behavioural economics key terms Flashcards
Bounded self-control
Individuals inability to make rational decisions due to The inability to control themselves
Individuals have good intentions but lack the discipline to see them through for example regular gym attendants were given up smoking or saving for the future
Consumers know there is a positive impact by doing these actions although self control doesn’t let us preventing us from making a utility maximising decisions
behavioural economics
Argues that emotional, social and psychological factors can influence decision making
Rules of thumb
Thinking shortcuts or informed guesses that individuals use to make decisions in order to save time And effort
For example consumers may choose The same hot drink in a coffee shop each time they visit because they have enjoyed it previously saving time and effort having to make comparisons on every visit.
These situations may not maximise our utility but are easy and bring us somewhat satisfaction
Anchoring
The tendency of individuals to rely on particular pieces of information were making choices between different goods and services
Occurs particularly in situations where people luck knowledge or experience for example a consumer choosing between car insurance premiums online may focus on a price as a key point of comparison rather than the features, access and exclusions of individual policies
RRP’s recommended retailing price on packaging we compare this with the real price and this affects our decision making
Availability bias
A cause when individuals make judgments about the likelihood of future events according to how easy it is to recall examples of similar events
Availability serves as a mental shortcut if an example comes to mind easily for example the calling a family member who lost their retirement savings in the last recession discourages personal saving
Social norms
Forms or patterns of behaviour considered acceptable by society or group within that society
For example tipping in restaurants. Link to economic policies For example Wearing seat belts
Altruism And fairness
Individuals are motivated to do the right thing even if it means paying more for a good or service as they are concerned for the welfare of others
May be seen as a rational and traditional economics, consumers can give a genuine sense of satisfaction from acting in this way.
Individuals don’t expect anything In return therefore decisions are not always utility maximising because humans have good morals feelings emotions which influence their decision making
Choice architecture
A framework setting out different ways in which choices can be presented to consumers and impact the presentation on consumer decision making
Framing
How something is presented influences the choices people make for example the way words and numbers are used
Nudges
Factors which encourage people to think and act in a particular way not just try to shift group And individual behaviour in ways which comply with desirable Social norms
Default choice
An option that is selected automatically in less an alternative is specified
Influencing consumer behaviour by setting socially desirable choices as default options
mandidated choice
Where people are legally required to make a decision
Restricted choice
Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. Too many choices people might make poorly thought out decisions or not make a decision
Bounded rationality
Idea that people may try to behave rationally to maximise utility but their ability to do so is restricted by:
the human mind having limited ability to process and evaluate all information,
the available information is incomplete and often unreliable due to a lack of information asymmetric information or information not being clear or too complex,
the time available to make decisions is limited,
therefore even with the best intentions individuals end up sacrificing or accepting suboptimal outcomes
