3.2.3 - Aspects of Behavioural Economic Theory

Question 1

What is behavioural economics?

Answer 1

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.

Question 2

Where has most of the behavioural economics study come from?

Answer 2

The USA.

Question 3

Why does the location of study on behavioural economics come from possibly cause problems?

Answer 3

There could be a bias towards the USA as a dominant or ‘correct’ economy.

Question 4

What is behavioural economics based on?

Answer 4

The insights of psychologists seeking to understand human behaviour and decision making.

Question 5

What did the UK government set up in 2010?

Answer 5

The Behavioural Insights Team (BIT).

They brought together many disiplines that are closely related. (behavioural economics, psychology and social anthropology)

Question 6

According to Dan Ariely, what is the difference between traditional economics and behavioural economics?

Answer 6

Traditional economics involves coming up with a theory then using it to explain actual behaviour.
Behavioural economics involves studying actual behaviour, then coming up with a theory.

Question 7

What is the BIT based on?

Answer 7

Nudge Theory

Question 8

What is Nudge Theory?

Answer 8

You can change the environment in order to indirectly influence a person’s decision making.

They still maintain free choice, but are essentially incentivized to choose one way or the other.

Question 9

What is the Homo Economicus?

Answer 9

The Economic Man

Question 10

What does the Homo Economicus actually mean?

Answer 10

The economic man is:

Self-interested
Aware of the consequences of his actions
Rational
Aware of what he wants
Acting on his preferences

Question 11

What are the short-comings of Homo Economicus?

Answer 11

People are somewhat altruistic.
Humans are generally impatient and lack self-control
Humans generally have ‘status quo bias’

Research from cognitive psychology suggests that:
Humans make decisions based on simple-rules-of-thumb (heuristics)
Humans have a large variety of biases (confirmation, recency etc.)
Humans can make decisions based on emotions (anger, regret etc.)

Question 12

What is bounded rationality?

Answer 12

When making decisions, individuals’ rationality is limited by the information they have, information in their minds, and the limited time they have to make a decision.

Question 13

What can bounded rationality often lead to?

Answer 13

Within complex situations, bounded rationality results in satisficing rather than maximising choices.

Question 14

What is satisficing?

Answer 14

A decision-making strategy that aims for a satisfactory or adequete result rather than going for the most optimal solution.

Question 15

What is bounded self-control?

Answer 15

The limited self control in which individuals lack the self-control to act in what they assume to be their best interest.

Question 16

What do traditional or orthodox economics assume in reference to choice making?

Answer 16

People have complete self-control over their actions.

Question 17

How do traditional / orthodox economics differ in comparison to behavioural economics in reference to decision making?

Answer 17

Traditional / Orthodox economists assume people have complete self-control of their actions, however, behavioural economists believe that individuals have limited self-control.

Question 18

What is an example of bounded self-control in practice?

Answer 18

Post Christmas, many people make New Year’s Resolutions to improve themselves. For example, to lose weight. A person will decide to go for a run once a day, working well for a week or two, but when rain falls, the resolution breaks as a result.

Question 19

What are the two types of thinking?

Answer 19

Thinking fast
Thinking slow

Question 20

What are the differences in the types of thinking?

Answer 20

Thinking fast is done with little to no effort to analyse the situation. This is automatic thinking.

Thinking slow is done with concentration and mental effort required in order to come to a decison.

Question 21

Where is thinking fast seen?

Answer 21

Buying a coffee in a train station, or ordering drinks in a bar.

It is also seen in high-level athletes. People who have practiced for many hours at their craft let their automatic thinking take over which allows them to play quickly and better.

Question 22

Where is thinking slow seen?

Answer 22

Buying a house or a car.

While learning a new sport, an individual will take time to think about what they are doing (holding a golf club, or the rotation of a basketball)

Question 23

What is cognitive bias?

Answer 23

A systematic error in thinking that affects the decisions and judgments a person makes.

