What is ‘consumer choice theory’?

‘Consumer choice theory’ is a hypothesis about why people buy things. Put simply, it says that you choose to buy the things that give you the greatest satisfaction, while keeping within your budget. At the heart of this theory are three assumptions about human nature

The first assumption is that when you shop, you choose to buy things based on calculated decisions about what will make you happiest. In economics language, this is known as utility maximisation (Economists really like to put quite simple concepts into long complicated terms.)

Secondly, the theory assumes that no matter how much you shop, you will never be completely satisfied. In other words, you will always be happier consuming a little bit more. This is known as the principle of non-satiation.

Thirdly, even though you always get more happiness from more consumption, the amount of pleasure you get from each good decreases with the more you consume. So if you eat two ice creams rather than one, you get more overall pleasure, but the second ice-cream won’t be as satisfying as the first. This is known as decreasing marginal utility.

Consumer choice theory has influenced everything from government policy to corporate advertising to academia.²

But the theory has been criticized for not being the most accurate description of how people actually make choices. A whole new branch of economics, called ‘behavioral economics’,  has emerged essentially to use findings from psychology to disprove the assumptions behind consumer choice theory. This has also led others to argue that consumer choice theory is less about describing how we do actually behave, and is more about describing how people should behave.³ In other words, by portraying people as self-interested shopaholics, economists are saying that is it okay and natural for us to be avid consumers.