Behavioural Economics Flashcards
Why and how does BE question the true effectiveness of traditional economic policy?
They argue that due to individuals bounded rationality, they may lack the time, cognitive ability or have imperfect information with which to maximise their marginal utility, leading them to make suboptimal choices.
This can therefore limit the effectiveness of traditional economic policy as consumers may not recognise the price increase following the introduction of an indirect tax for example, and hence not alter their consumption decisions accordingly.
Bounded Rationality?
Bounded rationality is when consumers lack the time, information or cognitive ability to make a rational/utility maximising consumption decision.
Rule of thumb?
Simple, useful tools that help an individual make a decision,
e.g. choosing the middle-priced option when faced with a range of different prices for similar products.
Bounded Self-Control?
Bounded rationality is when consumers lack the time, information or cognitive ability to make a rational/utility maximising consumption decision.
Anchoring?
This means placing too much emphasis on one piece of information,
e.g. the first price quoted for a job can influence an individual’s view of what’s a fair price.
Availability bias?
This is where judgements are made about the probability of events occurring based on how easy it is to remember such events occurring,
e.g. following a drought, people will overestimate the probability of a drought occurring the next year and make decisions based on this assumption.
Social norms?
An individual’s behaviour can be influenced by the behaviour of their social group (this could be anything from a friendship group to the population of the whole world).
For example, an individual may stop buying cigarettes if none of their friends smoke.
Altruism?
Doing the same thing over and over again,
e.g. individuals often choose to shop at the
same place regardless of any rational reason for going somewhere else.
Default options?
People are more likely to choose the ‘ default ’ option, so this can be used to encourage individuals to act in a certain way —
e.g. employees might be automatically enrolled onto a pension scheme.
Framing?
The context in which information is presented
can influence a decision,
e.g. changing the wording of a
choice could make an option more desirable, so charging a fee of £1 a day seems more appealing than £7 a week.
Nudges?
His is where some alternatives are made easier to choose
than others without removing the freedom of choice,
e.g. by only allowing smoking in certain areas, a government can ‘nudge” people into quitting.
Restricted Choice?
This occurs when people’s choices are
restricted,
e.g. people are restricted to only being able to choose from a limited number of schools in their local area.
Mandated Choices?
His is where people have to make a decision,
e.g. a government may implement a policy where people have to choose whether or not they’re willing to be organ donors.
Evaluation of BE policies?
Eval:
- Tax or subsidy = outcome can be predicted. We don’t know how people will react with BE policies ; they may all act differently.
- High admin costs? (Cost vs Benefit). Gov.failure?
- Are these policies strong enough to overcome deep-rooted addictions?
- Is info. Provision better?
- Integrated “Shove” policy best approach?
- Freedom of choice without coercion.
- Doesn’t fix complete market failure.
Advantages of BE?
o Relatively simple and low-cost
o Allows people freedom of choice without coercion
o Development of policies is based on trials, so is based on evidence
o May be able to overcome weaknesses in consumer behaviour theory including irrationality and
inconsistency
