Understand More On Rational Behavior In Economics And Its Example Here!

Some business owners seem to make the wrong decision. The decision even affects their businesses a lot. It can be because they decide based on their emotion, ego, or feeling.

The good news is that you can limit the risk of making the wrong decision. Here, we are about to discuss rational behavior in economics. Being rational helps to make better decisions in life.

About Rational Behavior in Economic

Say you have to decide whether you must launch a new product or not. You know that the product is not ready yet. It needs more improvement to follow the standard. On the other hand, customers are waiting for the product.

They keep asking when your company is about to launch it. As a person with rational behavior, you analyze first the benefits of the options. You will take the option that gives more benefits to you and your business.

For example, you think that improving the product a little bit more will give more benefits than launching it right away. Customers will be more satisfied with your new product. It gives you long-term benefits. In contrast, customers may be disappointed after buying your new product.

From this illustration, rational business owners will decide to postpone the launch. Some people think that your decision is irrational since the money is in front of you if you launch it right away. One thing is for sure you know the best for yourself and your business.

Indeed, it is not only about decisions in business but also in other cases, such as choosing the best insurance, investment instruments, and even buying something. The examples below will give you a better understanding of rationality in economics.

The Examples of Rational Behavior in Economic

Buying Something that Gives More Benefits

For instance, you want to buy a new PC. There are two different options in front of you. The price of the first PC is $175, whereas the second PC is $228.

A person who often chooses with their ego or emotion will buy the first PC. They only consider the cheaper price without considering the specifications and benefits they get. On the other hand, a rational person will check the specifications of both PCs first.

Surprisingly, a rational person may take the second PC even if the price is more expensive than the first PC. They decide to take it because of better storage, RAM, processor, resolution, and many more. For rational people, $228 can be a cheap price because they get the best product.

They also think that the PC is about to help them to accomplish tasks better. Imagine if they buy the first PC yet they have to repair it over again. The cost of having the first PC is more expensive than the second PC.

Indeed, it doesn't mean that they don't buy cheap products at all. They only do it when the products give more advantages to them. We can say that for rational people, price tags are not the only consideration to buy something.

Understand the Reason Why You Must Have Insurance

Some people decide not to take insurance. Most of them think that insurance increases their spending. It is because they have to pay the monthly coverage.

Talking about rational behavior in economics, rational people are about to use insurance. They even carefully pick the best insurance plans with the best coverage. Once again, rational people think about the future.

They know that the insurance coverage will be useful for them or their beloved family members in the future. Say they have to be hospitalized for a few days. They can only focus on the medication treatments without thinking about the cost anymore.

It also helps their family members. The family members only focus on helping the insurer to get their health back. Insurers don't have to pay a lot of money even if they have to do it. The most important thing is that they don't take insurance only because of trends or because other people use it.

They understand the benefits of the insurance plan for them. Rational people even think that having an insurance plan is one of the most rational strategies to save their expenses.

Investing Their Money in the Right Investment Instruments

Both irrational and rational people agree that they must invest their money. The difference between both of them is the way they choose the right investment instruments. Irrational people often pick an investment instrument based on their ego, trend, or big profit.

They will put their money on a certain instrument only because most people pick this instrument. Because of that, irrational people often regret their decision. The worst part is that some of them got nothing from the investment because they joined scam investment programs.

Unlike irrational people, rational people learn all types of investment instruments they can afford. They are not only learning about the profit but also the risks. The key is gathering as much information as it can. Then, they will analyze the data they get before finally investing their money in the instrument. Indeed, the process takes time, yet most rational people earn money from their investments. They even can use the money to support their life for a few years.

Investing Based on Their Budget

Despite rational people love to invest their money, they also spend it based on the budget. For example, they only have a limited amount of money for investment. They will choose to invest in affordable instruments, such as buying gold.

They also consider the investment return time. Rational people make investments with shorter investment return times in case they need money. Plus, they should ensure that the money is easy to withdraw.

Slowly but surely, they invest the money in a variety of instruments, such as property, mutual funds, shares, bonds, and many more. As a result, they earn money from a variety of sources. In contrast, irrational people often invest all their money in a specific instrument.

