Behavoural Econ

Question 1

Behavoural econ

Answer 1

Method econ analysis applies physiology yinsights into human behavour explain how consumer acts

Question 2

Bounded rationality

Answer 2

Customersoption to satisfice rathe rthan maximise
Uses rules of thumbs and approximations when making decisions
Due to high complexity of products- too much choice- may not have sufficient info to make fully informed decision

Question 3

Heuristics

Answer 3

Mental shortages/rules of thumb for deicison making to help peopole mke a quick satisfatory decision to complex q
Lack information or time
Optimal behavoir does not eequal maximising behavour

Question 4

Default bias in choice

Answer 4

Carry on behaving as always done
Repat choices- no mental cognitive effort

Question 5

Choice architecture

Answer 5

How decisions we make are affected by layout/range of choirce sthat are advantagous
Eg salad fornt canteen, stairs next to escalator

Question 6

Choices influenced by soicak birns

Answer 6

Accoeted by the majoirty
Bot smoking in public places

Question 7

Herd behavours

Answer 7

Often make decision based on who is around us
Financial markets

Question 8

Anchoring

Answer 8

Value set by anchor /first piece infomration recived
Mental reference point

Question 9

Rational behavour

Answer 9

Actions in persuit of self interest which for a consumer means attempting to max welfare, satisfaction or utility gained from g&s consumed

Question 10

Utility

Answer 10

Satisfaction or econ welfare an individual gains from consuming a gs

Question 11

Marginal utility

Answer 11

The additional welfare satisfaction or pleasure gained from consuming one extra unit of a gs

Question 12

Hypothesis of diminishing marginal utility

Answer 12

For a single consumer, marginal utility dervicesd from a gs diminishes for each additional unit consumed

Question 13

Utility max

Answer 13

Assumed by trad econ
But constrained by limited income, given set of prices budget constraint, limmited time available

Question 14

Diff between trad and behavoural econ

Answer 14

Ariely
Trad econ theory and aply actual theory
Behavoural observe actual behvaour and come up with theory

Question 15

Homo economicus

Answer 15

Economic man
Self interested only cares about himself, knows consequences of everythingh he does, he is rational, knwos what he wants and alwyad acts on those preferenes
Yet not always in relaitym, heuristiccs status quo bias

Question 16

Bounded self control

Answer 16

Limited self control in which individ lack self control to act in whichat they see as their self interest

Question 17

Kahneman

Answer 17

Thinking fast0 intuitive and instinctual-hait
Thinjing slow reflecting big deciaions more r9ational

Question 18

Cognitive bias

Answer 18

Systematic error in thinjig that affects the decisions and judgements that people make

Question 19

Availability bias

Answer 19

Occurs when indivdi make judgements about the likeligood of future events accordinng to how easy it is to recall similar events
Ie buying lottery tickets after seeing people win in news

Question 20

Social norms

Answer 20

Forms or patterns of behavur consudered socially acceptable

Question 21

Nudges

Answer 21

Factors which encourage people to think and act in patricular ways
Nudges try to shift gorup and individ behavour in ways which comply with desirable social norms
Ie presneting statistical info to young poeple to show heavy drinkiing not as common

Question 22

Alturism

Answer 22

Concern for the welfare of others
Gives them happiness to- so still maximising

Question 23

Fairness

Answer 23

Quality of being impoartial just of free of favourism- treating poepole equaliy sharing with others, gibing otherds respect and time

Question 24

Default choice

Answer 24

Option that is selected automatically unless other alternative specifiied
Opt out organ donations

Question 25

Framing

Answer 25

Tendency for poepole to be influkenced by the context in which the choice is presented when making the decision 90% fat free rather than 10% fat

Question 26

Mandated choice

Answer 26

Poeple are required often by law to make a decision Ie cookies

Question 27

Restricted choice

Answer 27

Offereing people a limited no of options so not overwhelmend by complexity of situyation Too many options dont make decisions Why comparison websites so effective

Question 28

Nudge- factors

Answer 28

Provide info for people to respond to Creates add social norms Opt out and default schemes Activcely choosing by industry

Question 29

Shove

Answer 29

Uses tax and subsidies alter incentievs- tax detterant Fines law banning activities and regulations

Question 30

An individual will consume a free good up to the point at which

Answer 30

The total utility is maximised

Question 31

An individual will consume a free good up to the point at which

Answer 31

The total utility is maximised

Question 32

If a rational consumer has a limited income, they will make purchases to max utility up to the point at which

