Behavioural Economics

Question 1

Challenging rational and fully-informed choices

Answer 1

We assume that people aim to maximise their own welfare, they have limited income so allocates their money to give them maximum satisfaction. BUT in reality consumers rarely behave in a well informed and rational way

Question 2

Why do people have bounded rationality

Answer 2

• lack of information
• time limits
• too many choices
• consumers satisfied not maximise
• mental limits

Question 3

What are heuristics

Answer 3

Mental shortcuts or rules of thumb for decision-making to help people make a quick, satisfactory, but perhaps not perfect, answer to a complex question

Question 4

What is default bias

Answer 4

People prefer to carry on behaving as they always have done

Question 5

What is choice architecture

Answer 5

It describes how the decisions we make are affected by the layout / sequencing / range of choices that are available

Question 6

What are social norms

Answer 6

How our day to day behaviour is influenced strongly by prevailing social norms or social customs

Question 7

What is herd behaviour

Answer 7

People making decisions based on who is around us and the choices they make e.g. choosing items off a menu

Question 8

What is anchoring

Answer 8

That value is often set by anchors or imprints in our minds we use as mental reference points e.g. ‘Big price drop’ campaigns by supermarkets

Question 9

What is priming

Answer 9

Our behaviour by cues that work subconsciously and prime us to behave / choose in certain ways

Question 10

What is framing

Answer 10

Framing a question or offering in a different way often generate a new response by changing the comparison set it is viewed in

Question 11

What is asymmetric framing

Answer 11

It involves including an obviously inferior 3rd choice or a hyper-expensive 3rd option rather than a simple expensive/cheap choice can guide consumers to more expensively-priced items e.g. 90% fat free or 10% fat

Question 12

What is availability bias

Answer 12

Happens when we often judge the likelihood of an event, or how often it occurs, by the ease with which examples and instances come to mind e.g. Shark attacks

Question 13

Commitment and choices

Answer 13

The more public our position, the less willing we are to change it

Question 14

What are behavioural nudges

Answer 14

An alternative to using taxes and subsidies to influence choices e.g. Cash incentives to stop smoking and choice architecture to encourage healthy eating

Question 15

Examples of behavioural nudges

Answer 15

• eliminating/restricting choices
• financial disincentives to take a particular course of action
• influencing choice

Question 16

What are some criticisms of behavioural nudges

Answer 16

• governments may become too paternalistic in their policies
• they focus too heavily on people’s vulnerability to fall for fallacies and their psychological biases
• limits such as deep psychological problems