They only do it because the instrument offers a big return. Irrational people even dare to borrow some amount of money from family members or financial institutions only to invest. These people don't think about saving the rest of the money for daily needs and urgent situations.

In the end, some of them were mad because they didn't get the profit they expected. They even have to face the truth that their money is gone!

Buying Something Because You Need It

Rational people buy something they need. They don't buy the product only because they have money or people buy it too. They realize the functions of the product once they buy it. The brand of the product is the second priority for rational people.

It is okay for rational people to buy products from underrated brands as long as they meet their needs. Irrational people decide something because of their ego. The intention to buy branded products is bigger after seeing other people buy them.

The worst is that they don't care about their financial condition. They dare to borrow the money only to get the product and be the same as others. In the end, they often face financial difficulty and sell all their items to cover it.

Buying Something While Thinking about the Profit in the Future

It doesn't mean that rational people manage their money well, it doesn't mean that they don't buy something for fun. Some rational people also love to buy collectible items. The thing that irrational people don't know is that rational people think about the profit of the items in the future.

Say a person loves to collect the watch from popular brands. Indeed, the person spends a lot of money on the watches. Yet, he is rational if thinking about the price of the watch in the future. Some rare collectible watches are so expensive today, right?

Keep Using the Old Items Instead of Buying the New Ones

Warren Buffet is one of the best examples of making rational decisions in economics. This man decides to stay in his old house. Buffet doesn't move to a bigger or more luxurious house only because he has money. He realizes that the old house is still comfortable for him and his family.

Buffet can keep the money to buy other things they need most. It is the same case with a vehicle and mobile phone. Buffet drives his old vehicle and uses a mobile phone he loves. Once again, he doesn't buy something because of the trend.

He only buys something if he needs it. An irrational person always thinks about buying the latest item even if they can still use the old ones. As a result, they spend most of their money to buy brands and trends. These people don't think about the function of the items. They are happy and proud to show the products off to others.

Selective in Choosing Discounts and Promotions

Most people are attracted to buying something because of discounts and promotions. This strategy triggers panic buying where customers decide to buy because of the low price. Customers have a limited time to think whether they need it or not.

The most important thing is that they were happy after buying the product. Most irrational people were trapped in discount and promotion strategies. This strategy can't trap rational people.

A rational person is about to carefully check the discount or promotion. Then, he will think twice about whether they need the product or not. They will leave the discount if they don't need the product no matter the percentage of the discount.

He will directly buy the discounted product only if they need it and the discount gives him more benefits. The point is that rational people always realize the things they buy.

Fill the Primary Needs before Buying the Secondary Needs

Rational people always think about filling the primary needs first before buying the secondary needs. For example, you are ensuring that you have food stock for a month first. Then, you also save your money for urgent needs.

You can start thinking about buying secondary needs after filling all the primary needs. If so, you are considered a rational person. Your decision is economically rational!

On the other hand, you see a new mobile phone and decide to buy it next month without considering your financial condition. It is considered an economically irrational decision. Imagine if you don't have money left in the middle of the month.

In this situation, irrational people often even make the worst decision. They borrow some amount of money from the financial institution. It is a fatal decision since you also have to pay the interest rate. Imagine that a small unwise decision ruins your life and the life of your beloved family.

You Love to Save Money before Buying Something Instead of Borrowing Money to Get It

You are rational if you save the money consistently to buy a specific item. It is a rational decision since you have to consider the primary needs and the things you need most. It will be wiser if you take a couple of dollars and save them separately.

You will keep the money until the amount of the money reaches the price of the product. Indeed, you will use the money to buy the item except there is another urgent need. You are irrational if borrowing money only to buy a new product.

Imagine that you don't have the money yet! All you think about is buying the product as soon as possible. There is no consideration for your primary needs, the needs of your beloved family, and even urgent needs.

Saving money to buy a new product takes time, yet it is paid! You can enjoy the product happily without thinking about your financial condition. On the other hand, you may get the product faster, yet you get stressed because of your financial condition.

So, try to analyze yourself whether you often make rational or irrational decisions in life. The example of rational behavior in economics above helps you to understand yourself. Start to think rationally and feel the effects. You will see a significant difference before and after applying it.