Working Paper: NBER ID: w18687
Authors: Daniel L. McFadden
Abstract: Economists since the days of Adam Smith and Jeremy Bentham have traditionally viewed consumers as driven by relentless and consistent pursuit of self-interest, with their choices in the marketplace providing all the measurements needed to reveal their preferences and assess their well-being. This theory of consumer choice is empirically successful, and provides the foundation for most economic policy. However, the traditional view is now being challenged by evidence from cognitive psychology, anthropology, evolutionary biology, and neurology. This paper begins by surveying the origins of neoclassical consumer choice theory and recent developments. Following this, it reviews the newer evidence on consumer behavior, and what this implies for the measurement of consumer choice behavior and well-being.
Keywords: Consumer Behavior; Well-being; Cognitive Psychology; Behavioral Economics
JEL Codes: D03; D1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| traditional neoclassical models (E13) | inadequate explanation of actual consumer behavior (D19) |
| emotional and cognitive factors (D91) | influence on consumer decisions (D12) |
| endowment effect (D11) | alters perceived value (D46) |
| traditional methods (C90) | overlook important aspects of consumer welfare (D43) |
| preference heterogeneity (D11) | need for models accounting for individual differences (C52) |
| context and past experiences (C92) | influence consumer preferences (D12) |
| psychological insights (D91) | integration into economic models (F02) |