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
