Behavioural Economics

Question 1

Behavioural economics

Answer 1

A method that applies psychological insights into human behaviour to explain how individuals make choices and decisions.

Question 2

Limits on rationality

Answer 2

-Bounded rationality
-System 1 and system 2 thinking

Question 3

Bounded rationality

Answer 3

Where an individual, however intelligent, is not able to make totally rational decisions due to:
-Limited information about choices
-Limited mental capacity to process information
-Limited time to make the choice

Question 4

System 1 and 2 thinking

Answer 4

System 1:
-Fast thinking
-Unconscious/Automatic/Everyday decisions
-Error prone
-E.g. Learning to drive
System 2:
-Slow thinking
-Conscious/Effortful/Complex decisions
-Reliable
-E.g. Experienced driver

Question 5

Bias

Answer 5

A general patter or tendency to think a certain way. They give us shortcuts to make decisions that are good enough. There are some types you should have an awareness of as they impact economic decision making.

Question 6

Cognitive bias

Answer 6

Decisions may not be ration due to cognitive bias. This is a consistent mistake in reasoning due to preferences, experiences or beliefs despite contrary information

Question 7

Types of cognitive bias

Answer 7

Conformation bias
Availability bias
Anchoring
Social norms
Altruism

Question 8

Confirmation bias

Answer 8

Means that we often look to have our existing views confirmed rather than challenged so we tend to believe evidence that supports our view and dismiss evidence that dont

Question 9

Availability bias

Answer 9

Occurs when individuals make a judgement about the likelihood of future events based on how quickly similar events spring to mind.