Behaviour Economics

Question 1

What does traditional economics assumes?

Answer 1

Rationality - economic agents would gather all the info, take time to consider options, conduct a cost benefit analysis and choose the course that maximises utility

Question 2

What does behavioural economics dispute?

Answer 2

Rationality and utility maximisation, and argues that emotional, social and psychological factors can influence decision making

Question 3

Behaviour economics focuses on the fact that we are not always rational, what bases these claims?

Answer 3

• bounded rationality —> rationality bounded by either time, choice or information
• bounded self control —> even when consumer has the ability to make utility maximising decisions, lack of self control stops them from making rational choices (e.g. addictions)

Question 4

What are heuristics?

Answer 4

• ‘rule of thumb’
  —> e.g. simple ways to make decisions/mental shortcuts that make satisficing decisions, which give a satisfactory level of utility, rather than the maximum

Question 5

What is Anchoring and how does it influence decision making?

Answer 5

Anchoring is where a value of something is imprinted on our mind to compare prices to (e.g. RRP prices which are much higher than the actual sale price, affecting our decision making)

Question 6

What are social norms and how do they affect our decision making?

Answer 6

Decisions are influenced by societal ‘rules’ - e.g. tipping at a restaurant but not a friends dinner party or the judgement of those drink driving

Question 7

What is availability bias and how does it influence decision making?

Answer 7

When examples come to our mind easily, this example influences our decision, even if not representative. How ‘available’ these examples are may be due to personal experiences or media coverages
—> e.g. when you know smoking is bad, but your nan smokes 3 packs a day and she is fine

Question 8

What is framing and how does it influence decision making?

Answer 8

Framing is the way info is present to us influences our choices.
- e.g. the focus of adverts or the way questions are framed affects our choices

Question 9

What is loss aversion and how does it influence decision making?

Answer 9

• endowment affect - we dont like losing items, and will mean that we take fewer risks, we attach too much monetary value to items we currently hold vs things we currently gain

Question 10

What is herd behaviour and how does it influence decision making?

Answer 10

It is ‘jumping on the band wagon’- what most people are doing - and can lead to bubbles

Question 11

What is choice Architecture and how does it influence decision making?

Answer 11

Our decisions are based on location or placement of something
- e.g. position of salad bar in a restaurant or placement of stairs vs lifts

Question 12

What do traditional economics also not explain?

Answer 12

Altruism - e.g. selflessness and charitable giving. Morals, emotions and feelings influence this as well

Question 13

What are some of the ways behaviour economics can be used as possible government interventions?

Answer 13

• framing
• nudges
• default choice
• restricted choice
• mandated choice

Question 14

What is framing?

Answer 14

Present info in a more favourable way to consumers

Question 15

What are nudges?

Answer 15

• e.g. design and location choices to nudge people towards ‘better’ choices

Question 16

What are default choices?

Answer 16

E.g. organ donation, salad with burgers

Question 17

What are restricted choices?

Answer 17

E.g. public smoking ban, or banning vending machines in schools - don’t completely remove freedom of choice but creates an incentive to stop

Question 18

What are mandated choices?

Answer 18

Force a choice to be made

Question 19

What’s some evaluation of behaviour economies?

Answer 19

• unpredictable and potentially costly
• might not be strong enough - too subtle?
• could lead to gov failure - cost a lot but not make much difference, etc.