3. Individual Economic Decision Making - Behavioural Economics

Question 1

What is the basic idea behind behavioural economics?

Answer 1

Humans aren’t always rational and don’t always act to maximise utility - social, psychological and emotional factors influence decisions

Question 2

Where may behavioural economics provide better explanations than traditional economics?

Answer 2

Traditional economics suggests consumers are always rational and always utility maximising, in the real world we know this doesn’t always happen, behavioural economics explains why

Question 3

Why, according to behavioural economics may ppl not make rational decisions? (1)

Answer 3

Bounded Rationality - time, choice & information - lack of time & info may stop ppl making a rational decision, too much choice may overwhelm consumers & prevent them making rational decisions

Question 4

Why, according to behavioural economics may ppl not make rational decisions? (2)

Answer 4

Bounded Self-control - ppl know the rational decision to make but don’t have the self-control to make it - e.g. nicotine in cigarettes means ppl can’t stop

Question 5

Why, according to behavioural economics may ppl not make rational decisions? (3)

Answer 5

Consumers may choose to use heuristics - mental shortcuts/rules of thumb - to make satisficing decisions - decisions that are satisfactory to the consumer but not necessarily utility maximising