Aspects of behavioural economic theory Flashcards
Assumption of rationality…
dominated standard economic thinking but there are many reasons why an individual may not act rationally
Why an individual (economic agent) does not act rationally
Limited capacity to calculate costs and benefits
Influenced by their own social networks
Often act reciprocally (helping) rather than pure self interest
Lack of self control, seek immediate satisfaction
Loss adverse (loss matters more than gain)
Different choices in cold + emotional states
Fall back on simple choices when choosing
Satisfice rather than maximise
What is bounded rationality? EXPLAINED
Most consumers do not have sufficient info to make fully informed judgements when making decisions in the market.
- Rules of thumbs replace pure rationality (heuristics = can lead to biases)
- Complexity, satisfice>maximise, people have limited attention spans
What is bounded self control?
The idea that individuals have limits on their self-control and these limits hinder their ability to maximize their utility.
What is bounded rationality? DEFINE
A human decision-making process in which we attempt to satisfice, rather than optimize.
Social norms examples?
Heuristic
Changing the social stigma of drink-driving and speeding
Queuing in shops
Seat bels are compulsory
Smoking bans
Habitual behaviour examples?
Heuristic
Many people carry on behaving as they always have
Repeat choices
Getting people to change might require incentivise that are compelling
Herd behaviour?
Making decisions based on who is around us, the choices they make
- Choosing items off a menu in a restaurant
- Finical markets
- Binge drinkers going on holiday together
Anchoring?
Value is often set by anchors, we use them as reference points.
Retailers are very adept at using this bias to persuade consumers to spend.
Eg. Big price drop, Size and noise of home crowd
Price of new products
Availability?
Tenancy of people to judge the likelihood of an event by the ease with what examples and instances come to mind
Altruism?
When people make sacrifices to benefit others without expecting a personal reward
