Behavioural Economics Flashcards
What is the definition of risk in behavioral economics?
Risk = we know the possible outcomes and their probabilities
Example: when rolling two fair dice.
What is the definition of uncertainty in behavioral economics?
Uncertainty = we don’t know the possible outcomes or the likelihood of these outcomes.
What is bounded rationality according to Herbert Simon?
People attempt to be rational but face constraints limiting how rational they can be.
What are the three constraints that limit rational decision-making?
- Information constraints
- Cognitive limitations
- Time constraints
What is a satisficer in behavioral economics?
Satisficers consider the cost of making a good decision and aim for ‘good enough for now’ rather than the absolute best.
What are the two systems in Kahneman and Tversky’s Two-system model?
- System 1 (fast system)
- System 2 (slow system)
Describe System 1 in Kahneman and Tversky’s model.
System 1 = our automatic, frequent and emotional cognitive system; it is stereotypic and subconscious.
Describe System 2 in Kahneman and Tversky’s model.
System 2 = slower, conscious/deliberate and logical system; requires more cognitive resources.
How do System 1 and System 2 interact?
System 1 provides emotional responses and conclusions, while System 2 either accepts these or engages in deeper reasoning.
What is nudging according to Richard Thaler?
Nudging aims to help people make better choices by considering their cognitive limitations and biases.
What are some situations where flawed bias occurs?
- Infrequent choices - not learnt effective heuristics
- Difficult choices - not sure which heuristics to apply
- Immediate benefits, delayed costs
- Decisions where we get no feedback - cant test how were doing an dadjust our heuristics
What is choice architecture?
Choice architecture is the practice of organizing and structuring decision environments to influence how people make choices.
What is the significance of default options in choice architecture?
Default options are powerful, exploiting the status quo bias and norm-following bias.
What is libertarian paternalism?
Libertarian paternalism is a framework for when nudging should be applied, balancing personal freedom with ethical limits for a person’s benefit.
What is libertarianism
emphasises personal freedom and autonomy
What are heuristics?
Mental shortcuts which can lead to biased decisions.
These decisions often lead to choices that make people less happy or poorer.
what is paternalism?
idea that its ethical to limit freedom in certain situations for a persons own benefit.
