Áron S OMOGYI *
2. Behavioral economics and the classical decision-making model
Behavioral economics is currently the “mainstream”1 trend. This economics approach completes the classical consumer decision-making model using conclusions from experiences gained through experiments. It is important to highlight that the followers of behavioral economics do not talk about a break from the neoclassical approach that put rational consumer decision-making into
* Senior lawyer at Fundamenta-Lakáskassza. The author would like to thank to Tibor Szász for the English translation.
1 The graphic at the following link is a good example of the “main role” played by behavioral economics and shows the advent of behavioral economics against the neoclassical approach.
http://books.google.com/ngrams/graph?content=behavioral+economics%2Cneoclassical+e conomic+theory&year_start=1960&year_end=2012&corpus=15&smoothing=2&share= In:
Maurice E. STUCKE: Behavioral antitrust and monopolization. available at: http://papers.ssrn.
com/sol3/papers.cfm?abstract_id=1961327
the center. Behavioral economics sets up to complete the existing recognized theory, that is, the rationality hypothesis. It can also be said that the reference points in the calculations and experiments of this trend are almost always those established by the rationality theory. The primary issue in behavioral economics is “how economic operators actually behave compared with the idealized neoclassical hypotheses, which is to say that the reality of the behavioral assumptions plays a central role”.2
Economics recognized the limitations of the neoclassical theory about 20 years ago and many competent consumer protection organizations (such as Federal Trade Commission – FTC, OECD, the European Commission) have since addressed the fi ndings of behavioral economics.3 Based on the things described herein, it can be established that behavioral economics is not an extreme economic approach with only a few followers, but a discipline with results known (and recognized) by regulatory and legislative organizations that play a key role in addressing consumer protection issues.
According to the neoclassical4 economic approach, the consumer is a rational person who is always able and willing to process all offers communicated to her/
him and s/he tries to reach profi t maximizing decisions when taking economic decisions. By way of simplifi cation, the science of marketing describes consumer decisions in terms of a consumer who a) recognizes the problem, b) gathers information, c) evaluates the alternatives, d) makes a purchasing decision and fi nally e) takes into account post-purchase consumer behavior (the question of satisfaction)5. I note in this regard that, in my view, Act XLVII of 20086 places a rational consumer, that is, the “neoclassic model” in the center of the regulation when it states that in the evaluation of the commercial practice, it is necessary to rely on the behavior of a consumer who acts rationally, informed with due care and diligence […].
2 KOLTAY, Gábor – VINCZE, János: Fogyasztói döntések a viselkedési közgazdaságtan szemszögéből. Közgazdasági Szemle, Vol. LVI, June 2009. 496. [hereinafter referred to as the
“KOLTAY–VINCZE”]
3 STUCKE op. cit.
4 In this paper, I consider the results of neoclassical economics the traditional classic approach.
However, it should be noted that the history of economic ideas draws a distinction between classical and neoclassical economic approach. I shall therefore present below the consumer decision-making mechanism based on the neoclassical approach.
5 Philip KOTLER: Marketing management. Budapest, Műszaki Könyvkiadó, 1981. 4th edition, 175., Figures 6–4.
6 Article 4(1) of Act XLVII of 2008 on the prohibition of unfair commercial practices against consumers.
Behavioral economics papers present the classical approach as follows: “1.
An economic decision-maker has consistent (free of contradictions and “ full”) preferences which are given. (De gustibus non est disputandum.) 2. In addition to the possibilities ensured by physical and informational limitations, an economic decision-maker will always make the decision most favorable to him or her. 3.
The decision-maker will always weigh his or her decision options correctly and only the level of knowledge can preclude the evaluation of the outside world.”7 The Koltay–Vincze paper notes that consumer attitudes such as self-interest seeking (ignoring the actions of others), insatiability and the assumption that the decision-maker consumer “has all the means of mathematical probability calculations” are part of the rationality theory.8
The following question follows from the above: is the consumer rational?
Does the consumer always make correct, or more precisely, rational decisions striving to maximize his or her profi ts? According to behavioral economics, the answer is defi nitely “no” to this question. If consumers would always make rational decisions, no one would buy a losing lottery ticket because it would be a waste of money.9 And if consumers do not make the correct choice, then what causes the so-called consumer choice deviation?10 It shows that consumers are unable to evaluate their own preferences? Or, if they are able to evaluate their own preferences, then they are simply not able to rationally evaluate the offers showed to them with due diligence? Why do consumers repeatedly make decisions that cannot be explained by the rationality theory?
A plausible answer can be given to the above question both for the legislation and the law enforcement authorities based on the classical consumer decision-making model. This plausible solution is summarized in section 68 of the basic principles developed by the Offi ce of Economic Competition (hereinafter referred to as “OEC”), which states that “in accordance with the above, consumer choice deviation can be explained by two phenomena: on the one
7 KOLTAY–VINCZE op. cit. It should be noted that the original version of this paper was sponsored by the GVH Center for Competition Culture.
8 Ibid. 496.
9 Colin CAMERER – Samuel ISSACHAROFF – George LOEWENSTEIN – Ted O’DONOGHUE – Matthew RABIN: Regulation for conservatives: behavioral economics and the case for “asymmetric paternalism”. University of Pennsylvania Law Review vol. 151., 1230. http://www.hss.caltech.
edu/~camerer/paternPLR.pdf This paper tries to show, through lottery purchases, that we tend to attribute high expectations to low probabilities when promised an exceptional prize.
10 Section 67 of the GVH principles: “This phenomenon is called a consumer choice deviation which means that the actual decision of the consumer differs from optimal despite of consumer optimization.”
hand, consumers do not carry out information search of an appropriate level and, on the other hand, a company exerts unfair infl uence on the information search carried out by the consumers.”
Therefore, according to the OEC principles, consumer choice deviation has two reasons: either consumers pay no attention or the company is unfair – no other options are mentioned. There is no need to address the fi rst reason because, if the purchasing decision is irrelevant for the consumers, then it is in vain for the other economic agents (in particular, companies) to inform the consumers about the features, risks and all other properties of a specifi c product, the content of the information provided will be completely irrelevant and the money spent unnecessarily will represent the costs related to the release of the information in question.
Based on the criteria and studies presented below, I fi nd questionable the second reason (that is, if consumers act with due diligence and gather information, then the explanation can only be the unfair commercial practices of the company that lead to consumer choice deviation).