Individual Economic Decision Making Flashcards
Define Utility
The satisfaction or economic welfare an individual gains from consuming a good/service
Define Marginal Utility
Extra satisfaction derived from consuming 1 extra unit of a good
What is the law of diminishing marginal utility
For a single consumer, the marginal utility derived from a good/service diminishes for each additional unit consumed
What can the law of diminishing marginal utility be used to explain
Why consumers are willing to pay less for each extra unit due to less utility, hence why the demand curve is downward sloping
What is utility maximisation
When consumers aim to generate the greatest utility possible from an economic decision
When firms try to maximise profit
Define Satiation
Point at which no more utility can be gained from consuming extra units of a good
After this point, the only yield is disutility
What are the 4 constraints made by scarcity, restricting the choices consumers make
Limited income
A given set of prices
Limited time
Budget constraint
What is ‘Thinking at the Margin’ about
Thinking about the effect of an additional action
What happens when economic agents think at the margin
Consumers think about how thecan maximise their current and future utility
Productivity increases as the most important tasks that maximise utility are proirtised
What does traditional demand theory assume
That consumers act rationally
Define Rational Behaviour
Acting in pursuit of self-interest, which for a consumer means attempting to maximise their welfare, satisfaction or utility gained from the goods and services produced
So a change in price/conditions of supply and demand will change a consumers economic incentives
What is symmetric information
Consumers and producers have perfect market information to make their decision, which causes an efficient allocation of resources
What is asymmetric information
When 1 party to a market transaction possesses less information relevant to the exchange than the other
Thus leading to an inefficient allocation of resources, information failure and thus market failure
What is Behavioural Economic Theory
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decions
What is the BIT
Behavioural Insights Team
Based in the cabinet office
Enables better designed policies/interventions to help people make better choices for themselves and society
Define Bounded Rationality
When making decisions, an individual’s rationality is limited by:
Imperfect information on alternatives/concequences
Limited mental processing ability
Time Constraints
So in complex situations, this causes satisficing, not maximising
Define Bounded Self Control
Individuals have a limited self control.
A lack of self control to act in what they see as their self interest
What was Daniel Kahneman’s behavioural theory
Humans think in 2 different ways to make decisions
System 1 - Thinking Fast
Instinctive, little effort used to analyse situation, automatic
System 2 - Thinking Slow
Usually used for bigger, more important decisions
Needs focus/concentration
Can cause overthinking - bad decisions
What is cognitive bias
A mistake in reasoning as a result of Rules of Thumb Preferences Contrary Info Beliefs
What is Confirmation Bias
Tendency to seek only info. that matches what you already believe
Ignoring/dismissing opinions that threaten our views
What is availability Bias
When individuals make judgments about the likelihood of future events according to how easy it is to recall examples of future events
Give an example of availabilty bias
It’s irrational to think it’s a good idea to buy a national lottery ticket, but from 2013-14 sales went up by £134 million
As stories of the winners are publicized nationally
What is negativity Bias
People usually pay more attention to bad news than good, we perceive it as more important
What is Anchoring
The tendency when making decisions to rely too heavily on the first piece of information offered
How do restaurants use anchoring
They may have very expensive main courses, then alternatives that seem ‘more reasonably priced’
Even if these alternatives are actually expensive, we are used to choosing the opinion not too expensive and not too cheap
What are Social Norms
Patterns of behaviour considered acceptable by society
From unconsciously learning from behaviour of other people
What are Economic Sanctions
Restrictions imposed by regulators / laws that restrict an individual’s freedom to behave in certain ways
What are Nudges
Factors that encourage people to think and act in particular ways
Try to shift group/individuals behaviour to comply with positive social norms
Give an example of a Nudge
Showing you drinkers that the majority of young adults do not engage in regular drinking
What is Alturism
When we act to promote someone else’s wellbeing, even if we suffer as a result
If one assumes one can gain satisfaction from giving, one can link this to maximisation
What is fairness
Treating everyone the same, sharing, being reasonable
A normative term
What does the governement use behavioural economics to do
Design better policy
More of complement and improve traditional economic theory used
What is Choice Architecture
Term used to describe how government policy-makers can lead people into making certain choices
They use behavioural insights (by the BIT) to design choice architectures to nudge citizens
What is default choice
Give an example of one
An option that is selected automatically unless an alternative is specified
Countries that require people to opt out of organ donations have a higher proportion of the population willing to donate
What is framing
Give an example used in retail
The tendency for people to be influenced by the context in which the choice is presented when making a decision
Saying a product is 90% fat-free instead of 10% fat
What are mandated choices
People are required by law to make a decision
What is restricted choice
Offering people a limited number of options so they are not overwhelmed by the complexity of the situation
The BIT found that a well designed system makes it easier for people to pay for gov. services eg. with direct debits
Give 3 examples of the government using choice architecture to influence decisions
Signs telling people to look left/right when crossing the road, reduces accidents
Allowing collaborative filtering - Providing an individual with information about the choices made by people in a similar situation
Monetary rewards giving an incentive for individuals to behave how they usually wouldn’t
What are Nudges/non-enforced compliance
Give an example of its use
A technique used by choice architects to change someone’s behaviour in an easy/cheap way, without reducing the no. of choices
Rumble strips on motorways
What is loss aversion about
People are biased in their real estimation of the probability of future events
Usually over-weight low and high probabilities
Usually underweigh medium proabilities
People feel losses more than they feel gains
Give 2 examples of policies that take advantage of loss aversion
Marketing emphasises discounts instead of cost
‘Save more tomorrow’ pension scheme
Plan costs investors nothing till they get a pay rise
Then, the increase in income the get from the pay rise automatically becomes their pension fund.
So they never see a reduction in disposable income
What is a shove
Instructing people to behave in certain ways
eg using fines/laws to ban certain practices
