2.3 Aspects Of Behavioural Economic Theory

Question 1

What is behavioural economics?

Answer 1

Method of economic analysis that applies psychological insights into human behaviour to explain how humans make choices and decisions

Question 2

What is behavioural economics built on?

Answer 2

Insights of of psychologists seeking to understand human behaviour and decision making

Question 3

When did the UK gov set up BIT and what does it do?

Answer 3

2010

Behavioural insights team based in the cabinet initially

Question 4

What does the BIT’s website state?

Answer 4

“Seek to understand how individuals take decisions in practise and how they are likely to respond to options”

Question 5

What did Dan Ariely state in his book Predicable irrational?

Answer 5

Traditional economics is about creating a theory and using it to explain actual behaviour

whereas behavioural economics is about observing actual behaviour and coming up with a theory

Question 6

Why are traditional theories attacked by behavioural economics?

Answer 6

Because they simplify assumptions on which the theories are built and are therefore unrealistic

Question 7

What assumption do behavioural economists query and why?

Answer 7

“Profit-maximising assumption”-entrepreneurs make business decisions solely on if it will make more profit

Question 8

What did Milton Friedman state in ‘the methodology of positive economics’?

Answer 8

“Truly important and significant hypothesis will be found to have assumptions that are wildly inaccurate descriptive representations of reality”

(In general the more significant the theory the more unrealistic the assumptions)

Question 9

What did Friedman reject?

Answer 9

Testing a theory solely based on assumptions

Question 10

What was Friedman’s core argument?

Answer 10

A theory should be tested or rejected on on the basis of the validity and fruitfulness of its predictions

Question 11

What do the traditional theories of a firm state?

Answer 11

-entrepreneurs are assumed to produce and sell up to the point at which

Marginal revenue=marginal cost

Question 12

What does homo economicus mean?

Answer 12

portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally

Question 13

Home economicus translation

Answer 13

Economic man

Question 14

What does behavioural economics think about homo economicus?

Answer 14

Seeks to move beyond it to a more realistic representation of how people choose to behave

Question 15

What are the three ways behavioural economics attempts to move past homo economicus?

Answer 15

1. -anomalies that defy rationality
2. Research from the field of cognitive psychology
3. Humans face substantial limitations of computation and reasoning

Question 16

behavioural economics attempts to move past homo economicus:

Way 1

Answer 16

People can be altruistic and care for the well-being of others also humans can be impatient and lack self control

Question 17

behavioural economics attempts to move past homo economicus?
Way 2

Answer 17

Humans often make decisions using simple rules of thumb (heuristics)-and suffer from forms of bias

-emotions are also heavily involved in decision making

Question 18

behavioural economics attempts to move past homo economicus?
Way 3

Answer 18

Complex environments: when people are acting strategically their best actions is dependent on what others choose to or

-e,g a firm setting a price will first have to wait and see what it’s competitors are doing

Question 19

In the world decisions are made in……

Answer 19

Bounded rationality

Question 20

What is bounded rationality?

Answer 20

When making decisions, individuals’ rationality is limited to the information they have, the limitations of their mind and finite amount of time available to make decisions

Question 21

What is bounded rationality closely linked with?

Answer 21

Bounded self control

Question 22

What is bounded self-control?

Answer 22

Limited self-control in which individuals lack the self-control to act in what they see as their self-interest

Question 23

What does traditional economics assume about self control?

Answer 23

Everyone has complete self control all the time

Question 24

Give an example of how self control can be limited?

Answer 24

New Years resolutions

-daily jog everyday but a little bit of bad weather leads the resolution being broken

Question 25

What did noble peace prize winner Kahbeman come up with?

Answer 25

Humans think in two different ways

1.”thinking fast”-instinctive little effort made in decisions

2. “Thinking-slow”-reflective thinking, metal effort is needed to work through a problem before a decision can be made

Question 26

What system falls under the “thinking fast”?

Answer 26

The automatic system

Question 27

What system falls under reflective thinning?

Answer 27

Reflective systems

Question 28

What is wrong with quick decisions?

Answer 28

They are heavily biased

Question 29

What is cognitive bias?

Answer 29

A systematic error in thinking that affects decisions and judgments people make

Question 30

Give a type or cognitive bias?

Answer 30

Confirmation bias which is the tendency to seek information that matches what one believes

Question 31

What are rules of thumb used for?

Answer 31

To make sensible decisions based on limited information but the decisions are prone to cognitive bias

Question 32

What are the two common rules of thumb?

Answer 32

-anchoring
-availability bias

Question 33

What is availability bias and when does it occur?

Answer 33

When individuals place to much weight on the probability of an event happening because they recall vivid examples of similar events

Question 34

Give an example of availability bias?

Answer 34

Buying a lottery ticket
Not a rational decision to buy one but people focus on the stories of the winners and decided to buy a ticket despite a small chance of winning

Question 35

What is anchoring?

Answer 35

Congestive bias describing human tendency when making decisions to reply to heavily on the first piece of information offered

-this piece of information is used in the subsequent judgments

Question 36

Give an example of anchoring?

Answer 36

Restaurant menus’

-choose cheapest item over expensive items even though prices might be still high

-often the middle option is selected, not to expensive and not to cheap

Question 37

What are social norms?

Answer 37

Forms or patterns of behaviour considered acceptable by society or a group within society

Question 38

Give an example of a negative social norm?

Answer 38

Young people having alcohol

Question 39

What are nudges?

Answer 39

Factors which encourage people to act and think in a particular way

-nudges try and shift group and individual behaviour in ways to comply with desirable social norms

Question 40

Give an example of positive social norms?

Answer 40

-no longer socially acceptable to smoke in society

Question 41

What is altruism?

Answer 41

Concern for the welfare of others

Question 42

What is fairness?

Answer 42

Quantity of being impartial (just or free from favouritism)

-treating people equally sharing with others and giving others respect and time and not taking advantage of them

Question 43

What is the negatives with altruism?

Answer 43

We suffer the consequences financially, at a personal risk or loss of time

Question 44

Dispute altruism not being common in traditional economic theory where was it present p?

Answer 44

Individuals receive satisfaction by giving to others and therefore it is still acting in the self interest

Question 45

What is the first impulse of humans?

Answer 45

To co-operate rather than compete

Question 46

Framing?

Answer 46

Bias on how information is presented to you

Question 47

What is the loss of aversion?

Answer 47

Non gamblers out of fear of losing what they have