Behavioural economics Flashcards
What do traditional economists believe
Consumers are always rational and looks to maximise their utility
What do behavioural economists believe
That consumers aren’t always rational and don’t always look to maximise their utility
It might be bounded
What is bounded rationality
Consumers make decisions based on the knowledge they have
What is bounded self control
Assumes consumers are able to exercise self control…humans will follow heuristics
Examples of biases in decision making
- Rule of thumb
- Anchoring
- Availability
- Social norms
What is the rational and selfish consumer called
- Homo economicus, a utility maximiser and makes rational decisions
What are heuristics
A rule of thumb
Short cuts to avoid taking too long to make a decision, they avoid having imperfect information or limited time.
- satisficing decision
What is anchoring
A bias created by human tendency to rely on first piece of information they are given.
So consumers are biased towards it when subsequent info is given.
What is availability bias
A bias towards events that were recent, personal or memorable.
Eg: consumer are likely to think plane accidents are more likely if been involved in one or know someone who has.
What is altruism
Being selfless and considerate to others.
What is choice architecture
The way choices are presented to consumers. The different designs affect the choice consumers make.
Well designed choices can help avoid irrational decisions and poor choices which improves consumer welfare.
What is framing
The way which consumers are influenced by the context of how choice is presented. Eg: being told monthly payment of smth rather than yearly
What are nudges
Aim to change the behaviour of consumers without taking away their freedom of choice.
Eg: rather than banning junk food replacing it with healthier food is a nudge
What s a default choice
An option selected automatically unless alternative is specified
Mandated choice
People are required by law to make a decision
