Rationality vs. Non-rationality Interpret Consumer Social Behavior at H&M

Rationality vs. Non-rationality

Interpret Consumer Social Behavior at H&M

By: Yixi, Jessica, Gabriela, & Tahlia

Economists make the assumption that people are rational, which means that people can rank bundles of goods depending on which goods will maximize their utility. A person makes choices based off of what will give him/her the highest happiness or satisfaction.  When a person is acting rationally he is also described as "wanting more rather than less of a good.” A person, who makes decisions, if rational, can defend the consumption choices made. Below we describe various three stories that involve choice and preferences in shopping at H&M.

When we enter a retail-clothing store like H&M, we often notice that customers tend to go around in different sections of items, and compare their prices, design and fitness. Rational consumers would weigh costs and benefits to maximize the utility, and they able to defend their choices. First, let us look at how a rational customer, Jane shopping at H&M: 

Jane decides to go shopping at H&M with a $50 budget. It is winter time and she needs a coat to fight the cold. Jane walks into H&M and sees a pair of shoes, coat, and a scarf. Although she would like all three items her limited budget only allows for her to choose two. So, she chooses the coat and shoes and leaves the scarf to maximize her utility. Jane’s decision is made based off of what she believes is best for her. The jacket and shoes meet her individual taste and she prefers this to any other combination of the three goods; she is happiest with the two goods she chose to purchase. In Jane’s case her opportunity cost foregone is the scarf. Opportunity cost is the best alternative foregone when having to make a choice between items, for example.

Sometimes, there are customers who are unable to make decisions and who walk out of the door with bare hands. Other times, they are unable to explain their decisions. We consider these people’s behavior as irrational. For example, Perry decides to go shopping with a $100 budget. He walks into H&M where he decides to buy the first two items he sees. If asked about his choices, Perry is not able to defend why he bought these first two items (a shirt and a pair of shoes). He does not act rationally because he does not think about what combination of items will result in the highest utility for him. Perry is extremely indecisive, has no preferences, and therefore no idea of what makes him better off. He cannot defend having bought the shirt and shoes because he purchased them randomly, without evaluation of each and without thinking of whether or not they made him better off or as better off as he can be. He did not use rationale in making his decision and thus is not rational.

If Perry were to act rationally he would know what he prefers. This would guide his decision making because his preferences would reveal what gives him a higher utility. With clear likes and dislikes Perry would know why he chose to consume a certain bundle.

(Below is a graph describing Jane’s behavior as a rational consumer)

At the OCB - X3, Y3 - Jane’s maximized utility is shown on the graph.

The rationality theory of consumer’s behavior also offers us a framework to understand the revealed preference. That being said, when a rational consumer is confronted with price and income, he/she will definitely choose the best bundle of goods he/she can afford. We can therefore find out consumer's revealed preference of goods from his/her choices.

Take Alice, an old customer of H&M for example. Alice is very fond of shirts and hats at H&M, and she would like to purchase new shirts and hats for the spring. She has a budget constraint of $90 for shopping. In early March 2014, the price for an average shirt is $30, and the price for a hat is $15. Under the assumption of strict convexity, Alice bought 2 shirts and 2 hats to maximize the utility. Since she made a rational choice to consume the best bundle she is able to afford, we can reach the following conclusion: where the bundle of 2 shirts and 2 hats was the chosen bundle with prices (30, 15), then for any combination of goods where the total price is less or equal to $90, she strictly prefer consuming 2 shirts and 2 hats to other possible bundles, such as buying 1 shirt and 2 hats. 

Works Cited

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http://www.investopedia.com/terms/r/rational-behavior.asp

Lawrence E. Blume and David Easley (2008). "rationality," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract." by Abstract] & pre-publication copy.

   • Amartya Sen (2008). "rational behaviour," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.

"Rational Choice Theory." Wikipedia. Wikimedia Foundation, n.d. Web. 28 Feb. 2014.