Behavioural Economics and Government Policy Flashcards
Define bounded rationality
When consumers lack the time, information, or cognitive ability to make a rational and utility-maximising decision
Define bounded self-control
When individuals lack the self-discipline to make utility-maximising decisions in relation to consumption or spending
Give an example of bounded self-control
Not saving for a pension
Consuming unhealthy/high-sugar foods
Define ‘rules of thumb’
Mental shortcuts that are used by consumers due to the constraints of bounded rationality
Define anchoring
The tendency for individuals to rely on specific pieces of information, typically the first piece they are given
Define availability bias
When individuals make judgments on the probability of events occurring based on recent experiences
Define social norms
Where individuals’ decisions are influenced by others
What does choice architecture refer to?
The way choices are presented to consumers
What is a potential benefit of choice architecture?
Well designed choice architectures can help consumers avoid making irrational and poor choices
his could improve consumer welfare
Give an example of choice architecture
Organ donation
Countries with an ‘opt-out’ organ donation have higher rates of donation that countries with an ‘opt-in’ system
What are nudges?
A type of choice architecture that aim to change the behaviour of consumers by small suggestions and positive reinforcements
Give an example of a nudge
Rather than banning junk food, increase the information about the benefits of healthy food
What is framing?
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)
Give an example of framing
Consumers are more likely to purchase something if it is framed with monthly payments, rather than a lump sum
Define a default choice
When a consumer is automatically enrolled in to a system, such as a pension scheme
