Individual economic decision making Flashcards
key assumptions in economic theory
economic agents are utility maximisers and are rational
how does information have an effect on rationality
economic theory assumes that everyone has perfect information
in real life everyone has imperfect information causing market failure
asymmetric information also effects it
Asymmetric information
when one party has more information than the other in a transaction
bounded rationality
people make decisions to make a satisfactory decision than spending ages making a rational decision which maximises utility
rule of thumb
choosing the middle priced option when faced with a range of different prices for products
anchoring
when too much emphasis based on one piece of information
availability bias
when judgements are made about the probability of events occurring based how easy it is to remember
social norms
an individuals behaviour is influenced by the behaviour of a social group
habitual behaviour
doing the same thing over and over again
choice architecture
where an individuals choice is influenced by adapting the way its presented
default option
when people are more likely to choose the default option
framing
the context in which a decision is presented for example changing the wording of an option make it more desirable
nudges
where alternatives are easier to choose without removing freedom of choice for example smoking in certain areas can encourage people to stop smoking
restricted choice
this occurs when peoples choices are restricted for example limiting number of schools
mandated decision
where people have to make a decision for example the government where people have to choose if you want to be an organ donor or not
