Aspects of behavioural economic theory

Question 1

What do behavioural economists use + what do they provide

Answer 1

use psychological, emotional and social factors to explain why people do not always act rationally
+
provide a more accurate model of how humans behave by taking into account all the ways humans behave and think

Question 2

Define cognitive bias?

Answer 2

mental errors we make when decision making

Question 3

Behavioural economists discovered 7 reasons for why individuals act irrationally, state the 7 reasons?

Answer 3

1. Bounded rationality
2. Bounded self control
3. Altruism
4. Social norms
5. Anchoring nails
6. Availability bias
7. Rule of thumb
   (Last 4 are cognitive biases)

Question 4

define bounded rationality + state aspects of bounded rationality

Answer 4

our limited brain power (limited mental processing) when it comes todecision making.
- Become worse when under time pressure
- When we can’t perfectly predict which options will maximise our utility, we often end up making the wrong decisions - irrational decisions that do not maximise our utility

Question 5

define Bounded self control

Answer 5

our limited ability to control ourselves

Question 6

define Altruism + statewhat alturism is motivated by + what does altruism involve + sate why altrism is an irrational decison

Answer 6

Altruism is when we care about the utility of other people
- altruistic behaviour is often motivated by fairness
- involves doing something nice for somebody else
- This is anirrationaldecision because it involves increasing someone else’s utility and rather thanmaximisingyour own utility.

Question 7

define social norms, state what social norms may be influenced by and what individuals may do

Answer 7

Social norms - unwritten rules or standards that guide behaviour
- influenced by the behaviour around us
- Individuals may prioritize social acceptance and conformity over personal preferences and rational decision-making.

Question 8

social norms: define Herd behaviour + state how Herd behaviour may lead to negative consequences + stae the type of bias herd behvaiour is + what herd behvaiour is influenced by

Answer 8

Herd behaviour is when Peoplefollow the herdand do what everyone else does
- a type of cognitive bias influenced by social norms
- people followsocial normstoo much, this means Decisions don’t maximise our utility= can lead to negative outcomes

Question 9

define anchoring bias

Answer 9

when consumers are influenced too much by the first piece of information they see

Question 10

define availability bias

Answer 10

when consumers are influencedtoo muchby themost recentpiece of information they see.

Question 11

define rules of thumb

Answer 11

mentalshortcuts which consumers use to makedecisionsquickly

Question 12

state the impact of social norms on decision making (5 impacts)

Answer 12

• Conformity Bias (tendency of individuals to align their thoughts, beliefs, and actions with those of a larger group or society, even if it contradicts their own judgments or preferences)
• Social Proof Bias (when individuals look to others’ actions or behavior as a cue for their own decisions. They assume that if many people are doing something, it must be the right or best choice)
• Pluralistic Ignorance (when individuals privately disagree with a social norm but assume that others accept it. So they conform to the norm even though it doesn’t reflect their true beliefs)
• Obedience to Authority (where individuals comply with orders or instructions from authoritative figures, even if those orders go against their moral or ethical beliefs.)
• Reactance Bias (when individuals rebel against perceived restrictions or attempts to control their behavior, leading them to do the opposite of what is expected.)

Question 13

sate2 ways in which altruism affect behaviour

Answer 13

• social norms (people want to be sen as being kind and generous)
• Reciprocity (encourage others to act in a similar manner)