1.2.10 - Alternative Views Of Consumer Behaviour

Question 1

What Is Behavioural Economics?
(3 Points)

Answer 1

~ Disputes the idea that consumers are always rational and looking to maximise their utility.

~ Instead it is argued that emotional, social and psychological factors can influence decision making (Cognitive Biases).

~ Due to bounded rationality.

Question 2

Describe ‘Bounded Rationality’
(5 Points)

Answer 2

~ Consumers aren’t always rational.

~ Are bounded by self control (Habitual Behaviour). E.g. Addiction.

~ Time -> consumers don’t have the time to make a utility maximising decision.

~ Choice -> Too large of choice, hard to evaluate option that maximises utility (Weakness at computation).

~ Information -> Lack of information, asymmetric information when making decisions.

Question 3

What Are The Cognitive Bias Consumers Make, When Making A Decision?
(7 Points)

Answer 3

~ Price anchoring.

~ Social norms.

~ Availability bias.

~ Framing.

~ Loss aversion.

~ Herd behaviour.

~ Choice architecture.

Question 4

Describe ‘Price Anchoring’ As A Cognitive Bias

Answer 4

Value imprinted in our mind as a reference point to compare prices to.

Question 5

Describe ‘Social Norms’ As A Cognitive Bias
(2 Points)

Answer 5

~ Are decisions are influenced by rules that society has dictated.

~ E.g. Tipping in restaurants.

Question 6

Describe ‘Availability Bias’ As A Cognitive Bias

Answer 6

We make decisions based on how easy it is to create examples, even if those examples completely inflate the probability of the thing actually happening.

Question 7

Describe ‘Framing’ As A Cognitive Bias

Answer 7

Being influenced in the way that information is presented to us.

Question 8

Describe ‘Loss Aversion’ As A Cognitive Bias
(2 Points)

Answer 8

~ Consumers don’t like to give things up or lose things, that we have a value towards.

~ E.g. Hard to take the risk to invest, even if we could come out with more (Endowment effect).

Question 9

Describe ‘Herd Behaviour’ As A Cognitive Bias

Answer 9

Make decisions because other people have made that same decision.

Question 10

Describe ‘Choice Architecture’ As A Cognitive Bias

Answer 10

Decisions are influenced based on the location, placement and information of something.

Question 11

What Are Choice Architecture Polices Useful At Overcoming?

Answer 11

Market failures.

Question 12

What Are The Choice Architecture (Nudge) Policies?
(5 Points)

Answer 12

~ Framing.

~ Nudges.

~ Default choice.

~ Restricted choice.

~ Mandated choice.

Question 13

Describe ‘Framing’ As A Choice Architecture (Nudge) Policy
(2 Points)

Answer 13

~ The way in which information is presented to us.

~ Decision making can be more informed and educated to benefit society.

Question 14

Describe ‘Nudges’ As A Choice Architecture (Nudge) Policy
(2 Points)

Answer 14

~ Ways we can be influenced by product placement and location.

~ To influence decision making and get us to do the right thing.

Question 15

Describe ‘Default Choice’ As A Choice Architecture (Nudge) Policy
(3 Points)

Answer 15

~ Entered into something, unless we opt out of it.

~ Have to physically make the decision to opt out.

~ Tries to get people to do things, they wouldn’t always force themselves to do.

Question 16

Describe ‘Restricted Choice’ As A Choice Architecture (Nudge) Policy
(2 Points)

Answer 16

~ Restricting the number of choice available.

~ Makes consumers opt for the better option.

Question 17

Describe ‘Mandated Choice’ As A Choice Architecture (Nudge) Policy

Answer 17

Have to make a choice one way or the other.

Question 18

What Are The Issues With Choice Architecture (Nudge) Policies?
(3 Points)

Answer 18

~ Unpredictable and costly.

~ Based on bias.

~ Might not be strong enough policies, to overcome deep rooted issues in society.