Predicting Irrational Behavior : An Economic Perspective

At the intersection of Psychology and Economics lies Consumer Behaviour, a branch of knowledge that studies the standard and habitual practices of consumers. Although this branch of inquiry is capable of informing brands and companies to utilise consumers’ information to sell their services and products — just as behaviour-prediction models function online — how can these psychologically-informed statistics prove to be useful when consumers behave irrationally? According to MIT Professor Dan Ariely, in his book, Predictably Irrational: The Hidden Forces that Shape our Decisions, consumers are traditionally and systematically irrational, and to defend the reliability of these statistics would be a novice assumption to make. Although Ariely does not promote the use of rationally collected data, he does encourage the collection of data as a whole, arguing that irrationality too is a behavior that can be calculated.

To determine that rational behavior is not always reliable, let us take the example of cigarette smokers. While buying cigarettes in bulk may be an economically rational choice for the consumers — considering any product bought in bulk is cheaper — many smokers may prefer to buy their cigarettes one pack at a time, to psychologically convince themselves that they are not further encouraging their cigarette-smoking addiction. Rationality cannot be predetermined without recognising the context of the purchase, and this is exactly why the study of irrational behavior is equally, or perhaps more important than the study of rational consumer behavior.

According to an article published in Forbes by former consultant, Ron Ashkenas, there are two particular ways in which the study of irrationality can be embraced. First, it is imperative to not fight irrationality with rationality, and understand the different forms of motivation that may drive consumers. The notion of rationality is based on the understanding that economic contextualization is the only form of logical reasoning, however, by considering examples such as the cigarette-smoking one, we learn that consumers, perhaps a majority of them, possess motivations aside from economic rationality. Second, it is also essential to consider contemporary modes of buying which depend upon the discovery and understanding of diverse groups, which may or may not be consciously adopted.

As maintained by this article, the statistically-fuelled comprehension of consumer-behavior while driven by data, may not be captured accurately. Although traditional forms of data collection may depend only upon economic rationality, it is imperative to study its holistic motivational values that consider diverse socio-economic and cultural perspectives. It is due to this reason that the prediction of irrational behavior is crucial.