behavioural economics terms

Question 1

Amazon flywheel

Answer 1

Is the model currently used to progressively grow online sales and the company, by maximising the customer’s online shopping experience, boosting sales and traffic, attracting more sellers and competition, broadening the selection or product range available, further enhancing the consumer’s experience, and so on. In addition, growing the business like this allows for greater economies of large-scale production or operations. It means a lower unit cost structure (with smaller profit margins but big volumes) and reduced prices, growing the company.

Question 2

Anchoring

Answer 2

Comes from behavioural economics. Anchoring is an arbitrary starting or reference point that affects a consumer’s perception. It is used by consumers to make a judgement, comparison, assessment or ranking of possible choices. It can be used by businesses to manipulate consumer choice.

Question 3

Behavioural economics

Answer 3

Is a relatively recent field of study based on the ideas drawn from psychology and economics. It proposes that consumers do not always make rational and self-interested decisions. Instead, they often take short cuts and have biases that affect their choices.

Question 4

Bounded rationality

Answer 4

Is an important theme in behavioural economics. It suggests that in making decisions, there are limits on consumer rationality. Consumers do not always have complete information for every decision. Sometimes they do not act in a self-interested way, and often they take short cuts and have biases that can reduce the quality of their decisions.

Question 5

Bounded self-interest

Answer 5

Is an idea that comes from behavioural economics. It says that while consumers can be selfish, this is not always the case. Their decisions can be affected by other beliefs like fairness and a desire to help others.

Question 6

Bounded willpower

Answer 6

Is an idea from behavioural economics, and says that sometimes consumers do not have the necessary willpower or determination to make rational decisions. Instead, they can end up taking the easy and less rational option, which may not be in their best long-term interest and, hence, may later regret their choice.

Question 7

Excise tax

Answer 7

Is an indirect levy used by the government to affect people’s behaviour by making the consumption of some potentially socially harmful goods, like alcohol and tobacco, more expensive and less wanted. By acting as a financial disincentive to consumers, it can change their behaviour.

Question 8

First Home Loan Deposit Scheme

Answer 8

Is used by the government to help up to 10 000 eligible first-home low-income buyers to purchase their home sooner with a saved deposit of as little as 5 per cent of the purchase price (normally the required deposit for a bank loan is $20 000). It aims to be a financial incentive for home ownership.

Question 9

Framing bias

Answer 9

Is an idea from behavioural economics. It says that consumer choices can depend on how the same information, facts or ideas are presented. It can be used to increase the likelihood that a particular choice will be made.

Question 10

Herd behaviour

Answer 10

Is an idea from behavioural economics and suggests that, sometimes, consumers just follow what the rest of their peers are doing, rather than reaching their own rational decision.

Question 11

Market failure

Answer 11

Exists when the free or unregulated operation of the price system (demand and supply) causes resources to be used inefficiently and in ways that reduce society’s general satisfaction and wellbeing. Examples of market failure can include situations where there is weak competition, incomplete or inaccurate information, the under-provision of public goods, negative externalities, and the use of common access resources. It is normally lessened by government intervention to change behaviour (e.g. pass laws, use regulations, run educational advertising, use of an excise tax or pay subsidies).

Question 12

Marketing

Answer 12

Includes a range of strategies that businesses use to attract consumers, capture their attention, get them interested, and sell products.

Question 13

Multi-branding

Answer 13

Is a common selling strategy where one company owns others with different names, even though they may produce a similar product out of the same factory.

Question 14

Narrative fallacy

Answer 14

Is an aspect of behavioural economics where consumers can be sucked into various scams, simply because of the plausible and impressive way information is presented, often focusing on a story with few facts.

Question 15

Nudge

Answer 15

Is a marketing idea drawn from behavioural economics. It involves providing a gentle reminder, a prompt, or something that catches attention and seeks to alter people’s behaviour in a predictable and wanted way, without forcibly limiting their choices.

Question 16

Overconfidence bias

Answer 16

Is an aspect of behavioural economics where in making decisions, consumers overestimate their current state of knowledge or skill and, hence, sometimes make ill-founded and non-rational choices.

Question 17

Present bias

Answer 17

Is an aspect of behavioural economics where in making a decision, consumers have a bias towards those that provide more immediate benefits, rather than being more patient and taking a long-term assessment that may ultimately be more beneficial and rational. Also known as short-term bias.

Question 18

Risk aversion bias

Answer 18

Is an aspect of behavioural economics where some people make choices that place more weight on avoiding making a loss, rather than making an equivalent gain.

Question 19

Solar panel rebates

Answer 19

Are a government financial incentive using subsidies to encourage households to install solar roof panels, by making them cheaper. The scheme is designed to help reduce CO2 environmental emissions and slow climate change.

Question 20

Status quo

Answer 20

Is a short cut and an aspect of behavioural economics where consumers fail to examine all the options — instead, sticking with what they have previously decided.

Question 21

The five Ps of marketing

Answer 21

Involved in selling to consumers includes consideration of the Product (i.e. one that is better than the rest, meets a need, and solves a problem for consumers), Price (i.e. must be profitable but offer value for consumer’s money), People (i.e. staff who are able to enhance the consumer’s shopping experience), Place (i.e. convenience for consumers), and Promotion (i.e. appropriate strategy that engages the target consumer audience).

Question 22

Traditional viewpoint of consumer behaviour

Answer 22

Is that when making economic decisions, consumers are rational, self-interested, knowledgeable or well informed, try to maximise marginal utility or satisfaction, and have ordered preferences. This means that their actions are predictable.

Question 23

Vividness bias

Answer 23

Is an aspect of behavioural economics where in making decisions, consumers place undue weight on just a small piece of information that stands out and catches their eye. Other important considerations in a decision are downplayed, so this can lead to irrational decisions.