ch 2 - Behavioural economics and economic policy Flashcards
what is behavioural economics
a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
bounded rationality
when making decisions, an individuals rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available in which to make their decisions.
this means that individuals, however high or low their intelligence, make decisions subject to 3 avoidable constraints:
- imperfect information about possible alternatives to their consequences
- limited mental processing ability
- time constraint which limits the time available for making decisions
bounded self control
bounded rationality is closely linked to the related concept of bounded self control
Daniel kahneman introduced economists to think in different ways
system 1: known as ‘thinking fast’, intuitive and instinctive. decisions are quickly made and little effort is used to analyse the situation.
system 2: known as ‘thinking slow’, concentration and mental effort are used to work through a problem
cognitive bias
a mistake in reasoning or in some other mental thought process occurring as a result of, for eg, using rule of thumb, regardless of contrary information
when does availability bias occur
occurs when an individual places too much weight on the probability of an event happening because they can recall vivid examples of similar events.
availability bias
occurs when individuals make judgements about the likelihood of future events, according to how easy it is to recall examples of similar events
anchoring
a cognitive bias describing the human tendency when making decisions to rely heavily on the first piece of information offered. individuals use an initial piece of information when making subsequence judgments
economic sanctions
restrictions imposed by regulation and/or laws that restrict an individuals freedom to behave in certain ways
nudges
factors which encourage people to think and act in a particular way. nudges try to shift group and individual behaviour in ways which comply with desirable social norms.
altruism
concern for the welfare of others. tales place when we act to promote someone else wellbeing, even though we may suffer as a consequence, either in terms of financial or time loss or personal loss.
fairness
the quality of being impartial, just, or free of favouritism, it can mea treating everyone the same. it involves treating people equally, sharing with others, giving others respect and time and not taking advantage of them
normative statment
a statement that includes a value judgement and cannot be refuted just by looking at the evidence.
what do economists need to consider in the context of behavioural economics on government policy
how it might influence the design of a variety of government policies which aim to reduce or eliminate particular economic problems
