Behavioral economists examine choices that consumers make that are not economically rational

Question

Economists generally assume that people are rational; that is, they weigh the benefits and costs of an action and choose an action only if the benefits outweigh the costs. Why do consumers not act rationally when the result is that they make themselves worse off?

Answer 1

Most people who do not act rationally do not realize that their actions are inconsistent with their goals. Another way to explain this is that they do not weigh the benefits and costs of their decisions correctly. Three mistakes are commonly made. First, while people usually account for the monetary costs of their choices they often ignore the nonmonetary opportunity costs. Monetary costs are easier to recognize because they call for payments of money, but nonmonetary opportunity costs do not. Second, people fail to ignore sunk costs. Although people may regret spending money for an activity, if the money cannot be recovered it should not factor into making current or future decisions. Finally, people often overvalue the benefit or utility they receive from current choices (for example, smoking) and undervalue the utility they expect to receive in the future (for example, not contracting lung cancer).