Aspects of behavioural economics Flashcards
what is behavioural economics
it disputes rationality and utility maximisation arguing that emotional , social and psychological factors can influence decision making
what does tradition economics assume consumers do?
-consumers gather all information
-weigh up all the information considering the costs and benefits
- they take time and make a utility maximising decision
-rational consumers that always look to maximise their utility when they have consumption decision
what may stop a consumer from maximising their utility?
-Bounded self control
-bounded rationality
what is bounded rationality -3 main points?
1)Time - consumers don’t always have enough time to be making a satisfactory utility maximising decision
2)Choice - consumers may have a large choice to evaluate the costs and benefits which can overwhelm consumers
3)Information - the information may not exist , may be a lack of info available , asymmetric information , information may not be clear or may be too complex
what is bounded self control?
Its when the consumer has all the information and knows exactly what to do consumption wise to maximise their utility but their self control may get in the way.
what is an example of bounded self control
when a consumer knows having fizzy drinks or smoking is bad , they know all the information but still may choose to consume it due to addiction or their self control getting in the way.
what are the types of biases?
rule of thumb
anchoring and framing
availability biases
social norms
what is rules of thumb
This is when individuals make choices based on their default choice based on experience
what it anchoring and framing?
Anchoring bias occurs when individuals rely too heavily on an initial piece of information (the “anchor”) when making subsequent judgements or decision
Framing refers to how the presentation or wording of information can significantly influence people’s choices or judgements
The same information can be framed in different ways, leading to different outcomes
E.g Consumers are more likely to purchase a product that states ‘80% fat free’ than ‘20% fat
what is availability bias ?
Availability bias is influenced by personal experiences, vividness of the information, media exposure, and emotional impact
E.g. People use alternative modes of transport when there is a plane crash, even though the probability of a crash happening is very low
what are social norms
These are the informal rules that govern behaviour in groups and societies
E.g Consumers buy expensive goods to display wealth or social status rather than for practical reasons
what is altruism ?
Altruism is the idea that behaviour benefits a group at the expense of the person performing it
E.g. Giving charitable donations or volunteering
This explains why individuals make decisions that do not always align with maximising their own personal benefits
