Chapter 2.6 Flashcards
Assumptions of rational consumer choice
Consumers make purchasing decisions according to their tastes and preferences
Consumers have perfect information about all their alternatives so that there is no uncertainty
Consumers maximize their utility
Bias
Systematic errors in thinking or evaluating, and are departures from normal standards of thought or judgement
Biases that affect consumer choices
Rules of thumb
Anchoring
Framing
Availability
Rules of thumb
Simple guidelines based on experience and common sense that simplify complicated decisions
Anchoring
The use of irrelevant information to make decisions which often occurs due to its being the first piece of information that the consumer happens to come across
Framing
How choices are presented to decision-makers
Availability
Information that is most recently available which people tend to rely on more heavily though there is no reason to expect that this information is any more reliable than other information
Bounded rationality and what limits rationality
The idea that consumers are rational only within limits, as consumer rationality is limited by consumers’ insufficient information, the costliness of obtaining information and the limits of the human mind to process large amounts of information
Bounded self-control
The idea that people in reality only exercise self-control only within limits
Bounded selfishness
The idea that people are selfish only within limits
Nudge
A method designed to influence consumers’ choices in a predictable way without freeing financial incentives or imposing sanctions and without limiting choice
Choice architecture
The design of particular ways or environments in which people make choices
Default choice
A choice that is made by default, which means doing the option that results when one does not do anything
Restricted choice
A choice that is limited by the government or other authority
Mandated choice
A choice between alternatives that is made mandatory by the government or other authority
Default choice, restricted choice and mandated choice are different types of __ within choice architecture
Nudges
What is the intention of choice architecture?
To work toward influencing people’s choices in a direction held to be socially desirable
Potential advantages of behavior economics in economic policy
May be a relatively simple and low-cost way to influence people’s behavior to act in socially desirable ways
Has been used successfully in a number of areas
Offer freedom of choice without forcing people to do anything or preventing them from doing anything
May be able to overcome the weaknesses of the theory of consumer behavior
Are based on principles of psychology which have been tested over many years
Policy development is based on trials, indicating use of flexible trial-and-error methods
Potential disadvantages of behavioral economics in economic policy
Is not based on any understanding of human behavior so can’t lead to a systematic and unifying theory
The unsystematic approach may not be valid over time or across different groups
Has risks of using psychological principles to manipulate consumers
Has risks that behavioral policies may be used as substitutes for necessary but politically costly economic policies
Traditional economic policies may be more effective
May be a new form of government regulation camouflaged under the guise of freedom of choice
May successfully affect people’s choices but might not reflect their true preferences
Rational producer behavior
The theory that firms are guided by the goal to maximize profit
Corporate social responsibility
Firms engaging in socially beneficial activities
Market share
The percentage of total sales in a market that is earned by a single firm
Incentives for growth maximization
A growing firm can achieve economies of scale and lower average costs, increasing profitability
A growing firm can diversify into different products and markets to reduce its dependence on a single product or market
Larger firms have greater market power and increased ability to influence prices
Largest firms reduce the risks of being affected in a recession or be taken over
Growth maximization reconciles the interests of both owners and managers
Satisficing
The idea that firms try to achieve a satisfactory level of profits together with satisfactory results for many objectives rather than optimal or best results for any one objective. Also used in consumer behavior
