Aspects of behavioral economic theory

Question 1

Behavioural economics looks at

Answer 1

the psychological reasons behind why people make decisions

Question 2

Bounded rationality suggests that when people make decisions they are limited by the following:

Answer 2

• The available information is incomplete and often unreliable (and rapidly out of date)
• The human mind has limited ability to process and evaluate information
• The time available to make decisions is limited
• economic agents using heuristics (rules of thumb) to help make decisions

Question 3

Bounded self-control

Answer 3

individuals have limited control over their decision-making and therefore make decisions that are not in their best interests

Question 4

Social norms

Answer 4

the rules of behaviour that are considered acceptable within a social group

Question 5

Nudge theory

Answer 5

an attempt to manipulate social norms through positive reinforcement in a non-coercive manner

Question 6

Anchoring

Answer 6

the tendency of individuals to rely on particular pieces of information, especially in situations where they lack knowledge or experience – this could be both relevant (eg the previous price paid or the first price offered affecting future consumption decisions) or an entirely unrelated piece of information

Question 7

Availability

Answer 7

making judgements about the probability of events by recalling recent instances eg basing a decision on particularly vivid events we can remember rather than the information at hand

Question 8

Loss Aversion - example

Answer 8

Loss aversion leads people to prefer to put their money into a safe but low-yielding investment rather than one that is a bit more risky but has the prospect of very high returns

Question 9

Altruism

Answer 9

selflessness - the principle or practice of concern for the welfare of others” occurs when economic agents help others at their own expense and believe in fairness in society

Question 10

Homo economicus

Answer 10

a rational decision maker that always makes decisions that maximise utility

Question 11

Bounded Rationality

Answer 11

When making decisions, rationality is limited by the information available, cognitive limitations, and the limited time available to make the decision