Behavioural economics Flashcards
How does behavioural economics differ from traditional economics
Traditional economics assumes that economic agents always act rationally
Behavioural economics uses psychological insights to help explain economic decision making
What are 3 challenges to traditional theory
We don’t have unbounded rationality, willpower and selfishnes
What is asymmetric information
Where sellers have different levels of knowledge than consumers about a good or service (e.g. car salesman)
What is imperfect information
Where consumers don’t have full information to make a rational decision
What is anchoring bias
Occurs when people rely too much on pre-existing information or the first information they see when making decisions. e.g. example, if you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap.
What is an example of the 3 types of choice architecture
Restricted choices in a school canteen
Default choices such as insurance renewal
Mandated choice such as organ donation
What is a moral hazard
S situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk knowing that its insurance will pay the associated costs.
What is status quo bias
When people prefer things to stay the same by doing nothing or by sticking with a decision made previously (fearing change)
What is herd mentality
Individuals reacting based on how others behave
What is heuristics
A shortcut way individuals take in order to make quick decisions when there isn’t enough time e.g. black Friday deals being good
What is loss aversion
People are more likely to act or be motivated to avoid losing something rather than gaining something extra
What is present bias
People focus on the current rather than of future needs