Answer 32

The marginal utility to price rleationship of each good purchased is identical to

Question 33

A consumer will be in a state of equlibrium with respect to the quantity of the goods purchased wheere

Answer 33

The relationship between marginal utility and price is the same for each product bought

Question 34

Hypotesis of diminishing marginal unity0 shape of curve

Answer 34

Downward sloping demand curve

Question 35

An example of a rule of thumb leaidng to bias in decision making regarding a consumers regular purchase of a bottle of wine

Answer 35

The fact it is the second cheapest one in the shop

Question 36

System one thinking-

Answer 36

Kahneman Fast and emotional

Question 37

System 2 thinking

Answer 37

Kahneman Deliberate and logical

Question 38

Choice architecture is sometimes criticised on the grounds that it

Answer 38

Effectively restricts some individuals freedom of choice

Question 39

Nudge theory

Answer 39

Any feature in the environ that attracts our attention and influences our behavoir without restricting our freedom of choice Ie opt out scheme Reduced size of general waste bins to incentivise poeple recyle Pictoral health warnings on cigrette packs to reduce smoking Example of libertarian paternalism

Question 40

Intrisic motivation

Answer 40

Motivation that is not linked to external incentives, but that is genuinely provided by the pleasure of doing something

Question 41

Loss aversion

Answer 41

Tendency of an econ agent to place higher value to losses than gains of teh same amount

Question 42

Risk aversion

Answer 42

Tendency of an econ agent to prefer certain outcomes to uncertain one

Question 43

Why do we need nudges

Answer 43

When tend to forget somethig When we see beneifts now and ocsts later- intertemporal choices- choicoes that have cnosequences over time

Question 44

Economists choice architecture

Answer 44

Thaler and sunstein

Question 45

Choice overload

Answer 45

A situation in which someone is faced with too many choices or options. The outcome is likely to be one of the following: • Greaterapplicationofheuristics,resultinginaless-than-optimaloutcome • Greaterunhappiness/stressinthedecision-maker • Greaterchanceofgoingwiththedefaultoption • Greaterchanceofchoicedeferrali.e.beingsooverwhelmedthatnodecisionismadeatall • Greaterchanceofboundedselfcontrolasdecisionfatiguekicksin.

Question 46

Curse of knowlegde

Answer 46

The difficulty that well-informed people have in understanding how lesser informed poeple may think

Question 47

Dual system theory

Answer 47

Thinkking fast and slow Kahnemann System 1 fast subconscious and automatic- habit System 2- thinking slow controlled and conscious- when decision v important and highly personal to us

Question 48

Partitioning

Answer 48

Consumption can be reduced by packaging something into smaller amounts Eg packet of crisps sweets Consumers face more decision points which can slow down the rate of spending or consumption

Question 49

Zero price effect

Answer 49

The demand curve for a good changes shape dramatically once the price of the good is zero

Question 50

Should gov intervene to encourage healthy diet - structure

Answer 50

Yes- market failure Sugar tax- trad policy Trad policy- education camapigans Behavoural econ- choice archetecture, framing Conc- behavoural policies most

Question 51

Gov should intervene to get more people to adopt a healthy diet - intro/explan

Answer 51

Market failure present justifies intervention 20% of 10-11y/o are obese suggests failure in market for unhealthy food Consumers ove restimate net benefit of unhealthy foods- infrormation failyure or due to behavoural heuristics that prevent them from makig rational cchoices that max utility Information faiklure- consumers unaware of ingredients of their foods or potential health conseqeunces of consuming it- demadn higher than if had full info Thus market. Signals produce undesirale outcomes, too many resources being allocated to the production of nhelathy foods Heuristics- consuemrs put less wieght on health consequences of eating sugary and fatty foods than they should, helath consequences uncertain and occur in future- consuemrs overdiscount the future Negative externalitoes demerit goods- 3rd parties impacted- nhs to treat obesity related illnesses Neg externality diagrram

Question 52

Gov intervenet to increase healthy food consumption- tax unhealthy food

Answer 52

Trad policy Sugar tax imposed apr 2018- unit tax Draw diagram Demand contratcs Evidence of sugar tax in mexico supports success of this policy with sales of sugary foods decreasing by 12% in first year of tax Tax rev hypotheicated to reduce consumption of unhealthy foods But tax unlikely effective- fiff to put monetary value on cost of neg externality Demand unhelathy foods price inelatic Regressive

