1.2.3 Aspects of behavioural economic theory

Question 2

BOUNDED RATIONALITY

Answer 2

= idea that people may try to behave rationally, but their ability to do so is severely restricted, for three main reasons:
1. human mind = limited ability to process and evaluate information.
2. available info incomplete + often unreliable
3. time available to make decisions is limited.
individuals end up ‘satisficing’, or accepting suboptimal outcomes.

Question 3

Bounded self control

Answer 3

= individuals have good intentions but lack
self-discipline to see them through, e.g. regular gym attendance, giving up smoking or saving for the future.
therefore people = predictably irrational

Question 4

rules of thumb

Answer 4

thinking shortcuts or informed guesses made in efforts to save time e.g. ordering same thing as you know you like it

Question 5

anchoring

Answer 5

Anchoring: the tendency, of individuals to rely
on particular pieces of information when making
choices between different goods and services.

Question 6

avaliability bias

Answer 6

when people make judgements about the probability of events by recalling recent instances.

Question 7

social norms

Answer 7

when
individuals are influenced
by others when making
decisions.

Question 8

altruism and fairness

Answer 8

biases of altruism and fairness mean that people are motivated to ‘do the right thing’.
e.g. Giving to charity, doing voluntary work or paying extra to support fair trade initiatives may be seen as irrational in traditional, neoclassical economic theory.