12.1 Foundations of Behavioural Economic Thought

Question 1

Q1: How does traditional neoclassical economics view consumer decision-making?

Answer 1

A1: According to traditional economic thought, consumers will always act rationally and maximize their utility (satisfaction) when making decisions. This involves gathering all available information, evaluating it, taking time to weigh up all the costs and benefits, and then making the decision that maximizes utility. The traditional view assumes that consumers have unlimited time, ability to comprehend choices, and access to perfect information in order to make rational decisions.

Question 2

Q2: What does behavioral economics argue against the traditional economic view?

Answer 2

A2: Behavioral economics disputes the basic premise of rational economic thought, arguing against the notion that consumers are always rational and utility-maximizing. Behavioral economists propose that consumer behavior is influenced by bounded rationality, bounded self-control, and altruistic motives.

Question 3

Q3: What is bounded rationality in behavioral economics?

Answer 3

A3: Bounded rationality in behavioral economics refers to the idea that consumer rationality is limited by factors such as time, choice overload, and imperfect information. Consumers do not always have the time to make perfectly rational decisions, comprehend and evaluate numerous choices, or access complete and clear information. These limitations can lead to suboptimal decision-making where utility is not maximized.

Question 4

Q4: How does bounded self-control impact consumer decision-making?

Answer 4

A4: Even if consumers have all the necessary information and know what a rational decision entails, they may not always act accordingly if their self-control is bounded. For example, consumers may exhibit poor self-control in cases of addiction, where they continue consuming goods (e.g., cigarettes) despite knowing the harm they cause. Similarly, individuals may struggle with self-control in activities like exercise, hindering them from engaging in activities that would increase their utility.

Question 5

Q5: What does behavioral economics argue about altruistic behavior?

Answer 5

A5: Behavioral economics disputes the idea that decisions are solely driven by utility maximization or profit-seeking. It suggests that moral values, emotions, and social/psychological factors play a role in explaining altruistic activity, where individuals prioritize the welfare gains of others over their own. This challenges the assumption of neoclassical economics that all behavior is motivated by self-interest.

Question 6

Q6: How do consumers often make decisions according to behavioral economists?

Answer 6

A6: Behavioral economists argue that, due to the limitations of bounded rationality and bounded self-control, consumers often make decisions that follow heuristics (rules of thumb) or mental shortcuts. These simplifications and shortcuts help to simplify and shorten the decision-making process, providing a satisfactory outcome that may not maximize utility but is sufficient to satisfy the consumer. This leads to satisficing decisions, where consumers sacrifice some utility to reach a satisfactory outcome.