral economics challenges this by showing real-world suboptimal choices. 2) Understanding consumer behavior is important for evaluating policy impacts, and both traditional and behavioral theories provide insights into reasons for suboptimal choices in markets. 3) Governments can help reduce inefficiencies by improving information flows, using technologies like big data analysis, and encouraging online platforms that connect producers and consumers.

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    1) Traditional economic theories view consumers as rational actors who make choices to maximize utility, but behavioral economics challenges this by showing real-world suboptimal choices. 2) Understanding consumer behavior is important for evaluating policy impacts, and both traditional and behavioral theories provide insights into reasons for suboptimal choices in markets. 3) Governments can help reduce inefficiencies by improving information flows, using technologies like big data analysis, and encouraging online platforms that connect producers and consumers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    102 views5 pages

    Liu Zheying 2

    Uploaded by

    刘哲瑛
    1) Traditional economic theories view consumers as rational actors who make choices to maximize utility, but behavioral economics challenges this by showing real-world suboptimal choices. 2) Understanding consumer behavior is important for evaluating policy impacts, and both traditional and behavioral theories provide insights into reasons for suboptimal choices in markets. 3) Governments can help reduce inefficiencies by improving information flows, using technologies like big data analysis, and encouraging online platforms that connect producers and consumers.

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    © All Rights Reserved
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    of 5

    From Traditional to Behavioral: Approaching Optimum with More Possibilities

    A new era is coming for the whole world, especially the increased uncertainty with
    potential opportunities arouse in the market. Traditional economic theory suggests
    that every individual is rational and with their choices are consistent with utility
    theory without deviation. However, recent behavioural economics challenges the long
    holding belief by releasing researches showing consumers’ suboptimal choices in the
    real situation. Understanding the mechanism of consumers’ behaviours should be of
    great importance for the evaluation of the macroeconomic impact of public policy.
    (Kubota & Fukushige, 2016) Since there is a solid basis of truth in the utility theory
    which should not be lost but used as foundations on which to build. (Fisher &
    Parry,1921).No matter how the theories vary according to the rapid-changing market
    condition, our society’s final goal is always the same，which heading to the
    optimization of allocation of resources in all aspects. In this essay, I would present
    some representative cases related to suboptimal choices, analyzing possible reasons
    behind and finally sharing my thoughts for the government’s action to reduce the
    inefficiencies in the market.

    In the modern world, consumers cannot be seen as simple computer systems deciding
    with common fixed arithmetic. According to Marshall’s Demand Curve model,
    consumers will keep switching to the next best alternatives to ensure the maximum
    utility received. For example, if consumers prefer good A than good B and prefer
    good B than good C, in which case the theoretical rationality tells us that they should
    always choose A, then B and C if there is some unused budget. However, there can be
    found some inadequacies and inconsistencies in Marshall’s analysis as the conclusion
    was mainly concentrated on a static theory which avoids dynamic macroeconomic
    problems in the reality. (Shailesh, 2016). Two of the main conditions suggested by
    traditional economic theories are transitivity and continuity of consumers’ choices in
    the market. If the consumers strictly follow the assumption, market activities will
    always end up with the same result. People with similar wants and needs do make
    their decisions depending on utility, yet this so-called “utility” can hardly be modelled
    by one general function. Different self situations will lead to various choices. When
    facing a variety of food placed on the supermarket shelves, wealthier consumers are
    likely to be attracted by the organic ones while those people with limited purchasing
    power may care more about the price. If demand and supply cannot meet with each
    other in the local market, which means some consumers have to end up with
    suboptimal decisions, certain inefficiencies arise. This can be corrected and improved
    largely by the joint effort of both government and market itself. In this situation, what
    the government can do is to frequently collect information in the local market and
    provide the latest details about the current situation. Market segmentation, including
    demographic, behavioural, psychographic and geographic segmentation, can be
    applied properly. (lotame, 2019)For instance, health care service should closely
    related to demographic factor. A higher proportion of aged citizens can be a signal for
    the market to provide much health care service as well as a related product, otherwise,
    once the demand exceeds supply, some patients have to make suboptimal choices,
    which is always due to price factor. By providing that related information, producers
    can match their potential consumers more readily, which thus help reduce the
    inefficiencies caused by the mismatch. Some hi-tech method such as big data analysis
    can be an excellent tool when collecting and analyzing information. Besides, firms
    which positively provide their data of consumers’ preference should be encouraged.
    As a reward , an access to the official analysis provided by the government can then
    be enjoyed.

    Another main problem associated with consumers’ choices is asymmetry information.


