behavioural economics theory Flashcards
assumptions of rational decision making
people maximise utility
independence
use all info available
max satisfaction is achieved
what influences decisions
cognital and emotional factors
utility
the satisfaction gained from consumption
rational choice theory
assumes people have perfect information
suboptimal decisions
people making choices unaware of consequences/ without imperfect info
irrational decision making
herd mentality - crowd following against their own preference
emotion - feelings over logical analysis
risk averse behaviour - lack of assessment over probabilities
faults of the theory
not everyone has the ability to calculate
altruism takes over self interest
emotion overtakes logic
people often stick to default choices
loss aversion
idea that people are more sensitive to a loss than equivalent gains
e.g. buy one get one free
anchoring bias
people basing decisions off of one initial piece of info, even if that is irrelevant
e.g. bargain hunting/ negotiation
framing bias
the way info is presented
framing bias examples
architecture - e.g. supermarkets placing essentials at the back
scarcity - creating urgency to consumer by branding something as limited
bounded rationality
not everyone came make rational decisions
e.g.
pension schemes can be complex
rules of thumb
bounded self control
people cannot limit their impulses
heuristics
saving time an effort choosing cheapest or most popular option
default options
automatically selected options usually for retirement plans or care insurance
nudging to a different default action can influence behaviour
e.g. libertarian paternalism
