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Technology drives consumers to irrationality
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)
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.
Thanks, looks, very good. I will definitely be reading it sometime soon.
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