Behavioural Economics Flashcards
Adverse selection
One participant in a transaction has more information before the transaction occurs
Nudge theory
Any arrangement of the choice architecture that alters people’s choices without limiting choices or significantly changing incentives.
Choice Arquitecture
The way choices are structured for consumers.
Limitations to human rationality
Bounded rationality, bounded self-control, bounded selfishness and imperfect information.
Rational Consumer: Utility Max.
Consumers want to maximise personal satisfaction (utility) at all times.
Limitations of rational choice
Cognitive biases, Rules of thumb (practical but not rational), Anchoring (guesses), Framing, Availability (Memory)
Rational Consumer: Perfect Information
Consumers making incorrect decisions based on false or incomplete information about alternative choices.
Rational Consumer: Skills
Assumption: Consumers have highly developed analytical skills that enable them to determine which goods they prefer and to effectively compare their possible choices in terms of costs and satisfaction (utility).
Rational Consumer: Transitive
If a consumer prefers apples to oranges, and oranges to bananas, that the consumer must prefer apples to bananas.
Rational Behaviour
Behaviour of a consumer/producer that seeks to maximise utility or profit, respectively
Behaviour that exhibits stable preferences over time.
Moral Hazard
A situation in which one participant takes on more risk because they know they will not pay the consequences of that risk.
There is asymmetric information after the transaction has taken place.
