Here's a brief overview of consumer decision making theories that drive thinking about behavioral economics based on a blog post by Gord Hotchkiss:
Invisible Hand by Adam Smith - consumer purchasing driven by the wisdom of the market. Everyone is a rational decision maker when making an economic decision. Capitalism is driven by the result - who wins and who loses.
Expected Utility - an individual weighs the pros and cons of a purchase before acting based on the potential return on investment. Emotion and the desire to avoid risk by a role, and diminish our ability to use logic when making a choice.
Prospect Theory by Tversky and Kahneman - decision making is not always logical and decisive. Everyone has a hard wired cognitive bias that results in illogical economic choices.
Bounded Rationality by Herbert Simon- if we are rationally engaged in a decision, we couldn't optimize it, particularly when the decision is complex. The decision maker uses "gut feeling" to guide decision making and satisficing - the intersection of satisfy and suffice based on our beliefs and instincts.
Information Asymmetry Theory by George Alkerlof- Historically, sellers held more information than buyers, creating an asymmetry. This created buying risk for the buyer. To cope, consumers developed beliefs about brands to guide future decisions - brand loyalty. Manufacturers continually emphasize positives and eliminate negative information. (the internet obviously changes this symmetry)
Choice Theory by Gad Romann - The consumer is compelled to purchase based on conflicting behavioral factors. Brands are a satisfice, or the best compromise to solve opposing sides of a conflict that reside in the individual. There is a fixed/limited set of conflicts with the consumer "mapping" a brand onto a particular behavioral paradox.
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