1.3 Behavioural Economics Flashcards
Unit 1 AOS 3
Characteristics of homo economicus
- Self interested
- Rational action
- Fully informed decision making
- Ability to order their preferences
Homo economicus
The economic human, used in economic theories to describe humans as rational and self interested beings.
Behavioural economics
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.
Bounded rationality
Occurs when human beings make decisions that are satisfactory, rather than optimal, because of limited information and time.
Overconfidence bias
Consumers will overestimate their ability to make good decisions (e.g. investing and debt).
Vividness
Consumers place too much weight on a small number of vivid observations (e.g. reading reviews compared to friend’s opinion).
Status-quo bias
Consumers don’t like change even though the change can be beneficial for them.
Herd behaviours
Consumers often follow the crowd.
Anchoring bias
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.
Confirmation bias
The tendency to search for information in a way that confirms and agrees with and supports an individuals previous beliefs or values.
Bounded willpower
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.
Bounded self-interest
Incorporates that humans are often willing to sacrifice their own interest to help others and consumers care about fairness and not always self-interest.
Social factors influencing demand
- 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)
Emotional factors influencing demand
- 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
Nudge
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).
Why nudge
- Effective because we tend to want to fit in (conformity bias)
- Most effective when it appeals to natural bias
Financial incentives (e.g. rebates)
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.
Rebates - effective
- 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
Rebates ineffective
- 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
Government disincentives
- 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)
Government disincentives - effective
- 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
Government disincentives - ineffective
- Consumers are addicted to consumption and lack willpower to reduce consumption
- Different strategies have different effects depending on the audience
Strategies to influence consumer behaviour (firms)
Increase sales build brand loyalty to achieve a competitive advantage, introduce new products increases profits.
Brand
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.
Building brand loyalty
- Increase trust
- Paying a higher price
- Brand advocacy
- Promotes brand engagement
Flexible payment options (buy now pay later)
- Can include interest, flexible payment options of smaller increments
- Exploits present bias (desire for immediate gratification)
Exploit consumer biases
- Procrastination bias
- Framing bias
- Availability heuristic
Nudges and choice architecture
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.
The decoy effect
When an expensive and less attractive option is added to make an alternative more appealing.A
Asymmetrical dominance
Third option (decoy) makes one of the original two options more appealing. It’ll be similar but inferior to one option.
Paradox of choice
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.
