1.2.10 Alternative views of consumer behaviour

Question 1

What is bounded rationality?

Answer 1

The idea that decision making by humans cannot be fully rational

Question 2

What are the assumptions of behavioural economics? (3)

Answer 2

1) Humans are habitual animals
2) Humans follow the herd
3) Humans have weaknesses of computation (for utility)

Question 3

What are cognitive biases?

Answer 3

Cognitive biases seek to explain why humans systematically deviate from the rational judgement

Question 4

Describe the anchoring effect

Answer 4

Placing too much emphasis on one piece of information:
The first piece of information we encounter has the greatest impact in anchoring our thinking (e.g. lowered prices)

Question 5

Describe the availability effect

Answer 5

Whatever comes to mind the easiest and the fastest, the most significance is applied to (e.g. cautions on the news)

Question 6

Describe the decoy effect

Answer 6

Having a ‘middle’ option to act as a decoy to fool us into thinking the more expensive, ‘better’, option is a good deal

Question 7

Describe framing effects

Answer 7

People reacting differently depending on how a piece of information is presented/framed

Question 8

Describe status quo bias

Answer 8

Doing what you have always done (default choice), as humans prefer to not change (habitual)

Question 9

Describe heuristics (rule of thumb)

Answer 9

An informal, practical decision-making method and mental shortcut, to make making decisions easier (e.g. soup of the day)

Question 10

Describe altruism and fairness

Answer 10

The idea of some decisions being made based on value judgements and not on the idea of self-maximisation (e.g. giving to charity)

Question 11

Describe loss aversion

Answer 11

The idea that humans hate losing more than they enjoy winning

Question 12

Describe social norms

Answer 12

An individual’s behaviour can be influenced by the behaviour of their social group (e.g. peer pressure)