Consumer Behaviors in a Digital Economy: Behavioural Finance Approach

Digital economies are growing across the globe due to the rapid growth in internet penetration. People have internet access at their fingertips and almost quite literally, in their pockets, through smartphones.

 

Internet offers access to tangible as well as intangible goods and services and both these areas have a great degree of overlap. For example, literary content as well as books and magazines are available for purchase online. The benefit that internet sales brings is the reduction in the cost of distribution, especially in case of online content such as e-books or music content. This in turn reduces the cost of purchase for the consumer; hence, lowering the prices.

As per the behavioral finance approach, online purchase trends often follow the psychological bias called herd instinct. Internet trends create fads and purchase behaviors that follow these fads. This is contrary to the basic assumption in economic theory that consumers are rational decision-makers. This happens because despite availability of a lot of information, consumers make decisions based on certain biases and fail to use all the information.

Other reasons why consumer behavior may not be rational in the digital economy is cognitive limitation. Even though there is a huge amount of information available it may not be possible for all to process so much information. With too many numbers to crunch or too many options to choose from, people may face difficulty.

Hyperbolic discounting is another major behavioral bias seen in the digital economy. With so many competitors, it is common to see consumers going for the higher payoff. However, this bias is not constant over longer periods as consumers are seen to go for smaller payoffs in near future as compared to larger payoffs in distant future.

Loss aversion is another key consumer behavior observed in the digital economy. People tend to pay more attention on avoiding losses as compared to making any profits. The decision making of consumers is also affected by the way in which information reaches them. The presentation of information has the power to impact the decision making choices.

Such behavioral biases lead to sub-optimal decision making among consumers. They may either fail to choose the correct product or fail to choose any product at all. This could be attributed to either insufficient search effort or the inability to choose from among a plethora of options on the internet.

Businesses use these behavioral biases found among internet consumers to their advantage. They use this concept to guide consumer decision-making through online ads which are often made to either become viral or use click-bait tactics. Training in online finance courses can help one to create profitable financial models using these biases.