4.1.2.3 Aspects of Behavioural economic theory Flashcards
What is behavioural economics?
Combining economic theory and psychology to explain why individuals make irrational decisions
What does it mean when an individual is a rational maximisers
Use all information when
making choices
People seek to maximise
satisfaction
Why may individuals not act rationally?
- Have limited capacity to calculate all costs and benefits
- Are influenced by their own social networks
- Emotion overtakes logic
- Altruism v pure self interest
*Desire for instant rewards - People stick to default
choices - They are loss averse (losses matter more than gains)
What is bounded rationality?
The idea that humans can never be fully rational due to the number of limits we face
What is bounded self control?
Refers to the idea that individuals have limitations in their ability to resist immediate gratification & make decisions that aligns with their long term goals
What are characteristics of bounded self control?
Impulsivity ( Overspending, procrastinating even when they know that these actions conflict with their long term goals)
Temporary discounting (Prioritising short term pleasure over long term gains)
What are key differences between bounded self control & bounded rationality?
Decision-making aspect / focus - Bounded rationality focuses on how individuals make decisions with limited information whereas bounded self-control focuses on how individuals make decisions that conflict with long term objectives
What is Heuristics?
Mental shortcuts used to simplify problems & avoid cognitive overload
What are the types of heuristics that affect day-to-day market behaviours
& decision making
Social norms
Habitual behaviours
Anchoring
Availability bias
What is habitual behaviours?
Repeat choices ( A routine of behaviours of certain individuals)
E.g. Buying coffee at a specific shop instead of making it at home
What is Herd Behaviour?
Making decisions based on those around you & the choices they make e.g. Choosing a dish on a menu
What is Anchoring?
Values set (anchors or imprinted) in our minds, to use as mental reference points. e.g. Retail pricing strategies
What is availability?
Refers to the tendency of people to judge the likelihood of an event by the ease e.g. * Periods of very warm weather affect beliefs about the causes of climate change
What’s Altruism?
When people make sacrifices to benefit others without expecting a personal reward e.g. e.g. a person being willing to forego a gain / reward if it means that someone else won’t
gain an even better reward.
What is loss aversion?
Refers to the basic idea that people feel losses more than gains
e.g. in financial markets where investors hold losses for long and sell gains too early