Question 24

What do behavioural economists suggest about automatic thinking?

Answer 24

Often heavily biased.

Question 25

What actually is a cognitive bias?

Answer 25

A mistake in reasoning, often occuring as a result of any contrary information.

Question 26

What are the two common problems with heuristics that lead to bias?

Answer 26

Availability
Anchoring

Question 27

What is anchoring?

Answer 27

A cognitive bias describing the human tendancy when making decisions to rely too heavily on an arbitrary marker. (often the first piece of information)

Question 28

What is availability?

Answer 28

Another name for recency bias.

Humans hold recent information in much higher standing over their decision making process.

Question 29

What is the availability bias?

Answer 29

Individuals make judgments about the likelihood of future events in accordance with how easy it is to recall examples of similar events.

Question 30

What is an example of availability bias?

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Answer 30

A person places read about 15 car thefts on the news, and therefore judges that car theft is far more common in the local area than it actually is.

A person sees a new millionaire every week as a result of the lottery and therefore buys a ticket thinking that they will win.

Question 31

Who are Ipsos?

Answer 31

A market research company.

Question 32

What did Ipsos publish?

Answer 32

Research highlighting how the general public in 14 countries held preconceptions on the make-up of their socities that were massively detached from reality.

Question 33

What were the stats from Ipsos for the UK?

Answer 33

The average citizen believed that 24% of the population were immigrants (13% real)
The average citizen believed that 24% of the working-age population was unemployed (<7% real)

Question 34

What is an example of anchoring?

Answer 34

A restaurant menu features a few very expensive items early in the main course section. Some more reasonably priced alternatives (comparatively) are placed after.

We are lured into choosing the cheaper option despite their prices still being high.

Question 35

When given an option of 3 products of similar utility, priced at £50, £40 and £30, which one do humans choose?

Answer 35

£40. As a result of belief the middle option is not too expensive, but also not too cheap.

Humans often choose the middle option.

Question 36

What is a social norm?

Answer 36

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

Question 37

What are nudges?

Answer 37

Factors that encourage people to think and act in particular ways.

Question 38

What are the types of social norms (in economics)

Answer 38

Negative and Positive

Question 39

What is an example of a negative social norm?

Answer 39

Attitudes towards drinking alcohol amongst young adults (particularily young men).

Many young adults drink heavily because they think it is what the majority of people their age do.

Question 40

What is an example of a positive social norm?

Answer 40

Attitudes towards smoking across society.

Healthy campaigns have made it abundantly clear that smoking has a very negative effect on one’s health. This led to people being much more willing to accept laws to prohibit smoking and the risks of smoking.

Question 41

What is the difference between a nudge and an economic sanction?

Answer 41

Economic sanctions involve restricting an individuals freedom to act as they want.

Nudges try and shift attitudes and behaviour to comply with social norms.

Question 42

Which method of changing social norms is superior?

Answer 42

This is a normative statement, so it’s not actually clear.

Critics of nudges suggest that sanctions are more effective at changing behaviour, as there are harsh punishments for breaking sanctions.

Sanctions are good at changing a social norm in one instance, as most people will follow the law as it’s in their self interest to do so. They lead to nudges though, as in the example of smoking, as a result of banning smoking in public places, people are now less likely to smoke in one another’s houses as it’s socially unacceptable due to the sanctions.

Question 43

What is altruism?

Answer 43

Concern for the welfare of others.

Question 44

What is fairness?

Answer 44

Impartiality.

Question 45

What did traditional economics believe in terms of altruism?

Answer 45

Homo economicus was not altruistic and only acted in self-interest.

Question 46

How can traditional economics factor in altruism?

Answer 46

It can still be accomodated in terms of maximising theory.

Humans want to help others in their nature, their first instinct is to cooperate rather than than compete.

Question 47

What type of term is fairness?

Answer 47

Normative.

Question 48

What did traditional economics believe in terms of altruism?

Answer 48

Homo economicus was not altruistic and only acted in self-interest.