Indiviudual Economic Decision Making Flashcards
What is rational behaviour?
Attempting to maximise the welfare/satisfaction/utility gained from the goods and services consumed.
E.g choosing a budget airline to reduce costs
What is utility?
The satisfaction/economic welfare an individual gains from consuming a good/service.
What is marginal utility?
The additional welfare/satisfaction/pleasure gained from consuming one extra unit of a good/service.
What is the hypothesis of diminishing marginal utility?
The marginal utility derived end from a good/service diminishes for each additional unit consumed.
What is asymmetric information?
When one part to a market transaction possesses less information relevant to exchange than the other.
What is bounded rationality?
When making decisions, an individuals rationality is limited by the information they have, and the finite amount of time available in which to make decisions.
E.g choosing well known branded products over cheaper alternatives
What is bounded self-control?
Where individuals have limited self-control to act rationally in their own interests.
E.g Impulsively purchasing items during Black Friday sales even if they don’t need them.
What is satisficing?
Accepting outcomes which are sub-optimal.
This is a consequence of bounded rationality.
E.g a small business owner charging a price that ensures a reasonable profit instead of maximising revenue through complex pricing strategies.
What is cognitive bias?
An error in thinking which affects the decisions and judgements that people make.
Often occurs as a result of holding onto ones preferences & beliefs regardless of contrary information.
What is a rule of thumb?
Thinking shortcuts/informed guesses used to make decisions based on limited information.
These decisions are prone to cognitive bias.
E.g people using save 10% of income a a guideline for financial planning regardless of their personal circumstances.
What is availability bias?
When individuals make judgments about the likelihood of future events according to how easy it is to recall similar events.
E.g after a plane crash makes headlines, people overestimate the risks of flying and choose to travel by car instead
What is anchoring?
The tendency to rely too heavily on the first piece of information offered (the anchor). Individuals use an initial piece of information when making subsequent judgements.
E.g seeing a discount ( was £100, now £50), perceiving the price as a good deal even if the product is still over priced
What are social norms?
Forms/patterns of behaviour considered acceptable by a society/group within that society.
These can lead to bias.
What are nudges?
Factors which encourage people to think/act in particular ways. They try to shift group/individual behaviour in ways which comply with desirable social norms.
When used as a part of a government policy, they must be open and transparent to the public
E.g Placing fruit & vegetables at eye level to encourage healthier purchases
What is choice architecture?
A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making.
What is the default choice?
An option that is selected automatically unless an alternative is specifies.
E.g UK employees are automatically enrolled in workplace pensions unless they opt out, increasing pension savings.
Opt out of organ donation system.
What is framing?
How something is presented (the frame) influences the choices people make.
E.g 90% fat free advertising instead of 105 fat free
What is a mandated choice?
When people are required, often by law, to make a decision.
E.g requiring uses to actively accept or reject cookies ensuring users make a conscious decision about their privacy.
What is restricted choice?
Offering people a limited number of options so they are not overwhelmed by the complexity of the situation.
Offering people too many choices is unhelpful and leads to poor decisions as most people cannot (be bothered) to evaluate a large number of choices.
E.g subject choices in schools, students can choose from a limited number of optional subjects
What is a shove?
They instruct people to behave in certain ways.
Often by responding to financial incentives/disincentives which reward/punish different decisions.
