Behavioural Economics

Question 1

Traditional economics assumes (3)

Answer 1

• Rational consumers: wish to maximise utility from consumption by spending income optimally
• Firms: wish to maximise profits
• Government: wish to improve social and economic welfare of it’s citizens

Question 2

Behavioural economics

Answer 2

Insights into human behaviour to explain economic decision making

Question 3

Bounded rationality

Answer 3

People aren’t rational when making complex decisions they opt to satisfy utility

Question 4

Default bias in choices

Answer 4

Repetition of purchases/choices often become automatic because these choices don’t involve cognitive effort
(eg choice of razor, cereal, sandwich, political party)

Question 5

Choices influenced by social norms

Answer 5

Social norms become accepted by the majority of a given community of people (eg wearing a seat belt and buying a round of drinks)

Question 6

Availability bias

Answer 6

When people judge the likelihood of an event and it’s frequency if it’s occurrence by the ease with which examples and instances come easily to mind

(eg recent plane crash=more people get the train and jaws increased fear of shark attacks)

Question 7

Anchoring bias

Answer 7

Human tendency to rely too much if the initial piece of info given (anchor), people use this unrelated info when making subsequent choices

Question 8

Framing

Answer 8

Putting a question in a different way often generates a new response by changing the comparison it’s viewed in

For example altering what info is given, 90% fat free vs 10% fat

Question 9

Altruism and fairness

Answer 9

• Altruism refers to our concern for the welfare of others
• Altruistic behaviour comes from people’s perception of fairness

Question 10

Loss aversion

Answer 10

When we emphasise losses more than potential gains, losses can be twice as painful as similar gain

Question 11

Choice architecture

Answer 11

Describes how the decisions we make are affected by the layout/ sequence and range of choices that are available

Question 12

Choice architecture examples (4)

Answer 12

• Nudges
• Restricted choice
• Framing
• Default choice

Question 13

Are nudges effective? (3)

Answer 13

• Might be useful in changing minor behaviours
• Unlikely to to address deep rooted issues
• Interventions such as taxes, subsidies and regulation may be as effective

Question 14

Richard Thaler Pensions

Answer 14

Suggested a pension plan where people contribute to their pensions only when their incomes increase so they never see a result ruin in their disposable income

Question 15

Why do people give in to bounded rationality? (4)

Answer 15

Time
Information
IQ
Emotions

Question 16

Heuristics

Answer 16

Rules of thumb, short cuts

Question 17

Restricted choice

Answer 17

Helps overcome the paradox of choice by minimising the amount of choice for consumers

Question 18

Mandate choice

Answer 18

Required by law to make a decision

E.g. opting out of donating organs

Question 19

Bounded self control

Answer 19

People think more about the present than the future

E.g Pensions and poor diets