Chapter 2 Flashcards
What is rational behaviour
Acting in pursuit of self interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed
What is utility
The satisfaction or economic welfare an individual gains from consuming a good or service
What is marginal utility
The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service
What is the hypothesis of diminishing marginal utility
For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed
What is asymmetric information
When one party to a market transaction possesses less information relevant to the exchange than the other
What is behavioural economics
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
What is bounded rationality
When making decisions 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 decisions
What is bounded self control
Limited self control in which individuals lack the self control to act in what they see as their self interest
What is cognitive bias
Is a systematic error in thinking that affects the decision and judgements that people make
What is 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
What is anchoring
A cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered. Individuals use an initial piece of information when making subsequent judgements
What are social norms
Forms or patterns of behaviour considered acceptable by a society or group within that society
What are nudges
Factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with desirable social norms
What is altruism
Concern for the welfare of others
What is fairness
The quality of being impartial just or free of favouritism.
What is choice architecture
A framework setting out different ways in which choices can be presented to consumers and the impact of that presentation on consumer decision making
What is default choice
An option that is selected automatically unless an alternative is specified.
What is framing
How something is presented influences the choices people make
What is mandated choice
People are required often by law to make a decision
What is restricted choice
Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many choices people may may make poorly though out decision or not make any decision
What is the point of satiation
When marginal utility is zero, total utility is maximised
Being “full up”
Traditional economic theory assumes that if individuals possess perfect information
They will make decisions that maximised their welfare
One of the ways in which asymmetric information can manifest itself is through the process know as
Adverse selection
What does George Akerlof market for lemons describe
The problem of asymmetric information possessed by buyers and sellers “lemon” being American slang for a poor quality car
In 2010 the Uk government set up
Behavioural insights team, marked the growing influence of behavioural economics
In complex choice situations bounded rationality often results in
Satisficing rather than maximising choices
What is the term used by humans to help the make sensible decisions on limited information
Rules of thumb
An example of a positive social norm
Social attitudes have altered towards smoking in the last 30 years
What are economic sanctions
Include restrictions imposed by regulations and /or laws that restrict and individuals freedom to behave in certain ways.
Sanctions such as the smoking ban maybe be more effective at changing behaviour
Example of default choice
Opt in
Opt out for blood and donor transplant
Example of framing
90% fat free v 10% fat
What is a nudge
Provides information for people to respond to
Create positive social norms
Opt out schemes rather than opt in
Active choosing by individuals
What is a shove
Uses taxation and subsidies to create incentives and on occasion in the case of taxes to punish people
Uses fines, laws banning activities and regulations
