5.1 Behavioural Economics Flashcards
What is the goal of behavioural economics?
To develop more accurate models of human behaviour to inform policy decisions, marketing strategies and other applications.
What does behavioural economics recognise about people?
People do not always behave rationally and in own best interest. Takes into account emotions, social influences, cognitive bias, etc.
What is the main assumption about traditional consumer behaviour
All consumers are rational.
What are the assumptions of the rational consumer?
- make logical decisions in own self interest
- not emotional or impulsive, weigh up costs
- Decisions by themselves, for themselves, not influences by external factors
- information needed for informed choice
- Have same preferences, do not change over time.
What is bounded rationality?
limited rationality
Suggests people have limited rationality, decisions based on limited set of information, rely on mental shortcuts to make decisions.
What are the limitations of bounded rationality?
Lead to biases and errors in judgement, can make decisions quickly and efficiently.
What are the types of mental shortcuts?
- Herd behaviour
- Vividness
- Framing effect
- Anchoring bias
- Sunk cost fallacy
What is herd behaviour?
Group follows decisions of others rather than making own decisons.
What is herd behaviour driven by?
Desire to conform to social norms, not left out, sense of safety in numbers.
What is vividness?
powerful feelings, strong images in mind. Irrationality; consumers may place too much weight on small no. of vivid observation.
What is the framing effect?
Cognitive bias based on how much information is available. Influences decision-making.
Influences how someone perceives information
Examples of framing effect.
e.g 20% off instead of $6 off, 80% fat-free instead of 20% fat
What is anchoring bias?
Tendency to rely heavily on first piece of information received.
What is the sunk cost fallacy?
When someone continues to invest time, money and resources into decision, even if not rational to do so, because they have already invested time into it.
Cannot give up one something because have already invested too much into it.
What is bounded willpower?
Idea consumers do not possess absolute self-control when confronted with choices. Succumb to appetites, urges, be emotional and impulsive, causing them to make decisions they later regret.
