Do we eat too much at Christmas? (How rational self-interest conflicts with profit maximisation)

As we pass through a holiday period which is widely seen as marked by excessive consumerism, it is worth reflecting  how such behaviour squares with the rational utlity maximising individual of economic theory. Either the model is incomplete and we lapse out of rationality during Christmas, or perhaps our consumption patterns are not so excessive afterall.

The theoretical complement of utility maximisation is profit maximisation by firms (companies). They set prices or choose inputs that maximise their revenues and minimise their costs. As described so far, there is no scope in the model for an excess of consumerism. Firms are not interfering with human rationality, and indeed, the profit motive leads to competitive prices and and an efficient allocation of goods.

However, the model assumes that an individual knows their utility function, that we know what makes us happy. As we know from painful personal experience, life is seldom so straightforward - even if we make a decision with the best of intentions, it is only too easy to misjudge one's best interests and end up  buying something we quickly realise we have no need for, lapsing into buyer's remorse. We regularly deviate from acting in our rational self-interest. And firms are only too aware, not only that we are capable of behaving irrationally, but that it is within their power to influence this and induce us to consume more than we need to. In other words it is in their best interests for us not to act in our best interests. Any self-respecting profit maximiser will seek to excite emotional decision-making at the expense of cool, calm and collected rational utility maximisation.

In particular, firms will exploit the fact that we respond to extrinsic motivation as well as intrinsic motivation, that we are susceptible to cognitive biases, and that our emotions can be manipulated and our good judgement clouded. Hence the realisation that 'sex sells', the sensory overload of the websites of budget airlines, the extreme (and enticing) limited time deals of Black Friday and so on. Most topically, the peer pressure of consumption norms linked to the Christmas festive period appeals to our extrinsic motivation and drags us out of making choices based on what we actually enjoy.

Does it matter? Morally, of course not, it's human to err and to make irrational decisions, and this is not likely to change any time soon, nor should it. From the perspective of economic theory however, it does suggest that rational self interest and profit maximisation are in conflict with one another, which represents a paradox. And as a corollary, a reliance on market systems untampered with to deliver optimal outcomes looks misplaced. Perhaps the 'greed is good' motto is an over-simplification after all.