Emergence of behavioural economics Flashcards
Aspects of behavioural economic theory -> Individual economic decision making -> Microeconomics
What is behavioural economics?
A method of economic analysis that applies psychological insights to explain how individuals make decisions.
What are the origins of behavioural economics?
- Roots in 1931 with L. L. Thurstone’s experiments on consumer preferences.
- Pioneered by Amos Tversky and Daniel Kahneman, focusing on decision-making and cognitive biases.
- Kahneman received the Nobel Prize in Economics (2002).
- Published Thinking, Fast and Slow (2011), introducing System 1 (fast, intuitive) and System 2 (slow, deliberate) thinking
What is the significance of Nudge: Improving Decisions about Health, Wealth, and Happiness (2008)?
- Written by Richard Thaler and Cass Sunstein.
- Influenced government policies in the UK and US.
- Popularised the concept of nudging, using subtle interventions to guide choices without restricting freedom (e.g., organ donation opt-outs).
What is bounded rationality and who proposed it?
Proposed by Herbert Simon, it suggests individuals have cognitive limitations and make satisficing (good enough) rather than optimising decisions.
What are heuristics and biases in behavioural economics?
- Availability heuristic: Overestimating likelihood based on recent events.
- Anchoring: Relying heavily on initial information (anchor) when making decisions.
What is loss aversion?
A concept from prospect theory where losses loom larger than equivalent gains. Example: People prefer avoiding a £10 loss over gaining £10.
How do social norms influence decisions?
Decisions are influenced by societal expectations and peer behavior.
What is present bias?
The preference for immediate rewards over larger future gains, demonstrating time inconsistency.
What is nudge theory?
Developed by Thaler and Sunstein, it involves encouraging better choices through choice architecture, such as setting default options.
How does traditional economics view human decision-making?
Assumes rational agents who maximise utility (households) and profits (firms), with assumptions like perfect information and self-interest.
What was Milton Friedman’s defense of traditional economics?
In The Methodology of Positive Economics (1953), Friedman argued that unrealistic assumptions can still produce valid predictions, emphasizing predictive accuracy over descriptive realism.
How does behavioural economics differ from traditional economics?
- Observes real-world behavior to derive theories.
- Challenges assumptions like utility and profit maximisation, arguing humans are not purely rational actors.
What are some applications of behavioural economics in public policy?
- UK Behavioural Insights Team (BIT) used nudges for tax compliance, energy efficiency, and health improvements.
- Example: Simplifying tax forms to increase payment rates.
How is behavioural economics applied in consumer behaviour?
Marketing strategies leverage anchoring and loss aversion to influence purchasing decisions.
How does behavioural economics explain financial market phenomena?
It explains market bubbles and other events through herding behavior and overconfidence bias.
