Aspects Of Behavioural Economic Theory 2.3

Question 1

What is meant by bounded rationality and self control ?

Answer 1

Individuals are rational decision makers who endeavour to maximise their utility

Question 2

What is the administrative man / bounded rationality model ?

Answer 2

Herbert Simons recognised the limitations of the decision making model, so he devised the bounded rationality model, also known as the administrative man theory
The assumptions of the model are:
The first alternative that is satisfactory is selected
The decision maker recognises that they perceive the world as simple
The decision maker recognises the need to be comfortable making decisions without considering every alternative
Decision could be made by heuristics

Question 3

What are social norms ?

Answer 3

The behaviour of other people effect the behaviour of the consumer. For example if there were 2 restaurants but one had a line consumers are more likely to go wait in the line than go straight into the other restaurant
Other peoples behaviour creates a bias in the consumer. This social pressure encourages consumers to do things they won’t otherwise do, or that they know could be harmful. Consumers become unwilling to change, even if it’s of benefit to them as consumers don’t always act rationally.

Question 4

What is anchoring ?

Answer 4

This is a type of bias created by the human tendency to rely on the first piece of information they’re given
The first piece of information causes consumers to be biased towards it when subsequent information is given
For example, if a cars original price is high, but it’s on sale at a lower price, consumers will be inclined to think it’s reasonable. Even if the price is more than the cars value

Question 5

What is availability ?

Answer 5

This is a form of bias towards events that were recent, personal or memorable. This is because they are overestimated and cause emotional responses
For example, consumers are much more likely to think plane accidents are much more likely to occur If they have been involved in one or know someone else who has. Even though they’re very rare, they overestimate the probability. This then influences the consumers behaviour
This type of bias is spread across populations by reporting them in the news and media

Question 6

What are the 3 different types of bias

Answer 6

Availability
Anchoring
Social norms

Question 7

What is altruism ?

Answer 7

Altruism is the act of being selfless and considerate towards other people
E.g. giving lunch money to a friend with no expectation or desire for repayment