Economics AOS3

Question 1

Define bounded rationality

Answer 1

Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.

Question 2

Define heuristics

Answer 2

Due to Bounded rationality consumers resort to ‘Heuristics or mental shortcuts to make fast and frugal decisions

Question 3

Describe all 9 heuristics

Answer 3

Availability
Herd behaviour
Overconfidence bias
Vividness
Status quo bias
Anchoring effect
Framing bias
Loss aversion
Present bia

Question 4

Define availability (Heuristic)

Answer 4

A tendency for consumers to rely on information that is the most consistent and accessible when making decisions.

Question 5

Define herd behaviour (Heuristic)

Answer 5

Where consumers follow what other people are doing instead of using their own information or making independent decisions

Question 6

Define Overconfidence bias (Heuristic)

Answer 6

Consumers often overestimate their ability to make good decisions.

Question 7

Define vividness (Heuristic)

Answer 7

Where consumers place too much weight on a small number of vivid observations when making decisions.
(A friends bad review on a product may hold more weight on a person than multiple good reviews online)

Question 8

Define status quo bias (Heuristic)

Answer 8

The tendency for consumers to stick with a particular choice even though the decision to do so is no longer in their self-interest. (Refinancing homes)

Question 9

Define anchoring effect (Heuristic)

Answer 9

Where consumers’ judgements are affected by some arbitrary starting value or ‘anchor’.
Example: A car seller showing a more expensive car then a comparatively cheaper car, making it seem more attractive.

Question 10

Define framing bias (Heuristic)

Answer 10

Framing refers to how options or propositions are presented. (A medicine works 90% of the time compared to failing 10% of the time)
Statistical framing and emotional framing.

Question 11

Define loss aversion (Heuristics)

Answer 11

Where consumers feel losses more acutely than gains. (Losing $10 compared to gaining $10)

Question 12

Distinguish between behavioural and traditional economics

Answer 12

Behavioural economics suggests consumers are bounded in rationality when making decisions whilst traditional economics states that consumers will always seek to maximise utility.
Traditional assumes consumers have full access to information of a product, behavioural does not)

Question 13

Define the term nudge

Answer 13

A nudge is subtly coaxing people into making good choices without having to resort to financial incentives or sanctions.

Question 14

Explain how a ‘nudge’ differs from the traditional economic approach

Answer 14

A nudge is a method to change peoples behaviour which differs from traditional economics which assumes consumers seek to maximise utility.

Question 15

Provide an example of the use of a ‘nudge’ by the Australian Government

Answer 15

The government using urgent hours comparison charts on doctors to reduce tax claims on urgent overtime.

Question 16

Describe the role of the Behavioural Economics Team (BETA)

Answer 16

BETA tests behavioural economics on Australians to improve legislation and create better laws.

Question 17

Six examples of how businesses can influence consumer behaviour

Answer 17

Bounded willpower
Procrastination bias
Transaction costs
Framing
Availability heurisitic
Status quo bias

Question 18

Example of how businesses take advantage of bounded will power

Answer 18

The success of Buy Now Pay Later (BNPL) schemes is based on the recognition that consumers:have bounded willpower and are influenced by present bias

Question 19

How do businesses take advantage of transaction costs

Answer 19

Buisnesses can lower prices by taking the hit on transactions costs creating an incentive for consumers. (Not a real definition)

Question 20

Example of how businesses take advantage of procrastination bias

Answer 20

Banks can take advantage of procrastination bias by making it hard for businesses/individuals to change banks, loans etc through extensive documentation.

Question 21

How do businesses take advantage of framing

Answer 21

Smart advertisers use framing to influence consumer decision making.
E.g. Colgate advertising toothpaste as 9/10 doctors recommend.

Question 22

How do businesses take advantage of availability bias

Answer 22

Businesses can take advantage of availability bias through things product placement to create impulse buys. (Chocolates at the checkout counter)

Question 23

How do businesses take advantage of status quo bias

Answer 23

Businesses can offer incentives to consumers to help them overcome the status quo bias and switch.
Buisnesses can also use the status quo bias by holding individuals to them through making it difficult to leave (Costs to change banks).