    In this information age, the fluent flow of accurate information can directly match
    consumers and producers to make the deal with optimality. The larger extent of
    related information in the market can result in exploitation of some minor producers.
    Typical examples are farmers with limited access to groups of consumers and thus
    find it hard to sell their products to those who needed. Middlemen then step in to
    connect both parties, paying the lowest and charging the highest. (Butt, 2013) As a
    result, consumers end up paying a higher price with the same product while farmers
    receive less amount than they could have got. This is a loss in social welfare due to
    the deadweight loss which reduces the efficiencies during the transaction. To provide
    a platform for those people to spread the information more widely is essential in the
    current state. E-commerce in China sets a good example for the promotion of goods
    previously unknown among potential consumers. By allowing easier access to the
    Internet, more producers are joining the waves of “Livestream selling”. Online
    platforms such as Alibaba’s Taobao, Kuai shou and Pin duo duo have reported an
    explosion in the live streaming activity. Taobao said the number of new sellers using
    the site’s live streaming platform surged by more than eight times in one month —
    from January to February, while transactions grew more than 160% year-over-year in
    March. (Cheng, 2020) New arrival Livestream economy age not only allows
    producers directly connect to all netizens with a fairly low cost but this trend also
    consistent with the dynamic character of the market. Therefore, the government can
    introduce an online live stream to lubricate the flow of information and also lower the
    transaction cost either by subsidy or other policies to make the most of e-commerce.
    Apart from the external reasons, each individual is not isolated from the outside world
    when making their own decisions. Consumers can be affected both by psychological
    and social factors, resulting in a subprime final decision. The application of prospect
    theory and expected utility theory can be a typical example illustrating the
    significance of certainty in the decision-making process. Allais (1953) reported
    examples showing that when choosing between certain lotteries, people systematically
    violate the theory. Kahneman and Tversky (1979) give the following experimental
    evidence to support one of Allais' examples. They experimented to analyze whether
    consumers would act rationally according to the back of the expected utility theory.
    When their subjects were asked to choose between a lottery offering a 25% chance of
    winning 3,000 and a lottery offering a 20% chance of winning 4000, 65% of their
    subjects chose the latter, while when subjects were asked to choose between a 100%
    chance of winning 3000 and an 80% chance of winning 4000, 80% chose the former.
    Expected utility theory predicts that they should not remain the same state in these
    two cases, since the only variable is winning possibility multiplied by the same
    constant. Their preference for the first choice in the lottery when it is certain in this
    example illustrates what is called the "certainty effect," a preference for certain
    outcomes. (Shiller, 1998) . That means when levels of uncertainty arise and increases
    to a certain degree, it will achieve a position to affect people’s choice and cover the
    real utility achieved. For the government, simple and understandable data picked out
    and presented to the public can help them evaluate actual utility more easily. Certain
    and precious details always contribute to more efficient decisions.

    It isn’t the matter whether traditional or behavioral economic theories contribute more
    to the macroeconomic analysis, as the latter is built on its former counterpart by
    involving more factors in reality. Both theories analyze the reasons of suboptimality
    existing in the market from different aspects and then come up with proper solutions
    towards the problem. Targeting right consumers with modern hi-tech methodology
    and then connect demand to the supply in a more direct way can be a practical way
    for the government to reducing inefficiencies in the market. While psychological
    biases should be following and analyzing with advanced research, in the long run, e-
    commerce and Livestream can be a good way to promote products with more detailed
    information, especially during the time of pandemics. The arrival of the new
    information age with various economic tools allow more possibilities in the way to
    optimality in this day and age.
    Reference:

    Kubota, K., & Fukushige, M. (2016). RATIONAL CONSUMERS. International Economic


    Review, 57(1), 231-254. Retrieved November 13, 2020, from
    http://www.jstor.org/stable/44075345

    Fisher, I., Knight, F., & Parry, C. (1921). Traditional Economic Theory--Discussion. The
    American Economic Review, 11(1), 143-147. Retrieved November 13, 2020, from
    http://www.jstor.org/stable/1807502

    Shailesh, K. (2016, May 23). Top 14 Contributions of Alfred Marshall to Economics.

    Economics Discussion. https://www.economicsdiscussion.net/economics-2/alfred-

    marshall/top-14-contributions-of-alfred-marshall-to-economics/21044

    lotame. (2019, July 30). What is Market Segmentation? 5 Benefits to Maximize Results.

    LOTAME. https://www.lotame.com/what-is-market-segmentation/

    Allais, M. (1953). Le Comportement de l'Homme Rationnel devant le Risque: Critique des Postulats

    et Axiomes de l'Ecole Americaine. Econometrica, 21(4), 503-546. doi:10.2307/1907921

    Shiller, R. (1998). Human behavior and the efficiency of the financial


    system. https://doi.org/10.3386/w6375

    Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under
    Risk. Econometrica, 47(2), 263-291. doi:10.2307/1914185

    Butt, S. (2013, December 20). Middlemen exploit sugarcane growers.


    DAWN.COM. https://www.dawn.com/news/1075257

    Cheng, E. (2020, April 29). Livestreaming is taking off in China, but it's not driving
    much sales in a market still reeling from coronavirus.
    CNBC. https://www.cnbc.com/2020/04/29/livestreaming-drives-fraction-of-sales-in-
    coronavirus-hit-china-market.html

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