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Technology drives consumers to irrationality

Posted by Graeme in Market failure at 10:36 am on Thursday, 15 February 2007

Technology, and the development of technological products, undermine free market mechanisms. One, of many, reasons for this is the problems consumers face in making a choice about purchases. Does this affect the assumption that consumers are able to make informed and rational decisions, which is required by the argument in favour of free markets?

Consider the average person making a decision to purchase a computer. They are buying what is by far the most complex type of device in common use, but are likely to know very little about it. Much of the little most consumers think they know (e.g. more gigahertz means faster) is wrong. How is the average consumer to make an informed decisions about computer hardware, operating systems, applications programs etc?

A particularly common mistake is to spend heavily for a fast PC, but not to spend on high quality peripherals such as modems and printers (by the way, please avoid USB ASL “modems” and give preference of postscript printers). Another is to buy what a shop or friend recommends (which comes out of a limited range, introduces agency problems, and advice is often given by people who are not particularly knowledgeable themselves) or what they use at work.

The same applies to a huge range of products such as digital cameras (more mega pixels does not always mean better pictures), MP3 players (different formats and compatibility) etc.

It can be argued that people are still buying what they want, so their decisions remain utility maximising. I cannot see how this can be true given that people may well make different decisions if they know more.

When I see people choosing a complex tool such as computer on the basis of its looks, I do not see a finely tuned free market economy delivering what people want, I see a mess and the triumph of marketing over functionality.

Comments (6)


Comment by Richard at 12:10 pm on 2 March 2007 at

Hi Graeme, I think you’d be interesting in this book: The Origin of Wealth by Eric D Beinhocker. I’m not that far through it, but he says the assumptions made by traditional economics (such as perfect rationality) do not adequately encapsulate reality and so we need an alternative. His solution is complexity economics which is derived from evolutionary theory. I can’t explain that yet, because I’m not that far into the book. But it seems like the kind of questions you’re asking, are the kind of questions he expects complexity economics to answer.

Comment by Graeme at 11:19 am on 12 March 2007 at

Thanks, looks, very good. I will definitely be reading it sometime soon.

Comment by Technology subverts more markets : Economics, economic efficiency, free market, information, market failure rational at 8:06 am on 7 April 2007 at

[…] looks like it is not just consumers who are unable to make informed rational decisions when faced with technology. It appears that Indian cotton farmers have a similar problem when faced […]

Comment by Technology confuses even : at 7:50 am on 23 April 2007 at

[…] professional buyers like banks and intelligence services.My previous examples concerned buyers of consumer electronics and genetically modified cotton seed. The example that Bruce starts with fooled people ranging from […]

Comment by How to buy cameras and PCs at 9:09 am on 28 January 2008 at

[…] previously complained about how consumers are too confused to choose complex technology, I am doing my bit to improve the situation with a little explanation, and some useful […]

Comment by Product specifications and consumer stupidity at 7:28 am on 14 November 2008 at

[…] New research provides more evidence that people simply are not rational in choosing what they buy, a fundamental assumption of economics. I have previously discussed problems including consumers inability to understand many products. […]

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