4.1.2 Individual Economic Decision Making

Question 1

Define Bounded Rationality

Answer 1

The idea that the decision-making capacity of individuals cannot be fully rational due to the limits that they face.

Question 2

Define Choice Architecture

Answer 2

A theory of consumer choice that argues that individuals may be influenced by the way goods and services are presented

Question 3

Define Cognitive Bias

Answer 3

A subconscious error in thinking that means consumers look at issues with a certain bias

Question 4

Define Social Norms

Answer 4

Common behaviours that are considered appropriate in society

Question 5

Define Anchoring

Answer 5

An anchor is any aspect of the economy that has no direct relevance to a decision but affects consumer decisions.

Question 6

Define Confirmation Bias

Answer 6

The tendency to interpret new evidence as confirmation of existing beliefs and preconceptions

Question 7

Define Endowment Effect

Answer 7

When an individual places a greater rating on what they already own

Question 8

Define Herding

Answer 8

When individuals act as a group acting collectively to make decisions

Question 9

Define Irrational Exuberance

Answer 9

When consumers, bankers and firms become overly confident that the price of an asset would continue to rise

Question 10

Define Automatic Thinking

Answer 10

An unconscious thinking process individuals have no control over

Question 11

Define Negative Framing

Answer 11

A technique that is used by choice architects when an individual is encouraged to make a choice based on negative effects

Question 12

Define Nudges

Answer 12

The idea that consumer behaviour can be influenced by specific suggestions and positive reinforcements

Question 13

Define Framing

Answer 13

A theory that states that consumer choices are likely to be influenced depending on how information is presented

Question 14

Define Optimism Bias

Answer 14

A cognitive bias that causes individuals to believe that they are less likely to experience a negative event

Question 15

Define Rational Economic Man

Answer 15

The assumption that individuals are rational, well informed and seek to increase their utility

Question 16

Define Salience

Answer 16

Consumers giving a greater weighting to recent events

Question 17

Define Status Quo Bias

Answer 17

An emotional bias which is a preference for current affairs rather than risking change

Question 18

Define Mandated Choice

Answer 18

When individuals must make a decision in advance whether they would like to engage in a particular action

Question 19

Define Restricted Choice

Answer 19

When limiting the amount of choice available may lead to consumers making an efficient decision

Question 20

Define Paradox of Choice

Answer 20

When having too many options make a choice difficult to make

Question 21

Define Sunk Cost Fallacy

Answer 21

When individuals continue their behaviour as a result of their previously invested resources

Question 22

Define Zero Price Effect

Answer 22

Where the demand curve changes significantly when the price of a good is zero

Question 23

Define Loss Aversion

Answer 23

When individuals focus on a potential loss rather than a potential gain

Question 24

Define Heuristics

Answer 24

A technique that individuals use to make decisions that may not be optimal but are sufficient given a limited timeframe

Question 25

Define Expected Utility Theory

Answer 25

A model that explains that individuals make an optimal decision under risk based on their appetite and preferences