BET Updated Flashcards
WHat are the 2 different schools of economic thought regarding BET?
Traditional Neo-Classical = Consumers will always act rationally and maximise their utility when making decisions.
Behavioural economics = Dispute the above premise, state that consumers will sometimes make irrational decisions due to certain factors
What are the causes of irrational decision making from consumers according to behavioural economists? 5
1) Bounded Rationality, bounded by;
-Time = consumers do not always have time to make perfectly rational, utility maximising decisions
-Choice = consumers at times are flooded with too much choice to comprehend, evaluate and make perfectly rational decisions
-Information = Imperfect information will hinder the process of making a utility maximising decision
2) Bounded self-control
Even if consumers have all the information, have weighted it up and know what a rational decision is, they may not actually make it if their self-control is bounded
3) Altruism (bounded selfishness)
This is where decisions are made with cost but no benefit is expected in return I.E; giving to charity. Behavioural economists dispute the notion that decisions are only being made to maximise utility instead sugegsting that moral values, emoptions and social concern can influence decision making
4) Heuristics (rules of thumb)
Mental shortcuts that simplify the decision making process to provide a satisfactory decision that may not maximise utility but will add enough utility to satisfy the consumer
5) Cognitive Biases
These are emotional, psycological and social factors that can influence decision making. See next car.
What are the 6 Cognitive Biases and how do they influence consumer decision making?
1) Anchoring
Price anchoring occurs when a value is imprinted in the mids of consumers as a reference point to judge the value of the good or service. I.E When shops display the RRP aswell as their discounted price, anchoring consumers to the ‘recomended retail price’, so they feel they are getting a good deal.
2) Social Norms
Where consumers make decisions based on society etiquette and expectations of how to behave. I.E Tipping in restaraunts
3) Availability Bias
When decisions are made based on the ease at which information is available to the consumer. I.E Ignoring the abundance of information regarding smoking causing an early death because the consumer had a grandmother that smoked and lived till an old age
4) Framing
The notion that consumers are influenced by the manner in which information is presented to them. I.E ‘low fat’ / ‘high protein’
5) Loss aversion and the endowment effect
The idea that consumers make decisions that avoids losses rather than acquiring exactly the same gains, clearly weighing losses greater than gains. I.E Consumers deciding to put money in low interest bank account rather than in low-risk shares as there is a chance that shares can lose value.
6) Herding
The idea of individuals following certain trends or ‘jumping on the bandwagon’ when making decisions. I.E In financial markets when many investors start buying a certain share driving the price up, others may decide to buy the exact same share believing it to be the right decision as others are doing it
What is the definition of Behavioural Nudge Policies and where do we use them in exams?
‘Nudge policies and choice architecture seek to influence behaviour by altering information, language and presentation but still allowing freedom of choice, overcoming problems with ‘shove’ policies that distort incentives.
They can be used as an alternate / complimentary policy for governments to go with social and economic policy and alter consumer behaviour.
What are the 5 behavioural nudge policies and the benefits of them?
1) Framing
The idea that consumers are influence by the way in which information is presented to them. I.E ‘low fat’ / framing gym memberships at ‘£1 a day’ instead of ‘£30 a month’ -> can promote consumption of merit good
2) Nudges
Where freedom of choice remains but certain options are made easier to choose than others. I.E Placing salad bars in the middle of school canteans to encourage healthy eating
3) Default choices
Where consumers are automatically enrolled onto a product/service and have to actively ‘opt out’. I.E Work pension schemes
4) Restricted Choice
For example restricted choices for children in schools regarding food available -> merit good
ALSO = Gov only allowing parents to apply to schools in their local area to mitagate excess demand from state provision
5) Mandated choice
Where individuals have to actively make a decision about something. I.E Forcing people to say yes or no regarding organ/blood dontations -> overcoming problems with ‘opt in’ schemes that are regularly ignored
What are the cons of nudge policies / choice architecture? 4
1) Limited effectiveness when combating deep rooted issues
For example excessive smoking and/or drinking -> policies do not get to root cause of problem -> unlikley to succeed in long term If at all -> role for shove policies for such market failures
2) No garantuee nudge policies will be successful
Results are highly unpredictable -> consumers still have freedom of choice to ignore policy -> could render policies ineffective -> cost of administration -> risk of Gov failure
3) Can give of impression that individuals are dumb
Consumers can see through behavioural attempts to alter their behaviour they may ignore intentions to simply make a point, people dont like to be treated as if they are stupid
4) Can encourange too much paternalism by the government
Encourage too much impeding in the day to day lives of individuals -> freedom is lost -> gov can lack info to make prefect decisions therefore no garantuee that such paternalism is even in the best interest of society
What are the evaluation points for behavioural nudge policies? 5
1) Untested, unpredictable and only likely to work to change minor behaviour
Might be better for gov to focus more on information provision, leaving it to individuals to make an informed decision themselves
2) Conventional shove policies are effective
Should not be considered ‘inferior’, price is an increbily important factor in consumer decision making and traditional shove policies can be more effective in altering this. Nudge policies should be seem as complementary
3) Nudge policies are effective when individuals are ‘predictably irrational’
Such as deciding not to opt out in schemes
4) Short term, lose their impact over time
As over time individuals get used to the policies used -> nudge policies should be used alongside policies that tackle the root of the issue
5) BET is not a replacement of classical economic thought and instead exists to compliment it, enhancing areas where traditional models fail.
