Lecture 5 Flashcards
An introduction to Behavioral Economics
What are the assumptions of the standard economic model?
- Consumers behave rational
- Consumers prefer more over less
- Consumers seek to maximize their utility
- Consumers act in self-interest
What is utility?
Utility refers to the SATISFACTION that
a consumption provides to a consumer
What experimental studies can be used as a method to measure consumer
preferences?
What is the concept of nudges?
Nudges are interventions that aim at altering people’s behavior by
either harnessing their cognitive biases or responding to them
How can nudges can be used to increase pro-environmental behaviour?
Examples:
- Eco-labeling
- Normative messages
- “Green” default options
Field Experiment with
hotel guests:
- Help save
the environment –> 35,1%
- + 75% of guests reuse
their towels –> 44.1 %
Explain why insights from behavioural economics contradict the
standard economic model
§ …list the features of discrete choice experiments
How can
system 1 and 2 explain behaviour?
Give examples of how nudges can be used to increase pro-environmental behaviors
Can you explain the law of Diminishing Marginal Utility
As consumption of a good increases, the associated
marginal utility declines
What is marginal utility?
The marginal utility of a good refers to the change in utility or satisfaction
due to the change in
consumption of that
good
What are the preferences in the indifference curves?
Value judgment
represented by a choice between
two (or more) potential
alternatives
What is the economic value in the indifference curves?
The economic
value of a particular item, or
good, for example a pizza, is
measured by the maximum
amount of other things that a
person is willing to give up to
have that pizza
What are the budget constraints in the indifference curves?
- The budget constraint defines the feasible SET OF CONSUMPTION CHOICES facing a consumer
- This constraint depends upon the prices of goods in question and the income available to a consumer
What are the influences of changes in income and changes in price?
Changes in income: shift to right
Change in price: change on axis
What can be used as choice data
- Revealed preferences: real market data, where individuals have experienced
the choice task - Stated preferences: individuals are
presented with hypothetical choice tasks
and asked to express a preference
What are revealed preferences
Real market data, revealed by actual behavior, i.e. choice to
purchase a product
ACTUAL BEHAVIOUR can thus be used, e.g. by looking at purchase
receipts, to define an ‘implicit’ demand curve for this individual
Reflects actual decision-making subject to budget constraint
Ultimately reflects ‘market experience’ with all relevant
circumstances
What are stated preferences?
Choice modelling is increasingly preferred for studies of consumer
preferences, especially where data is not readily available
Choice-based models rely on stated preferences:
- Survey method: consumers make their choice from a
potential set of alternatives
- Explore the underlying determinants of purchasing decisions
- Alternatives can include both real and hypothetical products
- Can suffer from ‘hypothetical bias’ if not seen as realistic
What are Discrete Choice Experiments (DCE)?
DCEs use sequence of choice tasks to collect preference
information
Individuals implicitly make TRADE-OFFS between the levels of
the attributes in the different
alternatives
Possible to consider
INTERACTIONS between attributes
What are the features of DCEs
- Choice tasks: (set, situation, scenario) is a set of alternatives
considered by a decision-maker - Alternatives: described by different attributes and vary by
attribute levels (e.g. organic: yes/no) - Monetary value: included as one of the attributes, along
with other attributes of importance
How is Kahneman and Tversky’s dual process theory the foundation of behavioral economics?
Foundational work to Behavioral Economics
Found evidence that people use
short-cuts when they make
decisions under uncertainty
System I thinking: fast thinking
Fast, auto-pilot, implicit, effortless, associative, difficult to control or modify, no self-awareness
System II thinking: slow thinging
Slow, serial, explicit, effortful, logical & sceptical, deliberately controlled, with self-awareness
System … runs the show, that’s the one you want to move
1 (fast thinking): 95% and system 2 (slow thinking): 5%
What are heuristics?
Found evidence that people use SHORT-CUTS when they make
decisions under UNCERTAINTY
Our brain reacts in stressful situations in such a way
that automatic patterns become more dominant. This means that
external stimuli are answered with the existing patterns. The
brain falls back on available, stored heuristics - system 1 largely
takes over.
How do the systems work together?
System 1 is always there and is always active. When it doesn’t have an answer it will call on system 2 for help.
Sometimes your two systems conflict and challange each other!
In the exercise with the colours written in another colour, how do the systems play a role?
System 1: read out the words
System 2: conscious, slows you down to concentrate on reading out the colours of the words
What are conventional methods?
Conventional marketing research struggles to read consumers real behaviour because it relies on direct questioning which generates a response from our slow, rational mind (system 2)
Our attention is largely activated by our quick, intuitive brain (system 1). People don’t have full access to their psychological motivations and instead post-rationalise decisions when asked to explain a choice
What are cognitive nudges?
- Descriptive nutritional labelling: info on calories, sugar etc.
- Evaluative nutritional labelling: colour-coded nutrition info (green = healthy)
- Visibility enhancements: make healthy choices more visible
What are affective nudges?
- Healthy eating calls: ask if consumers want vegetables
- Hedonic enhancements: make healthy foods more and unhealthy less appealing
What are behavioural nudges?
- Convenience enhancements: healthy as default and unhealthy harder to reach (have to ask for)
- Size enhancements: reduce size of packages and portions of unhealthy foods and bigger portions of healthy foods
How does context affect accessibility?
We naturally assess:
- Size, distance, and loudness
- Similarity, surprisingness
- Affective valence and
mood
E.g. presenting a muesli bar with vegetables of with snacks
Give an example of nudging against food waste
Pilot study: ugly carrot –> more risk perception (system I)
Construal Level moderates the influence of food aesthetics on purchase intentions and this effect is mediated by risk perceptions
Abstract mindset –> increase purchase of ugly foods and vegetables
Where is behavioural economics placed in the course scheme?
In between individual/micro level and household/meso level
