Economics AOS3 Flashcards
Define bounded rationality
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.
Define heuristics
Due to Bounded rationality consumers resort to ‘Heuristics or mental shortcuts to make fast and frugal decisions
Describe all 9 heuristics
Availability
Herd behaviour
Overconfidence bias
Vividness
Status quo bias
Anchoring effect
Framing bias
Loss aversion
Present bia
Define availability (Heuristic)
A tendency for consumers to rely on information that is the most consistent and accessible when making decisions.
Define herd behaviour (Heuristic)
Where consumers follow what other people are doing instead of using their own information or making independent decisions
Define Overconfidence bias (Heuristic)
Consumers often overestimate their ability to make good decisions.
Define vividness (Heuristic)
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)
Define status quo bias (Heuristic)
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)
Define anchoring effect (Heuristic)
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.
Define framing bias (Heuristic)
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.
Define loss aversion (Heuristics)
Where consumers feel losses more acutely than gains. (Losing $10 compared to gaining $10)
Distinguish between behavioural and traditional economics
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)
Define the term nudge
A nudge is subtly coaxing people into making good choices without having to resort to financial incentives or sanctions.
Explain how a ‘nudge’ differs from the traditional economic approach
A nudge is a method to change peoples behaviour which differs from traditional economics which assumes consumers seek to maximise utility.
Provide an example of the use of a ‘nudge’ by the Australian Government
The government using urgent hours comparison charts on doctors to reduce tax claims on urgent overtime.
Describe the role of the Behavioural Economics Team (BETA)
BETA tests behavioural economics on Australians to improve legislation and create better laws.
Six examples of how businesses can influence consumer behaviour
Bounded willpower
Procrastination bias
Transaction costs
Framing
Availability heurisitic
Status quo bias
Example of how businesses take advantage of bounded will power
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
How do businesses take advantage of transaction costs
Buisnesses can lower prices by taking the hit on transactions costs creating an incentive for consumers. (Not a real definition)
Example of how businesses take advantage of procrastination bias
Banks can take advantage of procrastination bias by making it hard for businesses/individuals to change banks, loans etc through extensive documentation.
How do businesses take advantage of framing
Smart advertisers use framing to influence consumer decision making.
E.g. Colgate advertising toothpaste as 9/10 doctors recommend.
How do businesses take advantage of availability bias
Businesses can take advantage of availability bias through things product placement to create impulse buys. (Chocolates at the checkout counter)
How do businesses take advantage of status quo bias
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).
