Behavioural economics bridges the gap between the real world and the classical economic theory. Through experimentation in psychology and economics, it provides a clear understanding of consumer behavior in the market- the limitations and biases. Behavioral biases affect the consumers' preference for products, future beliefs, and decisions on price to pay and quality of products.
The biases related to the preference of the consumers and their willingness to pay certain prices to include;
Discounting or present bias: This occurs when individuals overvalue the current effects over the future ones hence ignoring or inaccurately determining the future consequences.
Loss aversion: The consumers become more loss oriented and ignore the possible gains from an economic situation.
Default positions: The consumers are obsessed with their status quo and use it as their reference point.
The market participants’ beliefs are affected by the following biases;
Over-extrapolation occurs when individuals use only a few observations to make economic predictions.
Overconfidence: when people overly believe in their judgments and positive outcome.
Projection bias: the people underestimate the possibility of change in the future and hence remain rooted to their present preferences and tastes.
Decision making is affected by the following biases;
Framing: This involves the effect of when and how information is available for decision-making purposes.
Social and peer influence: Good judgment is affected when there is an overemphasis on the bad personality traits and emphasis on good personality traits.
Inertia: This is the ability of the consumers to do nothing or resist change