THE ROLE OF BEHAVIORAL ECONOMICS IN CONSUMER DECISION-MAKING

Abstract

This paper aims to analyze how behavioral economics theories and practices play an importantl role on consumption and consumer choice behavior. Behavioral economics main purpose is to obtain deeper understanding of human behavior and interactions, also to understand how they interact both as individuals and as a group.  Moreover,  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. 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  aimto  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.