Area of study 3 (Behavioral Economics) Flashcards
5:1
Define “Bounded rationality.”
“Bounded rationality,” is a key insight into behavioral economics stating that the ability of consumers to make consistently rational decisions (decisions that maximize their utility at the lowest cost) will always be compromised by several factors, thus, yielding irrational decision-making to occur.
5:1
Define “Bounded willpower.”
“Bounded willpower,” states that consumers are real human beings who don’t possess full self-control, thus they often act off impulse rather than on reason. This is the result of decision making which is irrational, as consumers tend to overvalue the present and undervalue the future.
5:1
Define “Bounded self-interest.”
“Bounded self-interest,” is a key insight stating that consumers are typically reasonable people who do care about fairness and equality in the world, thus, they’re not strictly motivated purely by self-interest and nothing else when they make key decisions as economic agents in the private sector.
5:1
Define the “Availability heuristic.”
The availability heuristic is a mental shortcut where consumers tend to rely on using easily accessible information to aid their decisions. Thus, this can often lead to decision making which is irrational by consumers.
5:1
Define the term “Herd behavior.”
Herd behavior contends that consumers are significantly impacted by the actions of others, with this influence acting as a tool to them making key decisions as economic agents in the private sector.
5:1
Define the term “Overconfidence bias.”
Overconfidence bias states that consumers commonly overestimate their rational decision-making abilities, leading to them making certain decisions that they’ll regret later on.
5:1
Define the term “Vividness.”
Vividness describes how consumers tend to make irrational decisions as they place a large emphasis on a small amount of information to aid their decisions, whilst ignoring great information which could help the decision making process.
5:1
Define the “status quo bias.”
This is a decision-making error describing how consumers will continue to make a choice (such as the choice to continually buy a streaming service) even though that decision may no longer be a rational one, occurring as consumers are usually quite averse to change.
5:1
Define the “Anchoring effect.”
The Anchoring effect states that a certain base factor will influence further decisions made by a consumer in a certain context.
5:1
Define “Framing bias.”
Framing bias describes how the way information is presented to consumers will impact/influence their subsequent decision-making.
5:1
Define the term “Loss aversion.”
Loss aversion states that consumers place more value on any pain associated with loss, relative to the value they place on an equivalent gain. This thus leads to irrational decisions to be made as consumers are so averse to a loss.
5:2
Define a “Nudge.”
A Nudge is any small and cost-effective action taken by the government to attempt to influence consumer behaviors in a predictable manner that doesn’t restrict their options or economic incentives.
5:2
Define a “Shove/Smack.”
A shove or a smack is a more traditional method the government uses to influence consumers and their behaviors, including enforcing laws or regulations that can restrict consumers’ options completely.
