Micro 26 - behavioural economics

Question 1

Define behavioural economics?

Answer 1

Combines economics and psychology to explain why people behave the way they do.

Question 2

What is behavioural economics about?

Answer 2

observing human behaviour and using the observations to develop theories.

Question 3

why is human behaviour important for policy making?

Answer 3

many free market policies are justified on the basic that people are utility maximising individuals (homo economicus), and will automatically do best when left alone to trade between themselves.

Question 4

Explain the “bounded rationality” aspect of behavioural economic theory

Answer 4

• People act to satisfice instead of to optimise.
• They don’t have time to make a decision.
• People act on impulse.

Question 5

Explain the “bounded self control” aspect of behavioural economic theory

Answer 5

Humans have limited self control.
People often have trouble exercising self-control and resisting short-term temptations, even when such temptations counter to their long-term objectives.

Question 6

Explain the “social and emotional bias” aspect of behavioural economic theory

Answer 6

• Social bias is making decisions based on other people’s decisions.
• Emotional bias is based on how you feel.

Question 7

Explain the “social norms” aspect of behavioural economic theory

Answer 7

Decisions where social norms outweigh personal decisions of utility, e.g. voting because it is considered social duty – even if we know voting makes no difference anyway.
People may prioritise conformity over their own preferences or logical analyses, which can result in biases in decision-making.

Question 8

define altruism?

Answer 8

Concern for other people.

Question 9

Why is altruism significant?

Answer 9

Disproves neo-classical economics.

Question 10

who are the “nudge unit”?

Answer 10

The behavioural insights team who are responsible for applying behavioural economics to government policy. It is part privatised.

Question 11

what does the “cabinet office” do?

Answer 11

They help government run efficiently and help with their policies.

Question 12

why might the traditional approach of applying indirect taxes on goods and services like alcohol and cigarettes not work?

Answer 12

• Bounded rationality.
• Bounded self control.
• Influence.
• Emotional bias.

Question 13

why may subsidies for goods like healthy foods not work?

Answer 13

people act on impulse - urge of eating junk food is higher than the urge to eat healthy food.

Question 14

why did the policy of “auto enrollment of people into pension schemes” work?

Answer 14

behavioural economists believe that people make irrational decisions and wont save for the furure.

Question 15

why did the policy of “changing the wording of campaigns such as most people pay their taxes on time “ work?

Answer 15

Social bias, they get influenced.
Altruism.
Goes against neo-classical belief.

Question 16

why did the policy of “sending text messages to people about their appointments” work?

Answer 16

efficient allocation of resources, because people are always on their phone.

Question 17

3 habit changing policies that have been successful?

Answer 17

1. littering - recycle bins.
2. Increase charging stations.
3. Traffic light on foods.

Question 18

3 concerns about behaviour economic policies?

Answer 18

1. people will chose not to do the right thing.
2. what may work in one country, may not work in another.
3. People respond to consequences.