Behavioural Economics

Question 1

What are choice anomalies?

Answer 1

When people’s choices do not conform to the standard assumptions of rationality and self-interest > deviates from utility max. and cost min.

Question 2

Bounded rationality?

Answer 2

Individuals find it optimal to use ‘heuristics’ (mental shortcuts) rather than calculating the fully rational decision

Question 3

Behavioural economics?

Answer 3

Involves more realistic assumptions about human behaviour + decision-making (recognises people are subject to cognitive biases that can affect DM + identifies that people have limited info-processing capacity + in reality, rely on heuristics)

Question 4

Example anomalies within consumer choice?

Answer 4

Status quo bias: consumers may stick with current cell phone plan even if there are better/cheaper option available

Anchoring bias: a high-priced product may be seen as more valuable than a lower-prices one, even if both are same quality

Choice overload: a consumer may have trouble choosing a restaurant to eat at when there are too many choice available

Question 5

Top position (primacy) effects + provide empirical evidence?

Answer 5

The tendency of consumers to prefer options that are presented at the top of a list due to limited attention and processing capacity of consumers

Hann et al. (2005) > top position effects in online shopping (profitability of a product being purchased decreased with positions down the page)

Question 6

Endowment effect?

Answer 6

People tend to value goods they already possess
more compared to goods they could potentially acquire