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
- this 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 jun 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
What is a mandated choice?
when consumers are required to state whether they wish to participate in an action
What is a restricted choice?
restricting consumers to a limited number of choices
Why are restricted choices used?
because of the existence of bounded rationality
What is an evaluation point on choice architecture and nudges?
critics say the use of nudges and choice architecture are manipulative and interfere with individuals’ freedom of choice
What is the response to the criticism of choice architecture and nudges?
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
