Consumer Choice and Aggregate Demand: An ABM Approach to Understanding the Impacts of Satisficing Behavior

Consumer Choice and Aggregate Demand: An ABM Approach to Understanding the Impacts of Satisficing Behavior

Omid Roozmand (Department of Environmental Studies, Dartmouth College, Hanover, NH, USA) and DG Webster (Department of Environmental Studies, Dartmouth College, Hanover, NH, USA)
Copyright: © 2014 |Pages: 18
DOI: 10.4018/ijats.2014100101
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Satisficing behavior is one of the most important subjects in consumer behavior studies. Satisficing consumers select any affordable bundle of items with utility larger than their satisfaction threshold. This contrasts to maximizing behavior, where the consumer selects the bundle of items with the highest possible utility within his or her budget constraint. Authors hypothesize that, all else equal, satisficers will purchase more goods overall when compared with maximizers. Furthermore, satisficers will also purchase more disposable rather than durable goods because they are less concerned with maximizing the total value of their purchases. To test these hypotheses, an agent-based model of consumer behavior has been developed that allows for decision making based on either satisficing or maximizing rules. Satisficer agents use a modified genetic algorithm to find a satisficing bundle. Maximizer agents apply dynamic programming to find the best bundle of items. The aggregated results of consumer agents' purchases support aforementioned hypotheses when consumers select from three types of products: 1) cheap disposable, 2) cheap durable, and 3) expensive durable. The hypotheses also hold when a more realistic set of items is constructed based on the common economic assumption that supply curves are upward sloping. In this latter case, consumers choose bundles from a total of 5 types of items, each of which differs in price, quality, and durability.
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1. Introduction

Much of economic theory is built on the assumption that consumers are rational utility maximizers (Morgenstern & Von Neumann, 1953). In other words, consumers are expected to purchase the basket (or set) of goods that will provide them the greatest benefit (utility) at the lowest price. Perfectly rational consumers also instantaneously know all information about all products (perfect information) and have no difficulty ranking different baskets of goods such that one basket will always stand out as better than all others (Arrow, 1959). If expectations are uncertain, then the basket of goods with the highest probability of maximizing utility is selected. In more advanced macroeconomic formulations, consumers also balance the benefits of savings and leisure time against the benefits of consumption, allocating their discretionary income (funds available after taxes) among multiple uses in the most efficient way possible.

However, as van den Bergh et al. (2000) point out, the basic rational maximizing approach of economics is not sufficient to explain much individual behavior relative to the environment. Social factors, like the relative gains issue described by Easterlin (1973) or social norms that define fashion and status symbols for specific groups are particularly important determinants of consumption and discarding behaviors. These can be incorporated into the rational utility maximization paradigm via the use of networked models (Janssen & Jager, 2002). There is also considerable scientific evidence that consumers use many short-cuts in their decision process and often engage in a range of “boundedly rational” behaviors that, by definition, differ systematically from what one would expect if the utility maximization assumptions hold (Devetag, 1999).

Satisficing is a form of bounded rationality that was introduced by Simon (1955). According to Simon, that individual decision making is limited by available information on one hand and the mind’s cognitive capacity on the other (Simon H, 1991; Rubinstein A 1998). While individuals may increase the available information via search, this requires a trade-off of time that individuals may not be willing to accept. In particular, given that they have limited time and cognitive capacity, when choice sets are large, individuals are not willing or able to search the entire range of possibilities. Instead they satisfice, selecting a readily available option that meets their satisfaction criteria without requiring substantial search time. This differs fundamentally from the maximizing assumption of total information and search for an optimal solution (Gigerenzer G et al., 2002).

Satisficing behavior is very common in economics and consumer purchasing behavior. Consumers do not often have the time to go to every store and examine all possible options, so they frequently satisfice. An exception occurs when consumers have low incomes and therefore are driven to optimize out of necessity. However, consumers with higher incomes can afford to shop for convenience rather than utility optimization. Therefore they are willing and able to spend more money on the first satisfactory option within their budget constraint, rather than extending their search to find the optimal option.

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