Behavioral Economics and Decision-Making PDF

TOPIC 1: Introduction to Behavioral Economics BEHAVIORAL ECONOMICS Behavioral Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. UNDERSTANDING BEHAVIORAL ECONOMIC...

TOPIC 1: Introduction to Behavioral Economics BEHAVIORAL ECONOMICS Behavioral Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. UNDERSTANDING BEHAVIORAL ECONOMICS IN ECONOMICS IN PSYCHOLOGY Rational choice theory in economics suggests that when Psychology says humans are emotional and easily people face various options, they make decisions to distracted beings, they make decisions that are not in maximize their benefit and satisfaction. their self-interest. This theory assumes individuals weigh costs and For instance, someone might impulsively buy a gadget benefits, choosing the best option based on their on sale, despite knowing that saving money would be preferences and constraints. more beneficial in the long run. For example, someone might choose to save money for a future trip instead of buying a new phone, as this would maximize their long-term satisfaction. In essence, behavioral economics is where combining the economic theories and psychology to explore why people make irrational decisions. Upon understanding behavioral economics, it influences consumer’s purchasing decisions by evidently showing that people often impulsively make decisions based on emotions, habits, and biases, rather than logic. TOPIC 2: Psychological Factors Influencing Managerial Decisions 1. Bounded Rationality - Bounded rationality is the idea that individuals make decisions based on their existing knowledge, which is often limited due to a lack of expertise or available information. In finance and investing, while the same public information is accessible to everyone, investors may not be aware of the internal circumstances within a company. 2. Choice Architecture - People can be easily influenced, which is evident in how promoters design incentives or deals to encourage consumer purchases. For example, placing a cracker display next to the cheese aisle in a supermarket is a deliberate strategy to prompt customers to buy both complementary products. This layout subtly guides consumers into making buying decisions based on a planned setup. 3. Cognitive Bias - People often make decisions influenced by cognitive biases, sometimes without even realizing it. For example, when choosing between two companies to invest in, factors such as the color of the logo, the CEO's name, or the city where each company is headquartered can create an unconscious bias that sways us toward one company over the other. Behavioral economics suggests that these seemingly minor details can significantly impact our choices. 4. Discrimination - Similarly, behavioral economics often links to discrimination, as people view things, events, or others through their own perspectives, which can lead to favoring certain alternatives over others. This bias does not always indicate that the preferred alternative is a better choice. 5. Herd Mentality - Many consumer decisions are influenced by the actions of others, driven by the fear of missing out or the desire to be part of a larger group. Herd mentality refers to the tendency of individuals to follow the crowd rather than making decisions based on the best outcome. THE ROLE OF EMOTION IN ECONOMIC BEHAVIOR Emotional decision-making is crucial in behavioral economics because it shows how emotions influence people's choices. Unlike conventional economic models, which assume decisions are purely logical and based on cost-benefit analysis, behavioral economics recognizes the impact of psychological and emotional factors. It demonstrates that biases, intuitions, and emotions often drive decisions rather than just logic. In summary, understanding emotional decision-making deepens our understanding of economic behavior, challenging the notion of complete rationality and making behavioral economics a more accurate representation of how people make choices. PERSONAL VALUES INFLUENCING MANAGERIAL DECISIONS Personal values are powerful motivators that significantly influence managerial decisions. Managers' own values, desires, and lifestyle affect their decision-making capabilities, leading to various outcomes for the company. For example, some managers might prioritize ethical considerations and social responsibility, aligning with companies that donate to causes they value, like Patagonia's commitment to environmental sustainability. This alignment can attract consumers who share similar values and foster brand loyalty. TOPIC 3: Implications for Consumer Behavior and Market Outcomes CONSUMER BEHAVIOR The study of how customers make decisions about purchasing products or services. It involves examining factors such as what influences customers to buy, how they research products, their preferences, and shopping habits. By analyzing consumer behavior, businesses can identify patterns and trends to better understand their target market, and tailor their strategies accordingly. This can also help identify opportunities for growth and innovation, as well as potential threats or challenges. 4 TYPES OF CONSUMER BEHAVIOR 1. Complex Buying Behavior - Complex buying behavior occurs when consumers purchase expensive or unfamiliar products, involving them deeply in the decision-making process. Consumers conduct thorough research and seek advice from friends, family, and experts before making high-risk purchases. For instance, buying a car for the first time is a significant decision because of the economic risk, requiring consideration of its appearance, social impact, and family opinions. 