Behavioural Economics Flashcards
What is bounded rationality?
Limitations to people ability to be rational based on their limited ability to process information,limited time or inaccurate information
What is bounded self control?
A limited ability to put into practice utility maximising behaviours
What are the 4 decision making biases?
1)Heuristic
2)Anchoring
3)Availability bias
4) social norms
Define heuristics
Mental short cut or a rule of thumb (e.g. never eat at an empty restaurant)
Define anchoring
A particular piece of information shifts someone’s perception of something
Define availability bias
Economic agents misjudge the likelihood or frequency of an occurrence based on the most recent evidence
Define social norms
Accepted pattern of behaviour with in society
What is choice architecture?
Designing the choice that people take in order that they might make better decision without loosing the ability to choose
5 types of choice architecture
1)framing
2)default choice
3)mandated choice
4)restricted choice
5)Nudges
What is framing?
The tendency for an individual to be influenced by the context in which information is presented
What is default choice?
The option that will be taken if no conscious decision is taken to change it
What is mandated choice?
Individuals are forced to make a choice without a default being set
What is restricted choice?
Giving individuals an limited number of options
What is nudges?
Encouraging individuals to change their behaviour in a predictable way without removing their ability to choose (must be low cost)
Evaluation points on choice architecture (5)
.Freedom of choice still means freedom to choose badly
.’Shoves’ (regulation/taxes) might be more effective
.Some nudges assume that people are stupid
.Less effective in the case of deep rooted behaviours (e.g. cigarettes)
.Low cost means low opportunity cost
