1.3 Behavioural Economics

Question 1

Characteristics of homo economicus

Answer 1

• Self interested
• Rational action
• Fully informed decision making
• Ability to order their preferences

Question 2

Homo economicus

Answer 2

The economic human, used in economic theories to describe humans as rational and self interested beings.

Question 3

Behavioural economics

Answer 3

A method of economic analysis that applies psycological insight into human behaviour to explain economic decision-making. Influenced by bounded rationality, willpower, and self-interest.

Question 4

Bounded rationality

Answer 4

Occurs when human beings make decisions that are satisfactory, rather than optimal, because of limited information and time.

Question 5

Overconfidence bias

Answer 5

Consumers will overestimate their ability to make good decisions (e.g. investing and debt).

Question 6

Vividness

Answer 6

Consumers place too much weight on a small number of vivid observations (e.g. reading reviews compared to friend’s opinion).

Question 7

Status-quo bias

Answer 7

Consumers don’t like change even though the change can be beneficial for them.

Question 8

Herd behaviours

Answer 8

Consumers often follow the crowd.

Question 9

Anchoring bias

Answer 9

A cognitive bias that causes us to rely heavily on the first piece of information given on a topic. Newer information interpreted with anchor as a reference point.

Question 10

Confirmation bias

Answer 10

The tendency to search for information in a way that confirms and agrees with and supports an individuals previous beliefs or values.

Question 11

Bounded willpower

Answer 11

Captures the fact that people can make choices that are not in their long-run interest. Consumers don’t possess absolute self-control when confronted with choices and can succumb to their appetites and urges. Emotional and impulsive to make regretful choices.

Question 12

Bounded self-interest

Answer 12

Incorporates that humans are often willing to sacrifice their own interest to help others and consumers care about fairness and not always self-interest.

Question 13

Social factors influencing demand

Answer 13

• Social awareness (e.g. for health risks and consequences)
• Social norms (changing norms of behaviour e.g. demand for recycled bags)
• Social pressure (e.g. peer pressure and the need to fit in)

Question 14

Emotional factors influencing demand

Answer 14

• Emotional arousal (e.g. demand for health insurance after major accidents)
• Binge drinking/eating at times of personal insecurity
• Demand for products (e.g. AFL season tickets) due to strong emotional attachment

Question 15

Nudge

Answer 15

Any policy or action that subtly coaxes citizens into making optimal choices without having to resort to large financial incentives or sanctions (cheap and easy).

Question 16

Why nudge

Answer 16

• Effective because we tend to want to fit in (conformity bias)
• Most effective when it appeals to natural bias

Question 17

Financial incentives (e.g. rebates)

Answer 17

A rebate is a partial refund of the cost of a good or service paid by the government to incentivise consumers to purchase the good. Firms may also offer rebates.

Question 18

Rebates - effective

Answer 18

• Tap into human motivation, desire to acquire resources
• Money is tangible and a universal reward, motivates people to do things they wouldn’t otherwise do
• Concrete and quantifiable compared to praise
• Can be customised to achieve different goals
• Can be short or long term

Question 19

Rebates ineffective

Answer 19

• Incentive is too small and won’t motivate citizens
• Incentive is too large and can create a sense of entitlement
• May be seen as unfair if not distributed equitably
• Temporary and may not create lasting motivation or behaviour change

Question 20

Government disincentives

Answer 20

• Indirect taxes (increase price and reduce demand)
• Public education (campaigns designed to inform citizens)
• Government regulation (complete ban on consumption involving fines/smack or financial penalties/shove)

Question 21

Government disincentives - effective

Answer 21

• May rise price of good and motivate consumers to seek healthier options
• Disincentives can be cost effective to implement and generate revenue
• Bans can significantly reduce consumption and appeal to law-abiding citizens

Question 22

Government disincentives - ineffective

Answer 22

• Consumers are addicted to consumption and lack willpower to reduce consumption
• Different strategies have different effects depending on the audience

Question 23

Strategies to influence consumer behaviour (firms)

Answer 23

Increase sales build brand loyalty to achieve a competitive advantage, introduce new products increases profits.

Question 24

Brand

Answer 24

A unique name, term, design, symbol, or any other features that identify a company’s products or services and distinguish them from those of other companies.

Question 25

Building brand loyalty

Answer 25

• Increase trust
• Paying a higher price
• Brand advocacy
• Promotes brand engagement

Question 26

Flexible payment options (buy now pay later)

Answer 26

• Can include interest, flexible payment options of smaller increments
• Exploits present bias (desire for immediate gratification)

Question 27

Exploit consumer biases

Answer 27

• Procrastination bias
• Framing bias
• Availability heuristic

Question 28

Nudges and choice architecture

Answer 28

Context within which people make decisions. Includes physical, social, and psychological features of the context that influences our decisions in which our choices take place. Describes how decisions we make are affected by layout/sequencing/range of choices available.

Question 29

The decoy effect

Answer 29

When an expensive and less attractive option is added to make an alternative more appealing.A

Question 30

Asymmetrical dominance

Answer 30

Third option (decoy) makes one of the original two options more appealing. It’ll be similar but inferior to one option.

Question 31

Paradox of choice

Answer 31

While more options seems beneficial, it has negative consequences. Struggle to make decisions in fear of making the wrong one, may feel dissatisfied for fear of missing out.