Visualize a particular time when you needed to acquire a new mobile phone. The processes of deciding on a particular model are usually complicated and thus as a prospective buyer, you may have opted to acquire one of the most popular brand. Another method of simplifying that decision would have been going for the brand that worked well for you in the past and opt for the newer improved version of the same. In other cases, a recommendation from a friend or just copying what your peers are using may have influenced your decision to go for a particular brand and model. In some cases, the manufacturers showcase a base model in which the customers are allowed to change the specifications to meet their needs. Some sellers opt to include all the features and include an option of either deleting some of them. Thus the customers are able to lower the cost by removing some of the features or increase by additional of other features. This same analysis is carried out in the acquisition of other products such as cars motor vehicles. The process of customers’ decision making is studied in the field of behavioral economics and in the subcategory of behavioral finance. In this forum, we shall expand more on the behavioral and economic forum for the automotive sector (Behavioral Economics Organization, 2016).
Behavioral finance is the study is the study of the impacts of the psychological, social and emotional factors in the economic decisions of specific individuals or organizations. This study also extends to the study of how the above factor influences the decision making, prices and the allocation of the resources. This is concerned with the boundaries that are introduced by the rationality of the agents of the economy. On a wide scale, the study of the behavioral economics involves the study of how the decisions in the market are constructed and the drivers that influences the public choices. Behavioral economics studies the reasons why at times people make decisions that can be termed as irrational (Shleifer, 2000).
In the past, economic studies concentrated on the unemotional aspect of economics. All the decisions were deemed to be rational and thus based on the information available in the market. The utility was assumed to be the ultimate driver of the decisions. However, as the studies progressed, it dawned to the scholars that most decisions that are made by the individuals are not solely informed by the utility set to be gained. There are other driving forces that shape the decisions of the users. Two people are likely to make two different choices given a particular set of conditions. This is the reason why one brand of products such as cars is popular in one country while in another they are not. People tend to buy products that resonate with the peers, costs and the brand value of their choice. In some cases, the decisions may be seen as irrational as they are not conversant with the norms. Ignoring this aspect of economic choices would result to misinformation and misrepresentation of economic facts in a setting. This prompted various scholars to explore it.
The behavioral economics field has been explored by various scholars, including Nobel laureates Gary Becker on the Motives, Consumer Mistakes in 1992; George Akerlof on Procrastination in 2001; Daniel Kahnman on Illusion of Validity, Anchoring Bias in 2002, and Herbert Simon on Bounded Rationality in 1978. Other build ups on the studies that were carried out by the ancient scholars include Gerd Gigerenzer’s publication “fast and frugal” that was a continuation of Simon’s theory. He suggested that the rationality of a decision that is being taken depend structures that are within the environment that the decisions are taking place. People are thus termed as “ecologically rational.” The implication is that with the constraints that are introduced by the limitations of the ability to solve all to solve all the underlying problems. But based on this limited ability, individuals can thus make decisions that are near the maximum capabilities.
Past studies of the economics ignored the concept of behaviors and cognitive studies that had been carried out by various psychologists. This concept of studying was popularly referred to as Homo economicus. As the studies continued, researchers realized that it was not possible to disassociate the concept of behaviors and rationality from the economy as most decisions were functions of such factors. The realization gave rise to a new area of study that was referred to as behavioral economics. Herbert Simon was amongst the first scholars who differed with the traditional approach. In his work “bounded rationality,” he asserted that people have unlimited information processing ability. This term was used to denote a more vivid concept of the human problem solving skills. Ignoring the bounded rationality in the study of economics is thus a misrepresentation of the real economic facts. Owing to the limitations of time and skills, people are not able to fully solve all the economic questions. Thus, they embrace an approximate solution that resonates with the majority view and that quest their ultimate needs. The results are that the decisions are not rational in terms of choices and judgments. There are various ways in which judgments divulge from rationality as explored by Kahnman in 1982. Some of the concepts that can be used to denote these tendencies include overconfidence, extrapolation and high degrees of optimism.
Some of the concepts that have been studied include mental accounting and risk/loss aversion. Most investors have a general idea of how the business is doing and they are aware of the steps that they are supposed to take in order to take the business to the next level. Thus, the decisions are pegged on optimizing the returns and lowering the risks of losses. This study is extended with the person's ability to exercise self control. Most traditional theories assumed that people were self conscious and thus were able to exercise self control in all aspects of their day to day lives but the reality is different. In most cases, we act on other forces such as peer pressure and social status amongst other factors. But we always strive to regain the control and make the correct economic decisions. A good example is that buying cigarettes in bulk will result to discounts and thus savings. However, having a full carton will encourage you to take more putting you at more risk and ending up consuming more. As a result, most smokers will opt to buy in smaller packs at a time. That is an example of our ability to exercise caution and self control. Thus, the economic predictors ignoring the fact that peoples’ decisions are not at their digression at all times are bound to be inaccurate. Another example is the fact that people are naturally selfish. The assumption here is that people will only act for the greater good unless their welfare is catered for in the results. However, in reality people do some activities that are for the greater good and nothing in return for them. Examples include voluntary works and charity donations. These are the irrational parts and economists must consider them in their decision making (Thaler & Mullainathan, 2008).
The study of the modern economics is also explored in another field that is known as the Evolutionary Economics. This was a term that was coined by Thorstein Veblen (1898) who was an American economist and also a sociologist. He asserted that economics is not static but rather a dynamic field that keeps evolving to adapt to the needs of the markets and the market players. He compared it to other scientific fields and deduced that the market evolved to accommodate the changing needs of the societies. Another notable inclusion in this definition is the fact that the economics behaviors are determined by a combination of a specific individual and the entire society. This mainstream study involves exploration of interdependence, structural change, and as well growth. It includes the studies of the processes that transform the economy of various organizations through the experiences and interactions with other outside factors (Geoffrey, 1993).
