3.2 Behavioural Economics Flashcards
What is behavioural economics?
a field of study that combines insights from psychology, economics and neuroscience to better understand how people make decisions in real world situations. It recognises that people dont always behave rationally or in their own best interest, and seeks to explain and predict their behaviour by taking into account factors such as emotions, social influences, cognitive biases, and other non-economic factors.
What is the goal of behavioural economics?
to develop more accurate models of human behaviour that can be used to inform policy decisions, marketing strategies, and other applications.
What was the traditional view of consumers?
they are rational
What is bounded rationality?
a concept in behavioural economics that suggests that people have limited rationality and make decisions based on a limited set of information and cognitive abilities, and often rely on mental shortcuts to simplify complex decision-making.
What are the types of bounded rationality?
- herd behaviour
- vividness
- framing effect
- anchoring bias
- sunk cost fallacy
What is herd behaviour?
When individuals in a group follow the decisions of others, rather than making their own choice. This behaviour is often driven by a desire to conform to social norms, to avoid being left out, or to feel a sense of safety in numbers.
What is vividness?
Vivid means powerful feelings or strong, clear images in the mind. Vividness is a type of irrationality because consumers may place too much weight on a small number of vivid observations.
What is the framing effect?
a cognitive bias in which people’s decisions are influenced by how information is presented or ‘framed’. The same information can be presented in different ways, and the way it is framed can influence how people perceive it and what decision they make.
What is anchoring bias?
Anchoring bias is a cognitive bias where people rely too heavily on the first piece of information they receive when making a decision, even if that information may not be relevant or accurate.
What is sunk cost fallacy?
a cognitive bias where people continue to invest time, money, or other resources into a decision, even if its no longer rational to do so, simply because they’ve already invested alot of time, money or resources in it. People feel like they cant give up on something they’ve already invested so much in, even if its not worth continuing.
What is bounded will power?
the idea that consumers do not possess absolute self-control when confronted with choices. They can succumb to their appetites and urges and can be emotional and impulsive, causing them to make decisions they later regret. This can be attributed to present-bias or peoples short-sightedness. This is where people overvalue the present while undervaluing the future.
What is bounded self interest?
the idea that consumers care about fairness and are not always driven by self-interest in order to maximise personal benefit.
What constitutes a rational consumer?
- consumers will always make logical/sensible decisions that are in their own self-interest and that maximise their utility (satisfaction).
- consumers are not emotional or impulsive and will carefully weigh up the costs and benefits carefully before making a decision.
- consumers make decisions by themselves and for themselves and are not influenced by external factors.
- consumers always have all the information they need to make an informed choice.
- consumers have the same preferences that do not change over time.
