Behavioural Economics and Government Policy Flashcards

1
Q

Define bounded rationality

A

when consumers lack the time, information, or cognitive ability to make a rational and utility-maximising decision

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2
Q

Define bounded self-control

A

when individuals lack the self-discipline to make utility-maximising decisions in relation to consumption or spending

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3
Q

Give an example of bounded self control/hyperbolic discounting

A
  • not saving for a pension
  • consuming examples of demerit goods
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4
Q

Define ‘rules of thumb’

A

mental shortcuts that are used by consumers due to the constraints of bounded rationality

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5
Q

Define anchoring

A

the tendency for individuals to rely on specific pieces of information, typically the first piece they are given

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6
Q

Define availability bias

A

when individuals make judgments on the probability of events occurring based on recent experiences

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7
Q

Define social norms

A

where individuals’ decisions are influenced by others

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8
Q

What does choice architecture refer to?

A

the way choices are presented to consumers

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9
Q

What is a potential benefit of choice architecture?

A
  • well designed choice architectures can help consumers avoid making irrational and poor choices
  • this could improve consumer welfare
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10
Q

Give an example of choice architecture

A
  • organ donation
  • countries with an ‘opt-out’ organ donation have higher rates of donation that countries with an ‘opt-in’ system
  • fruit bars at the front of schools
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11
Q

What are nudges?

A

a type of choice architecture that aims to change the behaviour of consumers by small suggestions and positive reinforcements

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12
Q

Give an example of a nudge

A

rather than banning junk food, increase the information about the benefits of healthy food
- the waiter asking if you would like anymore?

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13
Q

What is framing?

A

the way in which consumers are influenced by the context of how a choice is presented (for instance if positive or negative semantics are used)

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14
Q

Give an example of framing

A

consumers are more likely to purchase something if it is framed with monthly payments, rather than a lump sum

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15
Q

Define a default choice

A

When a consumer is automatically enrolled in to a system, such as a pension scheme

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16
Q

What is a mandated choice?

A

when consumers are required to state whether they wish to participate in an action

17
Q

What is a restricted choice?

A

restricting consumers to a limited number of choices

18
Q

Why are restricted choices used?

A

because of the existence of bounded rationality

19
Q

What is an evaluation point on choice architecture and nudges?

A

critics say the use of nudges and choice architecture are manipulative and interfere with individuals’ freedom of choice

20
Q

What is the response to the criticism of choice architecture and nudges?

A

since people are unlikely to have complete information, unlimited cognitive ability, and unrestrained will power - they will inevitably make sub-optimal choices and so nudges and choice architecture can improve people’s well-being

21
Q

what is loss aversion

A

you dont like to take the risk of losing something

22
Q

what is the endowment effect

A

attaching too much value to what you have rather than what you can gain

23
Q

what is herd behaviour

A

you follow the decisions of others

24
Q

altrusim and an example?

A

kindness or selflessness e.g charity