Identify a personal economic decision that was driven by a behavioral bias rather than by pure rational behavior. Given your understanding of behavioral economics, how would your decision differ today?

A personal economic decision that is driven by a behavioral bias rather than pure rational behavior might be a customer purchasing a more expensive pair of shoes because of its popular brand name instead of a less expensive but equally good pair with a less popular brand name.

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Take the example of a consumer that’s stuck between two pairs of running shoes. One pair is from a brand that’s not well known, but it’s fairly priced. The other pair is from a popular sports brand and quite expensive. The buyer wears both shoes and doesn’t feel there is a difference. They are both lightweight, well-ventilated, and comfortable.

The consumer is employed with a fixed salary. He has other needs apart from the shoes. A rational consumer would consider their financial responsibilities and focus on spending as little as possible to satisfy their needs. However, the consumer has seen his friends with those expensive sports shoes and has always thought they looked nice. Therefore, he makes an irrational decision based on cognitive bias and spends almost half of his salary on the product.

If the individual understood behavioral economics, he would stick to a rational decision. Why? Because the consumer relies on asymmetric information. The theory behind behavioral economics is that consumers don’t always aim to satisfy their utility. Sometimes, their purchase decisions are based on what others are doing.

In this case, the sports brand uses mass advertising to appeal to the emotional needs of the customers. The ads have models and professional athletes wearing those shoes and giving their approval. In the mind of the consumer, since they love the athlete or feel a special connection to the message in the ad, they automatically think that those are the best shoes, regardless of the price.

However, the reality is a bit different. You can never really know the raw materials used by producers or the costs involved in manufacturing the item. As a result, the messages in their ads may not be entirely true. The sooner you realize companies are trying to appeal to your emotions for their benefit, the more rational you will be.

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