Behavioural economics Flashcards
Define irrationality
A type of behaviour that occurs when consumers make decisions that go against the assumption of utility-maximising behaviour
Define anchoring and give an example
Cognitive bias - Consumers relying on he first piece of information received
E.g., seeing a discount in a shop
How do social norms affect our decision making?
Type of cognitive bias, decisions are influenced by rules society has dictated
e.g., tipping in restaurants but not at a dinner party
Define availability bias and give an example
Judging probabilities based on how easily an example comes to mind
e.g., not swimming in Australian seas due to hearing about shark attacks or not flying on a plane due to plane crashes
We overinflate the actual risk
Define framing and give an example
We are influenced by the way in which information is presented to us
e.g., ‘no sugar’ or ‘no fat’ labelled on food products, we are more likely to consume these.
Define herd behaviour and give an example
Making a decision because other people around us have
e.g., going to a restaurant and ordering what your friends have ordered
Define choice architecture and give an example
Our decisions are based on location or placement of something
e.g., location of salad bars in restaurants, hand sanitisers at door entrances, traffic cones stopping us speeding, stairs placed in front of lifts to promote exercise
What would behavioural economists suggest about employing workers?
Firms don’t employ everyone to profit maximise, but to it to help the individual. For example, employing disabled people or homeless people.
Define altruism
Acting on the interest of others, even at a cost to oneself, demonstrated by volunteering and charitable donations. Based on the assumption that consumers don’t act in a way to maximise utility, but have morals and feelings.
Define nudges and give an example
Ways in which we can be encouraged to make a decision
e.g., placement of fruit and veg in supermarkets
What are the 3 types of choices (nudge policies)
- Default choice - going to be entered into something unless we opt out e.g., organ donation, salad on the side of a burger
- Restricted choice - public smoking bans, school food choices (no fizzy drinks) - don’t have a choice
- Mandated choice - have to make a decision, opt in or out e.g., rounding up to a pound for charity in a supermarket
Define bounded rationality
Bounded rationality suggests that consumers don’t act rationally as they don’t have sufficient information to make fully informed judgements or have limited time available. It suggests that consumers opt to satisfice rather than maximise.
Define bounded self-control
The idea that individuals have limits on their self-control and these limits hinder their ability to maximise their utility.
E.g., consumers know it will benefit them in the LR to save for their pension but this means they have less spending in the SR. It’s the procrastination which leads to consumers making irrational decisions by not having self-control.
Define rules of thumb
Followed when people use heuristics (mental shortcuts) when making decisions. A role/principle that you follow which isn’t based on exact calculations.
