4.1.2 Individual economic decision making

"Think of a recent decision that you needed to make. Discuss how insights and tools from economic theory and analysis might have been helpful in making the decision." [Essay Competition-  awarded a certificate of commendation and a trip to Cambridge]

Sitting with my family at our favorite restaurant, I was confronted with a menu and faced with what seemed like a simple task: choosing what to eat. As I scanned through the options, I quickly realised this was anything but easy; with so many choices and limited time, I found myself applying economics to make the best decision I could.

When choosing a drink from the menu, I understood how several principles of behavioral economics had been implemented, and I was not to be fooled! I immediately noticed price anchoring was being used; the presence of a higher price option which acts as an anchor, making the other drinks seem relatively cheaper. If I originally thought £2.50 was expensive for a soft drink, seeing £20.00 at the start of the reframed my perception, making £2.50 seem reasonable. I researched into this further, I found out this may tap into the primacy effect, where people are more likely to choose items, they see first. Therefore, by placing higher ticket items at the start, restaurants may use the primacy effect to increase profits. The menu uses “choice architecture” effectively. Soft drinks are grouped with little price variation, making them a default option, even for those who avoid alcohol. However, I chose water to avoid sugar and stay true to my gym goals. Faced with small (£2.50) versus large (£4.50) mineral water, the pricing demonstrated the decoy effect: the large bottle seemed a better deal for just an extra £2, nudging me to upsize. This setup also ties into prospect theory and loss aversion, as customers (me included) fear missing out on a better unit price. Ultimately, I fell for the trick and bought the large bottle for £4.50.

I was then tasked to choose starters. Due to my religious preferences, I do not eat non-vegetarian foods and hence I was left with the only vegetarian option: Spring rolls. As I felt like I there wasn’t altruism towards us Veges at the restaurant, and we were being starved with a lack of vegetarian options, I decided to not choose any starters and decided on moving to the mains. 

There is a potential digression from the Nash equilibrium, which occurs when all players in a scenario make the best possible decision they can, taking into account the decisions of others, and no one has an incentive to change their choice unilaterally. In the context of my restaurant visit, my family’s choices didn’t significantly impact my own. For example, everyone ordered starters except me, I felt slightly pressured to order one too, to avoid standing out or seeming unsociable, yet I didn’t due the earlier premise. 

From a rational bounded choice theory perspective, a consumer would logically compare prices, ingredients, and portion sizes to maximize utility. I was not able to exercise this, as I had scarce time due to my mother telling me to “hurry up”. The option to add tofu for £1 more employs the decoy effect, making the tofu add on appear like a better-value choice. This links to marginal utility, as the small additional cost offers a disproportionately higher perceived benefit—more protein and a fuller meal—thus increasing the utility gained per pound spent. It could also be argued that my demand for tofu was relatively inelastic in this case because of a small option providing more welfare. Additionally, anchoring plays a role again, with cheaper options like Stir Fried Broccoli and Pak Choi (£9.95) listed at the top, making the £12.95–£13.95 curry dishes seem premium and justifiable. This ties into opportunity cost, as spending slightly more yields a richer, more complex dish. The use of charm pricing (ending prices in .95) taps into the left-digit effect, where £12.95 feels cheaper than £13. Ultimately, I chose the Panang Curry with tofu (£13.95) because I wanted to increase my protein intake, and the tofu add-on seemed like a worthwhile upgrade for just £1 more. From a rational choice theory perspective, I weighed the price against the nutritional benefits, recognizing that the tofu option would provide more sustenance and value for the extra cost.

Dessert. Usually, the best part of the meal! A PPF can be used to illustrate the trade-off between indulging in dessert and maintaining my health benefits. On one end of the production possibility frontier, skipping dessert preserves gym progress; on the other, opting for dessert would be something nice to finish the meal off with. The restaurant’s lack of a printed or online dessert menu limited my ability to evaluate options, forcing me to rely on impulse rather than deliberate comparison. This information asymmetry and the resulting bounded rationality (compounded by time pressure) narrowed my decision space, visually captured by the PPF. Ultimately, the diagram underscores that each dessert choice came with an opportunity cost: a measurable loss in my health benefits, which I was not willing to incur.

After indulging in a delicious meal that was potentially designed to nudge my spending higher, the total amount I spent on the final bill came to £22 including the service charge. Reflecting on this through an economic lens, I considered the counterfactual: what if I had cooked the same meal at home? A quick breakdown of ingredient costs—coconut milk (£1.50), tofu (£2.00), vegetables (£3.00), and spices (£1.50)—suggests that I could have prepared a similar dish for roughly £8.00, a significant saving compared to the restaurant price. The added premium, of course, accounts for convenience, ambiance, and service, but in strict utility terms, my consumer surplus took a hit. At the end of the day, economics is a lot like food: both involve balancing scarcity, opportunity costs, and maximizing utility. In this case, I bit off more than I bargained for: both financially and behaviorally!

Comments about this essay: I enjoyed writing this essay, it was nice to see things that we have learnt in school such as anchoring being used to influence consumer behaviour. I wish the word count was a bit greater so that I would be able to talk more about other concepts, but oh well its fine!