Evolutionary Economics also focuses on the technological and organizational innovations. Thus, individual choices are shaped by the levels of the innovations in terms of technology and as well the operational efficiencies. This branch of economics does not study the decision maker or the choice object as two entities, but rather a focus on an inside transformation of the economic drivers and the implications therein (Canterbery, 1998). Another recent approach in the study includes the application of the evolutional psychology to the economics. This is in an effort to explain the gaps that are left by the traditional approaches to the study of the economics such as biases and irregularities in the rational choice theory. Traditional concepts such as utility were seen as the only pillars of economic decisions in the past. However, today the paradigms have shifted and the decisions are driven by various factors, including the emotions, peer pressure, advertisement, cultural factors and the general characteristics of the product under considerations.
Bound rational choices emanate from the limits that are imposed by our abilities to process the available information. An example is the price value evaluation. People often make decisions based on their perceived value and the values may not always be based on the quality or the cost of production, but just an inherent value that is attached to an object. This is seen in the sale of antiques, celebrity merchandizes, locally produced or imported amongst other factors. People are willing to pay higher prices for certain branded products as compared to a similar or even higher quality product that does not bear the brand name. The concept of zero price effect is also part of the evolutionary and behavioral economics. Any product that is advertised as free will intrinsically attract more users as compared to one with a charge regardless of the price. A significant drop in the price also creates a similar impact and thus buyers will make a decision based on the price and overlooking the other factors. In most some cases, the price is viewed as an indication of the product quality. Thus, users will prefer the product priced higher based on believes that it is being sold at a higher price because it is of higher quality. Similarly, they will shun low priced products as inferior. These decisions are thus not based on the utility, but on the accompanying emotions and influences from peers and individual problem solving skills (Charles et al., 1991).
The above economics trends affect the operations of all the market segments in a society. Queensland’s motor industry is divided into four categories, including the motor vehicle manufacturing industry, automotive parts manufacturing, automobile wholesalers, and finally the retail sector that include both the motor vehicles and as well the parts. In overall, Australia has only four car manufacturing organizations which are branches of oversee manufacturers. The market is homogeneous with few barriers to entry. The only factors that affect the industry are the economic factors such as the Gross Domestic Product, inflation and the fuel costs. Thus, since the market is fairly uniform, car manufacturers are thus forced to compete based on other parameters such as market appeal and prices.
Thus, owing to the shifting paradigm in the market dynamics and operations, the companies have been forced to keep up with the changes or else they may be axed out by the competition. Some of the notable recent changes in the Australian market include the introduction of the Australian Car Industry, Good and Service Tax (GST) and final efforts to reduce the use of second hand cars that has seen it slump in the recent years. Most companies specialize in terms of the product and as well in terms of the market segment that they target. However, there are some companies that have a vertical integration and serving different sub category.
Queensland being a metropolitan has a diverse population mix that has diverse characteristics. Thus, behavioral and evolutional economics plays an important role in how the market operates. With the four different countries each manufacturing all the lines, plus as well a mix of imported cars that supplement the markets and the need of the individual importers. Thus, the market forces and decision models are important elements that marketers from respective brands should know. Rational decision making is not always the driving force that drives the sales in the region. The major players in the industry have been Ford Motor Company of Australia, a subsidiary of Holden; Toyota Australia and General motors. Australia has managed to builds strong brand, especially in the manufacture of larger passage vehicles and is well known in the world and as well in the Queensland market.
Although competition is from diverse sources, including the other manufactures, imports, especially from Asia amongst others. Some of the manufacturers have managed to remain competitive despite the strong competition from low priced models from Asia. Some of them have succumbed to the pressure and they have announced plans to exit in the recent future. They Include Toyota Australia and Ford Australia. The forces behind these tendencies are the behavioral and evolutionary choices. Australia is known to be a good manufacturer of large passage vehicles and thus most companies operating from that sector will opt to use their products. This is in spite of the fact that there could be cheaper imports from other countries. As discussed above, people tend to attach a particular value to a product and thus they are willing to pay premium for it.
Innovation and technology in the automobile industry are another key driver of the market. The Queensland automobile industry has some international brands redesigned to meet the needs and the requirements of the local people. However, some of the international brands and foreign models have gained popularity at the expense of the locally produced ones. Thus, some of the companies are unable to stay competitive and thus are forced to shut down their operations in the State. In order for the automotive industry to stay vibrant in the future, there is a need for industry collaboration in terms of market research, research and development and other measures that are aimed at neutralizing the moves that are taken by the world competitors. The assumption that people will buy just because of the utility and just because they are locally manufactured is unfounded and efforts to win back the customer loyalty should be carried out (Motor Traders Association, 2016).
Psychological, social and emotional factors affect the business decision making, especially on the customer part. Traditional theories ignored the emotional aspect of the economics and formulated theories that did not account for this critical theory. Simon was amongst the first scholars to explore the subject. His study sets the pace and laid down the structures for other researchers to explore the subject. Evolutionary economics on the other hand, evaluates the dynamical aspects of the economy. There are constant changes in the economic trends and thus, organizations should align themselves to tap into those changes. Such changes are responsible for the market shifts in Queensland and Australia in general. These shifts in the market have strengthened some of the manufacturers while driving others out of business.
References
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