2. Dissonance-Reducing Buying Behavior - In dissonance-reducing buying behavior, consumers exhibit high involvement due to factors like high prices and infrequent purchases, but face limited choices with minimal differences among brands. As a result, they buy products that are readily available with minimal research. Consumers often make quick decisions based on available options, time constraints, or budget limitations. For example, a student needing a new laptop for their studies may quickly choose one from the limited brands available in their budget range. The primary considerations might be the laptop's functionality and price, rather than extensive research into each brand's unique features. 3. Habitual Buying Behavior - Habitual buying behavior occurs when consumers have low involvement in purchase decisions and perceive few significant differences between brands. When buying daily routine products, consumers do not put much thought into their choices. They typically buy their favorite brand, the one they use regularly, the one available in the store, or the least expensive option. For example, a consumer who always buys handbags from Gucci might automatically choose another Gucci bag without extensively researching other brands like Prada or Dior. This decision is influenced by brand familiarity and preference rather than in-depth comparison or evaluation of different options. 4. Variety-Seeking Buying Behavior - In variety-seeking consumer behavior, involvement is low, and significant differences between brands lead to frequent brand switching. Consumers switch products often due to curiosity or boredom, rather than dissatisfaction. For instance, a student who buys snacks might choose a different brand each time for a new taste experience. UNDERSTANDING IMPLICATIONS FOR CONSUMER BEHAVIOR AND MARKET OUTCOMES Understanding the market that you wish to serve is essential when it comes to running a successful business. Consumers have unique number of choices for places to shop and what to buy. To survive, retailers need an understanding of how consumers shop. Specifically, they need to know the six primary factors that significantly impact consumer behavior including psychological, social, cultural, personal, economic, and technological influences. 6 PRIMARY FACTORS THAT AFFECT CONSUMER BEHAVIOR 1. Psychological Factors - Human psychology significantly influences consumer behavior, guiding actions from product awareness to purchase decisions. Key psychological factors: motivation, perception, learning, attitudes, and beliefs. Understanding these factors helps create effective customer interaction strategies and reduces customer turnover. o Motivation drives purchases by fulfilling needs, such as a skincare brand appealing to the desire for youthful skin. o Perception shapes how consumers interpret product information, influenced by attention and interpretation. o Learning from experiences shapes preferences, like associating a brand with positive emotions. o Attitudes and beliefs form the basis of decision-making, influencing brand loyalty and purchase decisions. 2. Social Factors - Social Influences: Humans are influenced by family, friends, and social circles, shaping preferences and buying behavior. By understanding these social factors, businesses can better predict and respond to consumer behavior. o Family Impact: Family members, from parents to children, have a strong influence on purchase decisions. Different members may influence different types of purchases. o Peer Influence: Reference groups like friends and colleagues impact consumer behavior, with social networks amplifying this effect through shared recommendations. o Roles and Status: Life stages and social status, including income and occupation, shape buying habits, influencing whether individuals prioritize luxury items or practical purchases. 3. Cultural Factors - Shared values, beliefs, customs, and practices guiding consumer choices. By understanding these aspects, businesses can develop effective strategies for diverse markets. o Culture: refers to the collective programming of the mind that distinguishes one group of people from another. It encompasses the values, norms, and practices that guide behavior within a society. o Subculture: Unique segments within broader cultures with specific preferences. o Social class: Influences purchasing power and brand preferences. 4. Personal Factors - These include age, life cycle stage, occupation, lifestyle, personality traits, self-concept, and gender, influencing consumer behavior and preferences. By understanding these personal factors, businesses can better tailor their marketing strategies to effectively reach their target audiences. o Age and life cycle stage: different life stages influence purchasing habits. For example, Teenagers prefer trendy items; retirees focus on health-related products. o Occupation: profession dictates product and brand preferences. For example, Healthcare professionals prioritize high-quality medical equipment; corporate executives invest in luxury accessories. o Lifestyle: Reflects an individual's way of living, including interests, activities, values, and attitudes. For example, Health- conscious consumers seek organic foods; eco-friendly brands appeal to environmentally conscious consumers. o Personality: Influences brand perception; adventurous individuals may prefer brands associated with excitement. o Self-concept: Drives brand loyalty as consumers seek products reflecting their identity. o Gender: Affects purchasing behavior; men may prioritize functionality, while women focus on emotional connections.  