INDIVIDUAL DECISION MAKING

Question 1

Define rational behaviour

Answer 1

Acting in pursuit of self-interest, maximising personal welfare, satisfaction or utility gained from production or consumption

Question 2

Define utility

Answer 2

Satisfacton or economic welfare gained from consuming a good or service

Question 3

Define marginal utility

Answer 3

Additional welfare, satisfaction or pleasure gained from consuming one extra unit

Question 4

Diminishing marginal utility

Answer 4

Theory suggests that the ‘additional’ utility gained for each extra unit of consumption reduces

Question 5

Factors limiting utility maximisation

Answer 5

Limited income
Given set of prices
Budget constraint
Limited time

Question 6

What is revealed preference

Answer 6

Theory working backwards, consumers show preferences by choosing at given prices and for given income levels

Question 7

What is the trade off for consumer decision making

Answer 7

Welfare vs Utility

Question 8

What is asymmetric information

Leads to…

Answer 8

When one party posseses less relevant information to the exchange/ transaction than the other

Leads to adverse selection

Question 9

What is adverse selection

Answer 9

when the unequal information distorts the market and leads to market failure

Question 10

Example of adverse selection

Answer 10

For example, buyers of insurance may have better information than sellers. Those who want to buy insurance are those most likely to make a claim. Therefore firms are reluctant to sell insurance

Question 11

What is behavioural economics

Answer 11

A method of econ-analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions

Question 12

What are the unavoidable constraints subject to choice

(Bounded rationality explaination)

Answer 12

Imperfect information
Limited metal processing ability
Time constraint

Question 13

What is bounded self control

Answer 13

Where individuals have limited self control to act rationally in their own interests

Question 14

What is the difference between system 1 and 2 thinking

Answer 14

S1- ‘thinking fast,’ instinctive and intuitive

S2- ‘thinking slow,’ reflective thinking, concentration and effort

Question 15

What is cognitive bias

Answer 15

A systematic error in thinking that affects the decisions and judgements people make

Question 16

What are rules of thumb

Answer 16

Thinking shortcuts such as informed guesses that individuals use to make decisions in order to save time and effort

Question 17

Availibility bias

Answer 17

When individuals make judgements about the likelihood of future events according to how easy it is to recall recent examples

Question 18

What is the effect of availibility bias

Answer 18

Consumers place too much weight on the probability of an event happening distorting decisions

Question 19

What is anchoring

Answer 19

A cognitive bias describing human tendancy when decision making to rely too heavily on the first piece of information offered to make subsequent judgements

Question 20

What are nudges

Example

Answer 20

Factors which encourage people to act in particular ways

Health campaign

Question 21

What is altruism

Answer 21

Concern for the welfare of others

Question 22

What is choice architecture

Answer 22

Framework setting out different ways in which choices can be presented to consumers and the impact on decision making

Question 23

Default choice

Answer 23

The option that is selected automatically unless an alternative is specified

Question 24

Examples of choice architecture

Answer 24

Framing
Manated choice
Restricted choice