Behavioural Economics Flashcards
what is a rational consumer
A person who weighs up the costs and benefits to them of each additional unit of a good purchased.
What is insurance
A way for risk averse customers to remove risk.
This is done by:
the law of large numbers and the pooling of risks
importance of the independence of risks
what are two types of asymmetric information
unobservable characteristics
unobservable actions
What is adverse selection
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expense of other parties who do not have the same information
what are methods to reduce adverse selection
Regulation
Reputation
Assurance
Warranty
Signalling: The better-informed party takes the lead.
Screening: The less-informed party takes the lead.
What is moral hazard
Situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
Solutions:
monitoring
changing incentives
what is framing
The way in which a choice is presented or understood. A person may make different decisions depending on whether a choice is presented optimistically or pessimistically.
what is bounded rationality
When the ability to make rational decisions is limited by lack of information or the time necessary to obtain such information or by a lack of understanding of complex situations.
what is heuristics
A mental short-cut or rule of thumb that people use when trying to solve complex problems or when faced with limited information. They reduce the computational or research effort required but sometimes lead to systematic errors.
what is loss aversion
Where people value outcomes as either losses or gains in relation to a reference point. This can mean that losses are disliked more than would be predicted by standard diminishing marginal utility.
what is the endowment effect
The hypothesis that people ascribe more value to things when they own them compared to when they are merely considering purchasing or acquiring them – in other words, when the reference point is one of ownership rather than non-ownership.
what is the nudge theory
The theory that positive reinforcement or making the decision easy can persuade people to make a particular choice. They are ‘nudged’ into so doing.
what is reciprocity
Where people’s behaviour is influenced by the effects it will have on others.
Economic model of rational choice assumes “rational self-interest,” many people often engage in acts of generosity and exhibit altruism.
Acts motivated primarily by a concern for the welfare of others.
Donations to charity are the most obvious example.
how do we evaluate economic models
Econometrics: Field that develops and uses statistical and analytical techniques to test economic theory.
Experimental Economics: Branch of economics that relies on experiments to illuminate economic behaviour.
