Towards a New Theory of Consumer Choice

Abstract:

The consumer choice is one of the most important problem in the field of economics. The consumer seeks for a basket of goods that maximize the utility under the budget constrain. The classical models in economics assume that individuals have unlimited ability to analyze information, but recent literature demonstrates direct violations of transitivity and independence, which suggest that people often do not maximize utility functions (see, Thaler 1999, Kahneman & Tversky 1974). Thaler (1999) argues that the individual divides the products into consumption categories and that money is not fungible between categories. We present a seeds to a new consumer choice model under categorization, and analyze behavior that combines maximizing, satisficing and the use of heuristics. In addition, we define and study a novel notion, category elasticity, to define flexibility in re-assigning the budget between categories.