Behavioural economics Flashcards
What did people assume when making early economic theories
Individuals are rational and self interested
What is an economic man or homo economicus
A rational person who calculates the benefits and costs
What is behavioural economics
It is a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
What is the first clash between traditional and behavioural economics
The traditional view is people use information skilfully to make rational decisions
The modern view is there is a limit to rationality and face a bounded rationality
What causes bounded rationality
People are stopped from being rational from:
The ability for the brain to process info
The incomplete or unreliable info
The time available to make the decision
The environment where the decision is made
Bounded self control
What is bounded self control
There is a limit to the amount of self control humans have over themselves depending on the conditions where the decision is made
e.g. New Years Resolutions
Impulse purchases
What are the 2 different ways decisions are made
System 1 - Instinctive and emotional
System 2 - Slow thinking and logical]
Different decisions are made depending on which is used
What do people do when faced with difficult or choice overload decisions
Use heuristics
What are heurictics
They are mental shortcuts or techniques used to help individuals come to decisions quickly
e.g. Never eating in an empty restaurant
What is the solution to information failure for behavioural economsists
to simplify or reduce the number of choices or information
What is the second clash
Traditional view is people are rational when processing the information
Modern view is that humans have biases in their decision making
What are the types of biases
Availability
Anchoring / framing
Loss Aversion
Social norm
Recency
What is availability bias
It is when people make judgements about the probability of events by how easy it is to recall examples of events (the recency effect)
This is not a good way to the underlying probability of a such event occurring
e.g.
Where to travel following press reports of terrorism in countries
What is Anchoring bias
This is the tendency to give too much weight to a single piece of info which is normally the first one, when making decisions
e.g. Charity donations form that lists £10, £15, £20
What is framing bias
The way information is framed can effect the persons choice
e.g. yoghurt is 90% fat free not contains 10% fat
What is loss aversion bias
This is the observation that people feel greater unhappiness from losing something than the happiness they feel getting the same item
What is a social norm
It is a belief that is held by the group of people who we associate about how we should behave in a situation
What is social norm bias
When people’s decisions are influenced by other people’s thoughts and beliefs
E.g. Herding - individuals in a group start to act collectively but without any one individual centrally directing the group
What is clash 3
The traditional view that people are self centred and self interested and don’t care about others interests
The modern view is that people can act selflessly and put others above their self
e.g. charity donations
What has the government set up for behavioural economics
They set up a behavioural insights team also known as the nudge unit
What are the key principles of the Nudge unit
People will change their behaviour when given subtle nudges
Use of nudge policy is libertarian paternalism and is designed to change the behaviour for the better but still give freedom
What is a nudge
It is a means of changing people’s behaviour in a predictable manner without removing their freedom of choice
What is choice architecture and what does it do
It is the way a choice is presented and can affect the decisions people make
What are examples of nudges to better health
Making junk food less accessible and healthy food more accessible
Telling patients what a hospital appointment costs to increase the chance that they go
Making people opt out of organ donation than opt in
What are the advantages and disadvantages of nudges
People say that it takes away peoples freedom but limited cognitive ability and incomplete information means they will make sub optimal choices anyway
May encourage the government to act too paternalistic
Focuses on peoples weakness too much
Limits to nudges
Conventional policies are just as effective
If a consumer experiences bounded rationality and the anchoring effect which good is he likely to base his view of the good off
The first one
What will a consumer always attempt to do
Maximise their total utility
What is income
Income is a flow of money going to factors of production
e.g. wages, Rental income, Interest savings, dividends
What is wealth
It is the current value of a stock of assets owned by a person
e.g. Savings, Property, shares, pension schemes
What are the 2 measures of income inequality
Gini coefficient
Palma Ratio
What is the Gini coefficient
Overall measure of income inequality
Between 0 and 1
0 - no equality
1 - Perfect equality
What is the Palma Ratio
Ratio of income of the top 10% of income households divided by the income of the poorest 40%
Causes of wealth inequality
Age - Older means they have more chance to gain assets
Inheritance
Causes of income inequality
Gap between high and low paid jobs
Regressive impacts of indirect taxes
Less generous welfare benefits system - welfare cap
Unaffordable housing for buying and renting
Wealth inequality
Which countries have a gini coefficient higher than 0.5
South Africa
Mozambique
Angola
Which countries have a gini coefficient lower than 0.3
Croatia
Slovenia
What are the 4 largest taxes
Income
VAT
National Insurance
Corporation
What is the gini coefficient for the UK in 2022
0.343
What % of the UK population receive more benefits than they pay in tax
52%
What the trend in income inequality over the last 10 years
Relatively stable but high
What is causing the widening gap between high paid and low paid jobs
Increasing scale and depth of working poverty
Decline in full time employment in manufacturing
Decline in trade union membership
Bonus culture
Rise in executive pay relative to median incomes
Zero hour contracts
Education
What is the UK’s median and mean disposable income
Median - £32,349
Mean - £39,328
What is the UK personal allowance
£12,570
What are the UK tax rates
20% between £12,570 and £37,700
40% between £37,700 and £125,000
45% beyond £125,000
National Insurance - 13.25%
VAT - 20%, Different depending on good
What policies can reduce inequality
Higher marginal tax rates on income and wealth: more progressive
Increase in the legal minimum wage
Rise in the relative level of benefits
Measures to increase employment rates
Subsidies on energy bills, childcare
Rent control to tackle unaffordable housing
Laws to tackle discrimination in labour markets
Universal Basic Income
What are benefits to increasing national minimum wage
Improves work incentives and labour productivity
Lifts people out of working poverty which reduces welfare benefits
Higher consumer spending
Reduces the unemployment trap
What are costs to increasing national minimum wage
Job losses in labour intensive industries - real wage unemployment
Risk of cost push inflation
Reduced price competition for UK exporters
Escalator effect
Whats the problems with making taxes more progressive and making regressive taxes smaller
Less Incentives - Laffer Curve
Regressive taxes are big revenue earners for the government
Whats the problem by increasing benefits
Poverty Trap
Bigger costs on governments
Whats the problem with minimum wages or maximum bonuses
Less incentives
Change in employment
What are the problems with legislation
Cost to businesses
Enforcing them
Government failure
Whats the relationship between income and wealth inequality
Mutually reinforcing
What are the 4 main types of wealth
Physical
Pension
Housing
Financial
What are the consequences of wealth inequality
Unequal distribution of property, causing some to live in low-quality homes
The fall of social mobility via the wealthy affording better education, health
Impact on income inequality, as wealth creates income
Only the wealthy can afford to take big risks as entrepreneurs
What are the consequences of income inequality
Sense of unfairness, especially if associated with discrimination
Impact on aggregate demand
Impact on economic growth and performance
Impact on social indicators, such as crime, education, physical health, mental health