Question 53

Gov intervene to increase healthy food consumption- educational campaign

Answer 53

Gov enforce restaurants takeaways fast food outlets and others to provide calorie info Policy helps individ more effectively wight up benefits and costs of consuming diff foods- make choices that max utility Reduce info failure Yet ineffective as uk already has compulsory food labelling of ingreients and campaigns such as Change4life initiative Consumer protection act 2007 already protects consumers against misleading ads suggesting that info provision cannot eailu be improved

Question 54

Gov intervene increase consumption healthy foods- behavoural

Answer 54

Consyers show signs of bounded rationality- peoples ability to make rational decisions severly limited because of human mind limited ability to evaluate info and boucnded self control- inability to conrtol aspects of our own behavour Choice architecture- change way infor and choices presented dto us, nudge us to make socially optimal deciisons that max utility Healthy food must be placed on supermarket shelves where more likely pruchased- eye level, near checkout under attractivelighting Framing- unhealthy yougurt 80% fat rather than 20% fT FREE Few disadv behavoural policies Could encourage gov become too paternalistic- dont restrict cnosumer freedom to consuer

Question 55

How useful behavoural policies are in influecing peoples choices

Answer 55

Behavoural polcies- lib parternalism approach to influencing poeples choices Trad econ policies- tax regulation and information campiagns Behavoural polciies incorporate psychology into their creations and tus may be more useful at directly influencing peples choices Nudges- smoking Influence choices- choice architecture healtheir eating Making decison making easier- default options Overall- trad econ policies alongside behavoural polciies = behavorual not enough alone

Question 56

Behavoural policies influence peoples choices- nudges

Answer 56

Restrict choice- smoking- only smoke in smoking speciific areas- outside ofr in non public places away from children Additional challenges imprsed- consumption demerit godos may be reduced closer to social optimum Neg externalities- nhs treat smoking related health conditions But- lowenstein and chater argue- nudges fail to adress root cuases of the problem, smoking, largely info failyre and adidtcive natioure- behavoural not enough Info cmapighns- inform individ of health risks such as increased risk throat cancer- mroe people quit Quit smoking campaigns nictoine replacemn needed tackle addictiveness Lt combination- reduce normality of smkong, behavoural econ still play orle

Question 57

Healthier eating- behvaoural polciies

Answer 57

Choice aerchitecture- place healthier foods and snacks at eye level or near chekcout at a supermakret, increasing the likeliness of pruchain these godos dud eto easy acecsibility, esp when comes to impulsive last min decisions Place salad bar first- encourage individ full plates woityh salad before But- need subsity healthy foods- progressive policy reduce health risks nutrient defiiciencies- increase financial acessibility Subsidy equal msc=msb and mpb Subsidies- famrer grow furit veg more ffeicinet capital or processes reduce price But could lead to subsidy capture asymmetric info occurs- subsidy wasted and reducition in price minimal

Question 58

Behvaoural econ- deicison making

Answer 58

Bounded rationality and heursiterisi may be utilised in order make deciisons Default options useful as it more mental effort opt in- proved effective organ donations Especially effective does not reduce free will- can opt out if wish

Question 59

15 marker- econ a social science

Answer 59

Social science- defimed as study of how human behave and interact- eon- around conusmer deicisons Social science- concerned how people institutions and sociteie make deiciosns how to use scarce reosurce and max welfare Institutional econ- emphasise legal policital and social framework in which eocn actiity occurs- econ outcomes not determined soley by market forces But also influecned by ruels regulationa and nroms that shape ehavour econ actors Analyse issues porperty rights contracts and regulation of markets Study human and how make choices- how social psychological and polictical fatcors influence deiciosn making, how deicisons affect society Uses tools and methos other social sciences- sociology and sphycology understand how diff econ systems free or mixed eocn operate- kahnesman

Question 60

But econ not social science

Answer 60

Mroe closely related to natural sciences- it increasingly relies on mathematical models and data analysis to study human behavoir and econ systems Eg econometrics Application of statistical methods to econ data in order to rto estimate and test hypothesis about econ relationships Branch of econ thtat aims to provide empircal evidence for economic theories and to forecast future eocn trends

Question 61

Critic of nudges

Answer 61

Lowenstein and chater Nudges turn us into ‘unwitting accomplices to forces opposed to creating a better society’ as it fails to adress root cause of problem