5. Economic Factors - A strong economy increases money supply and boosts consumer purchasing power, while a weak economy leads to a struggling market, affecting jobs and consumer confidence. o Personal income: Higher disposable income increases purchasing power, allowing more spending on luxuries and discretionary items. o Family income: Multiple income sources result in higher overall earnings, encouraging spending on essentials and luxuries. o Consumer credit: Easy access to credit (e.g., credit cards, loans) spurs higher spending on comfort and luxury items. o Liquid assets: Greater liquid assets (cash, savings) provide confidence to spend on discretionary purchases. o Savings: Prioritizing saving reduces expenditure on purchases; lower savings rates lead to higher spending on products and services. o Economic conditions: The broader economic climate (e.g., inflation, interest rates) impacts consumer confidence and spending patterns. 6. Technological Factors - social media, e-commerce, and mobile tech help consumers discover, evaluate, and purchase products. o Data and analytics: Businesses collect data to understand consumer behavior, reducing turnover and increasing profits. o Real-world applications: Tech impacts consumer choices in various industries. For example, Social media influencers in fashion, VR in car-buying, and AI chatbots for customer service. RESOURCE ALLOCATION Resource allocation involves planning, assigning, and managing resources like people, time, money, and tools to effectively complete tasks or projects. It ensures that limited resources are used wisely to achieve goals, whether it’s meeting deadlines, sticking to budgets, or reaching performance targets. This process helps prioritize important tasks, avoid resource wastage, and ensure smooth operations. For example, in a project, decisions need to be made about task assignments based on skills, budget allocations for activities, and time management to prevent delays. Resource allocation also requires strategic planning, adapting to changes, and ensuring each resource adds value to the overall objective. When done correctly, it enhances efficiency, minimizes waste, and keeps projects running smoothly. STRATEGIC APPROACH FOR ALLOCATING RESOURCES 1. Cost Control and Productivity - Effective resource allocation is crucial for managing project costs and enhancing productivity. By efficiently distributing resources, project managers can prevent overspending and ensure optimal use of available resources, leading to successful project outcomes and increased client satisfaction. 2. Enhancing Team Morale - Thoughtful resource allocation, considering team members' capacities and interests, boosts morale and engagement. When employees feel valued, they contribute positively to project outcomes. This approach benefits the current project and enhances team performance on future projects as well. 3. Client Satisfaction and Project Delivery - Ensuring client satisfaction hinges on delivering projects on time and within budget. Efficient resource allocation is key, as it guarantees that resources are available when needed, preventing delays and maintaining high-quality outputs. This approach directly contributes to project success and client satisfaction. BENEFITS OF RESOURCE ALLOCATION Maximizes efficiency: Assigning the right resources to the right tasks prevents waste and ensures optimal use. Improves outcomes: Careful allocation leads to timely, on-budget task completion and high-quality results. Prevents delays: Balancing workloads avoids overloading and underutilizing team members, ensuring smooth project flow. Enhances productivity: Assigning resources based on strengths improves performance and work environment. Boosts flexibility: A well-planned allocation allows quick adjustments to handle urgent tasks or changes. Improves decision-making: Clear resource view aids in prioritizing tasks and managing risks effectively. Ensures better budgeting: Careful allocation helps track costs and stay within budget, avoiding overspending. SOURCES: What Is Behavioral Economics? Theories, Goals, and Applications. (n.d.). Investopedia. https://www.investopedia.com/terms/b/behavioraleconomics.asp#toc-principals-of-behavioral-economics Consumer Behavior - The Decision Lab. (2024). The Decision Lab. https://thedecisionlab.com/reference-guide/economics/consumer- behavior?fbclid=IwZXh0bgNhZW0CMTEAAR2_O-byDKMr7bo- 2wkh5wAP1RXIl1caFD6RzPCB09WPm7PN01vBM9_S0bc_aem_zipmjNo9yIgECmLZJbXSuQ Clootrack. (2023). Clootrack.com. https://www.clootrack.com/knowledge-base/types-of-consumer-behavior What are the 6 factors influencing consumer behavior? - Clootrack. (2024). Clootrack.com. https://www.clootrack.com/knowledge-base/major- factors-influencing-consumer-behavior#s-2-the-social-factors Athuraliya, A., & Creately. (2024, December 3). What Is Resource Allocation? Importance, Steps, Tips, and Templates. Creately. https://creately.com/guides/what-is-resource-allocation/#benefits-of-resource-allocation Solis, D. (2024, January 4). What is Resource Allocation? Strategies and Examples for Sustainable Development. Sustainable Business Toolkit. https://www.sustainablebusinesstoolkit.com/what-is-resource-allocation/ Variety-Seeking Buying Behavior | Overview, Strategies & Examples Video. (2024). Variety-Seeking Buying Behavior | Overview, Strategies & Examples - Video | Study.com. Study.com. https://study.com/academy/lesson/video/variety-seeking-buying-behavior-definition-marketing- strategies.html What are some strategies to optimize resource allocation? (n.d.). 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Behavioral Economics. Investopedia. https://www.investopedia.com/terms/b/behavioraleconomics.asp INFLUENCERS ABORDO, ANGELYN S. AGLIPAY, ATHENA CZARINA G. ALEGRE, DARYL DAN ANCHETA, JUDD MARGARETTE U. BACARRA, CYTHEREA DANAE N. BATI, CASSANDRA JEANIN G. BUCSIT, NIKKA ANDREA S. CABAL, JAMINE CRYSTELLE C. CAPILITAN, JANESSA NICOLE J. CLARIZA, STEPHEN PHILIP L.