behavioural economics

Question 1

economic agents and rationality

Answer 1

rational consumers maximise utility

rational firms maximise profits

rational workforce will balance welfare at work with high pay and benefits

Rational Governments: wants to maximise the welfare of the electorate.

Question 2

why is it difficult to assume rationality

Answer 2

Reasons for Irrational Behaviour

Limited capacity to calculate costs and benefits
Influenced by social networks
Act reciprocally rather than in self interest
Lack self control/immediate satisfaction
Actors are loss averse (losses matter more than gains)
Satisfice rather than maximise
Habitual

Question 3

What is Behavioural Economics?

Answer 3

A branch of economics that disputes rationality and utility maximisation as the sole basis of decision making, arguing that emotional, psychological and social factors play a role.

In other words, people don’t always act in their ‘best interests’.