How does irrationality affect consumer demand?

Biases can lead to irrational decision-making. Humans may choose to rely on the first piece of information they see instead of checking all options — this is known as anchoring. Another example is availability bias, where a recent or vivid memory influences a decision. These biases mean consumers don't correctly weigh up opportunity cost and therefore don't maximise utility.

Past Paper Example: Explain how rules of thumb and irrationality can affect consumers’ demand for goods and services (June 2019)

This past paper question is from June 2019. To answer it, students should discuss heuristics (rules of thumb) like anchoring and availability bias, and explain how irrational behaviour like habitual actions or herd behaviour can lead to consumer choices that don’t maximise utility.

Behavioural Economics | A-Level Economics Model Paragraph (AQA, Edexcel)

Last updated on 28 Jun 2025

Please note: for this topic, Edexcel A-Level Economics students just need to learn the bounded rationality paragraph. AQA A-Level Economics students should learn all areas of this topic.

Economic theories have traditionally been built on the assumption that agents are rational utility maximisers. Behavioural economics embeds studies from psychology to help us economists understand that humans have bounded rationality and bounded self control. They also fail to maximise utility due to biases, or deliberately through altruistic choices.

Humans have bounded rationality for two main reasons: social norms and computational weakness (due to lack of time and imperfect information). Firstly, humans may choose to make similar decisions to people around them, due to a fear of being seen as different. For example, Elon Musk used X to influence social norms in the leadup to the 2025 US election. Secondly, humans have computational weakness. This means that humans are unable to see or measure utility in the same way that economists can. When eating chocolate, a human would not measure the exact number of pieces that would maximise their total utility, as this would take too much time and information - which are limited. In order to save time, humans rely on mental shortcuts known as heuristics. For example, they may remember that one local grocery store sells the required bread, but they may buy butter and other ingredients there too to save time. Lastly, there is imperfect information about many goods and services and actions around us. It is difficult for someone to research who the best tutor is as data about success or prices are not transparent.

Humans also have bounded self-control. This is the idea that humans may be aware of a choice that will increase their total utility but still not be able to make that choice. For example, most smokers will be aware that smoking causes health issues and will lead to uncomfortable illnesses however they will be unable to quit. This may be the case due to a combination of herd behaviour, as well as habitual behaviour and addiction. Examples of this include peer pressure or the idea that smoking was trendy many years ago, which led to it becoming a habit for some. Now, due to the addictive nature of nicotine, smokers may find it hard to quit even if they are keen to.

Biases can also lead to irrational decision making. Human may choose to rely on the first piece of information they see, instead of throroughly checking all options. This is known as anchoring. This means they are not correctly factoring in the opportunity cost of a decision and therefore are not maximising utility. Another example of a bias is availability bias, which leads to agents favouring choices that relate close to a fond memory. Someone who wins a bet may continue to make more vets regularly as they have a distinct memory of winning in the past. They will not be able to correctly weigh up the opportunity cost of spending their money gambling.

Finally, some economic agents deliberately choose not to maximise their utility through altruistic behaviour. This is the act of helping and caring for other people, and less so about your own utility. This would lead to some businesses offering discounts to some customers, and can explain the presence of non-profit organisations and charities. People may act like this this as they have their own beliefs on what is a fair outcome, or they may get utility out of seeing other people that are happy, which is difficult for an economist to measure or factor into models.