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BBI of Chicago
December 2021

The influence of behavioral finance on interstate purchase choices

By: Karoline França da Silva.

For a long time, it was believed that human beings were rational beings who made the best decisions without variable factors being able to influence them. Lobão (2012) states that rational beings' decisions are based on three basic principles: perfect rationality, perfect self-interest, and perfect information.

According to Hebert Simon (1955), the complexity of the problems and the individual's cognitive capacity limits their ability to make decisions in conditions of perfect rationality. Normally, people are risk-averse for gains and risk-prone for losses, and choices are made from a point of reference, accepting satisfactory rather than optimal solutions, and not visualizing long-term gains.

Currently, several scholars, including Kahneman and Tversky, have developed lines of research on behavioral finance, demonstrating the individual's influence in the decision-making process. They contest the existence of unlimited rationality, stating that individuals may have their behavior affected due to irrationality aspects, using mental shortcuts to simplify the decision-making process, such as choosing suppliers.

In the purchasing sector of a company, to choose a supplier, several factors are taken into consideration, including quality, cost, delivery, flexibility, and service. When taking into consideration the cost, there is an important aspect that the buyer, or person responsible for the purchasing sector, often does not assess. By confirming that the other factors are satisfactory and the overall cost is lower than other suppliers, a supplier from another state gets chosen to provide the goods.

It is important to consider the tax calculation due to the provider being in another state. The tax substitution for goods that will be resold or differential rates for industrial inputs. Often, the buyer only considers the lowest overall cost without realizing that there will be taxes that end up making the purchased product more expensive in the long run. Furthermore, if a more in-depth study were done, trying to see the bigger picture, the company could have chosen a supplier within the state, with a lower cost of goods.

In short, it is important to observe the importance of behavioral finance to understand which mental shortcuts can affect the choice of people who hold decision-making positions within companies. Once the company knows which areas it must look deeply into that can be hindering the decision-making process, the better the result of the choice made, be it an investment or the choice of a supplier of goods or inputs.



BIBLIOGRAPHIC REFERENCES

LOBÃO, J. Finanças Comportamentais: quando a economia encontra a psicologia. São Paulo: Actual, 2012.

SIMON, H. A. A behavioral model of rational choice. Quartely Journal of Economics, 69, February, 1955, p. 99-118.

PICOLOTO, D. Análise multicritério para seleção de fornecedores na industria moveleira.2020. Dissertation (Bachelor in Production Engineering) – Universidade de Caxias do Sul, 2020.

 

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