4. Individual Economic Decision Making - Behavioural Economics & Biases Flashcards
What do behavioural economics call social, emotional and psychological factors that influence decision?
Cognitive Biases
What are the 7 different types of cognitive bias?
- Anchoring2. Social Norms3. Availability bias4. Framing5. Loss aversion6. Herd Behaviour7. Choice Architecture
What is anchoring?
This is when a price/piece of information is imprinted in to the consumers mind and used to influence decisions - e.g. stores set RRPs as anchors we see the actual price is lower so buy the products
What are social norms?
When behaviour is influenced by rules society has created - e.g. tipping in restaurants bc it’s the ‘right’ thing to do
What is availability bias?
This is when ppls decisions are swayed by the easiest information they have to hand about a certain topic rather than what the whole picture is - e.g. if you have a healthy elderly relative who smokes you may think smoking isn’t that bad for your health bc this info is easily available to you in spite of the overwhelming evidence overall
What is framing?
This is when information is presented in a certain way In order to entice consumers to buy certain goods - e.g. low fat heavily advertised on a product and presented in a certain way
What is loss aversion?
The idea that ppl are more reluctant to risk a loss than they are to try and make a gain - ppl are more fearful of losing something they already have than losing out on something they could potentially get
What may loss aversion lead to?
Endowment Effect - this is where you attach a overly high monetary value to things you already have rather than things you cld get - reduce your willingness to engage in transactions and risk your current possessions etc.
What is herd behaviour?
This is effectively jumping on the band wagon, when ppl make a decision based on the fact that everyone else is making that same decision - e.g. ordering the same meal as your friends at a restaurant
What is choice architecture?
This is when decisions are influenced by the location and presentation of structures/information - e.g. ppl are less likely to take the stairs if the elevator is right round the front of the building in full view
What is altruism & how is it explained by behavioural economics?
This is the idea that ppl behave in a kind or selfless manner and don’t expect anything in return - according to traditional economics this wld virtually never occur if ppl were utility maximisers and firms profit maximisers but it does - behavioural economics can explain that emotional factors etc. influence decisions and cause ppl to behave in a way that isn’t necessarily utility maximising - e.g. giving to charity
