IB Economics Rational Consumer Choice

Why We Think We’re Rational: The Myth of the Perfect Consumer (HL)

Let’s start with a confession:

You’re not as rational as you think you are. Don’t worry - none of us are. Not even that smug friend you have who triple-checks every price on Amazon, before buying socks.

In IB Economics, we love to assume people are rational beings - carefully weighing their options, always hunting for the best deal, and never falling into impulse-buying bubble tea because it looks “aesthetic.” This idea is at the heart of rational consumer choice theory - a neat little model you should be aware of by now, that explains how people are supposed to make decisions.

But real life? Real life is illogical, and full of goods and products we don’t need.

IB Economics What is Rational Consumer Choice?

At its core, this theory is simple: people try to make choices that give them the most utility - that’s economist-speak for satisfaction. They use logic and reasoning to weigh up the options and pick the one that gives them more pints for their pence.

You’ll often hear this model rely on three dreamy conditions:

1. Your habits, tastes and preferences don’t change.

2. You’ve got perfect information about all the choices available.

3. You’re always aiming to maximise your satisfaction.

Sounds a bit like asking a teenager to pick a phone plan using a spreadsheet.

Let’s Get Real: Do People Actually Do This?

The answer: Not always.

In fact, behavioural economics exists because economists realised that people often don’t follow the rational script. I’ll show you how:

IB Economics Real-life Example: Netflix and Data-Driven Rationality

Netflix uses your viewing data to recommend shows you’ll like. That’s rational decision-making done by machines. Their goal? Maximise your screen time (and your subscription renewal). That’s real, daily rationality.

But…

IB Economics Real-life Example: Kodak’s Big Oops

Kodak invented the digital camera in 1975. Then ignored it. Why? Because they thought it would ruin their film business. Oops. By the time they realised people were switching to digital, it was too late. They filed for bankruptcy in 2012. So much for rational choices. This is classic business management failure.

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The Classical IB Economics Assumptions:

Beautiful but Flawed

Classical economists like Adam Smith painted a world where:

• Consumers are rational.

• They have perfect information (like real-time stock data).

• They aim for utility maximisation - always choosing what satisfies them most.

The reality? Not so tidy. Why?

Too Many Options.

Have you ever tried picking a mobile phone plan in the UK lately? It’s like decoding an ancient language - data limits, roaming rules, and more fine print than a Shakespearean contract. In the end, most people just… give up and pick the one their mate recommended or stick to their old mobile phone plan.

No Time, No Energy

We want to compare every option, but let’s face it - who has the time? You’ve got deadlines, exams, and 42 tabs open. Making the "perfect" decision sounds nice until you’re three pages deep in a PDF about your e-bike or scooter insurance.

Peer Pressure Is Real

Even if you know you shouldn’t spend £200 on those Nike trainers, your brain says: "But everyone else is!" Economics might like to believe we’re calculators - when in reality, we’re more like social butterflies trying not to feel left out.

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Here Come the Biases…

Now that we’ve torn down the rationality myth, let’s talk about the biases that alter our choices. These are the real MVPs of irrational behaviour.

1. Heuristics (Rules of Thumb)

Instead of analysing every menu item, you just get the burger. Again. Why? Because it was good last time. Heuristics save time, but don’t always lead to the best outcome.

2. Anchoring

Ever seen a t-shirt “discounted” from £89.99 to £29.99? You think, “What a steal!” But it was never worth £90 to begin with. That first price is the anchor - and it messes with your head.

3. Framing

Would you rather eat something that’s “90% fat-free” or “10% fat”? Same thing. But the first one sounds healthier, right? That’s framing - manipulating how information is presented to sway your decisions.

4. Availability Bias

After watching one too many TikToks of lottery winners, your brain thinks winning the lottery is more common than it is. Suddenly you're buying scratch cards again. Just don’t tell your parents.

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Something to Think About for your IB Economics Course…

Here are a few questions to quietly simmer in the back of your mind:

• When was the last time you made a completely rational decision?

• Have you ever fallen for anchoring - like paying more because the original price seemed higher?

• Are there any decisions you always make on autopilot? Why those?

• If we’re all irrational sometimes… does it mean markets can be irrational too?

Take care dear students,