4.1.2.1 Consumer behaviour Flashcards
What are the two key assumptions in traditional economic theory?
Economic agents are rational and utility maximisers.
What does behavioral economics think about traditional theory?
The assumptions are unrealistic and want to improve upon it in order to make it more relevant.
What is the rational individual called?
Homo economicus
How does homo economicus maximize their utility?
By comparing costs and benefits of alternatives and then choosing the option that maximizes their net utility.
What does rationality rely on in traditional economic theory?
Symmetric information and the ability to use the information to make a rational decision.
What is a information related issue that effects rationality?
Asymmetric information, which occurs when one party has more information than the other in a transaction.
What are the three reasons that consumers may not act rationally?
Lack of time to make a rational decision.
Asymmetric information.
People may not be able to process the potentially vast amount of data involved in making a decision or have computation weakness.
What is a limit on decision making known as?
Bounded rationality.
What does the existence of bounded rationality lead to?
People having to satisfice rather than spend a long time and exert a lot of effort in making a rational decision that maximizes utility.
What is the concept of bounded self control?
Homo economicus is assumed to have total self control and will only act to maximize utility, However individuals have limits on self control as a consumer may have a limited ability to stop an addictive consumption act despite it not maximizing their utility.
What are the five biases effecting rationality?
RAASH
Rule of Thumb (Simple tools to help individuals make a decision)
Anchoring (Placing too much emphasis on a single piece of information)
Availability bias (Where judgement are made about the probability of something happening based on how easy it is to remember it happening.)
Social norms (An individuals behavior being influenced by the behavior of their social group)
Habitual behavior (An individuals preference for doing things over and over again)
How might fairness affect rationality?
Individuals might not always act out of self interest and might choose to act altruistically.
What are the five methods of choice architecture?
F NORM
Framing (The context a option is presented may influence a decision)
Nudges (Some choices are “easier” to choose than others)
default Options (People are more likely to pick the default option)
Restricted choice (When choice is restricted)
Mandated choices (When people are forced to make a choice between options).
