3.1.2 Indivdiual economic decision making Flashcards
Traditional or Neo-classical view
The view based on the assumptions that we are rational and try to maximise our own utility in decision making.
Utility
A measure of satisfaction e.g from consuming a good or service.
Marginal utility
The extra utility gained from consuming one more unit. It usually falls as we consume more. e.g the more pizza u eat the less enjoyment u may get from one extra slice.
Maximising behaviour
The assumption that we attempt to maximise our own total utility in decision making. total utility is maximised when marginal utility is 0.
Imperfect information
The information may be biased or wrong. This may make it hard to make rational decisions.
Asymmetric information
Where one party has better information than the other. This creates an imbalance of power in transactions which can cause market failure. e.g buying a second hand car.
Behavioural economics
A method of economic analysis that applies psychological insights and scientific method to understand and explain economic decision making
Bias in decision making
Factors that mean that decisions are not purely rational or maximising.
Anchoring bias
The common human tendency to rely to heavily on the first piece of information (the “anchor”) when making decisions.
Status Quo bias
A form of bias in decision making. A preference for the current state of affairs. e.g staying with the same bank or hairdressers.
Rules of thumb
A broadly accurate guide or principle based on practise rather than theory. e.g I only buy red wine with a picture of a chateau on it and 13% alcohol.
Social norms
A source of bias in decision making that considers what is acceptable in a group or society
Risk aversion
A behaviour of humans ( especially consumers and investors) , when exposed to uncertainty, to attempt to reduce that uncertainty. For example, a risk-adverse investor might choose to put money in a low and guaranteed interest rate, rather than in shares that may have high expected returns, but also involves the chance of losing value.
Simon Herbert
A behavioural economist known for his theory of bounded rationality, a theory about economic decision- making that suggests consumers “satisfice”
Bounded self control
Idea developed by Simon Herbert, suggesting that individuals are unable to exercise self-control when presented with certain choices. e.g gambling
Bounded rationality
Individuals rationality is limited by time, information and cognitive skills. With these limitations we cannot solve problems optimally, but take mental short-cuts.
Framing and choice architecture
Developed by Richard Thaler, the design in which different choices can be presented to consumers and the impact of this on consumer decision making.
Satisficing
Choosing an option that is ‘good enough’ rather than the best option.
Nudges
Consumer behaviour can be influenced by small suggestions and positive reinforcements through framing and architecture. These are used by business and governments to encourage you to make choices.
Utility maximisation
The aim of trying to achieve the highest level of satisfaction possible from the consumption/ production of a good. Occurs when MU= 0
Heuristics
Mental short cuts in decision making. Rule of thumb or social norms.
Alturism
Unselfish regard for the welfare of others in decision making
Default choices
The option that a consumer ‘selects’ if they do nothing. e.g a tick on a form or they automatically opt u in unless u say otherwise.
Restricted choice
A form of framing. A limited number of choice available
