MICRO - 9. behavioural theory ✅

Question 1

what is bounded rationality

Answer 1

individuals are rational decision makers who endeavour to maximise their utility

Question 2

what is the administrative man

Answer 2

herbert simon recognised the limitations of the decision making model so he devised the bounded rationality model - administrative man theory

Question 3

what are the assumptions of this model

Answer 3

• the first alternative that is satisfactory is selected
• the decision maker recognises that they perceive the world as simple
• the decision maker recognises the need to be comfortable making decisions without considering every alternative
• decisions could be made by heuristics

Question 4

what does bounded self control assume

Answer 4

• bounded self-control assumes consumers are able to exercise self-control
• however, consumers are unable to exercise self-control with some decisions.
• The law of diminishing marginal utility suggests that every extra unit consumed provides a smaller benefit to the consumer.
• Yet, if the example of food is taken, some consumers will still eat more than gives them optimal benefit.

Question 5

how does the short and long run influence rationality and self control

Answer 5

• Consumers know that it will benefit them in the long run if they save for their pension, but this will limit their spending in the short run.
• Spending less in the short run instils fear in the consumer, even if they are aware that unless they save, they will not be able to consume as much in the long run.
• With the long run view, consumers feel as though they ‘could always start saving tomorrow’.
• It is this procrastination which leads to consumers making irrational decisions by not having self-control.

Question 6

what did gerd gigerenzer’s work involve

Answer 6

• gerd gigerenzer’s work also developed these theories further into ‘fast and frugal’ heuristics in which the rationality of a decision depends on structures found in the environment

Question 7

what do biases in decision making mean and how does this compare with rational

Answer 7

• consumers do not always act rationally.
• acting rationally means making a decision that results in the most optimal level of utility or benefit for the consumer.

Question 8

what is the rational consumer

Answer 8

Homo Economicus, who is a utility maximiser and makes rational decisions

Question 9

what are heuristics

Answer 9

• heuristics simplify the decision making process to come to a reasonable decision.
• they are shortcuts to avoid taking too long to make the decision, and they avoid the problem of having imperfect information or limited time

Question 10

how do heuristics affect decision making

Answer 10

• the consumer might use common sense or intuition.
• they might consider how it is cheaper to buy goods in the sale.
• they might have pre-decided criteria, or a rule-of-thumb, and only buy the good if it is in a sale.
• this could lead to irrational decisions being made.

Question 11

how do social norms affect decision making

Answer 11

• if there are two restaurants; one is empty whilst the other has a long queue, consumers are more likely to queue for their food than go straight into the other restaurant.
• the behaviour of other people affects how the consumer acts.
• other people’s behaviour creates a bias within the consumer.
• this social pressure encourages consumers to do things they would not otherwise do, or that they know could be harmful.
• consumers become unwilling to change, even if it is of benefit to them, if it goes against the norms of their society.

Question 12

what is anchoring

Answer 12

• this is a type of bias created by the human tendency to rely on the first piece of information they are given.
• this first piece of information causes consumers to be biased towards it when subsequent information is given

Question 13

how does availability affect decision making

Answer 13

• this is a form of bias towards events that were recent, personal or memorable.
• this is because they are overestimated and cause emotional responses
• this type of bias is spread across populations by reporting them in the news and media.

Question 14

example of anchoring

Answer 14

if a car’s original price is high, but it is on sale for a lower price, consumers will be inclined to think this is reasonable, even if the lower price is more than the car’s value.

Question 15

example of availability

Answer 15

consumers are likely to think plane accidents are much more likely to occur, if they have been involved in one or know someone else who has.

Even though they are very rare, they overestimate the probability. This then influences how the consumer behaves.

Question 16

what is altruism

Answer 16

Altruism is the act of being selfless and considerate towards other people.

Question 17

what can be used to describe altruism

Answer 17

the Ultimatum Game is used to describe altruism.
- there are two players: a proposer and a responder.
- The proposer has to offer the responder a portion of the sum of money they are given.
- The proposer can choose how much to offer.
- The responder can either accept or decline the offer.
- If the responder accepts the offer, the sum of money is divided.
- If the responder declines the offer, both players receive nothing.

Question 18

what does the ultimatum game show

Answer 18

• highlights the perception of fairness. Proposers and responders do not aim to get as much money as possible, but they aim to distribute the money according to what is considered fair.
• responders choose to accept nothing rather than be treated unfairly (with offers below 25%).
• This essentially ‘punishes’ the proposer for treated them unfairly by offering a small amount.
• Proposers might try and be fair, but they also try to offer an amount which will be accepted by the responder.

Question 19

what is choice architecture

Answer 19

• choice architecture refers to the way choices are presented to consumers.
• The different designs affect the choice consumers make.
• Well-designed choice architectures can help consumers avoid making irrational decisions and poor choices.
• This could improve consumer welfare.

Question 20

what is an example of choice architecture

Answer 20

a consumer might be offered fewer choices, to avoid the time cost and consideration it takes to evaluate an extra choice.

An example of choice architecture is organ donation. Countries with opt-out organ donation have higher rates of organ donation than countries which have opt-in systems. This is because of the perceived effort with signing in or out of the system.

Question 21

what is framing

Answer 21

framing is the way by which consumers are influenced by the context of how a choice is presented.

The context is made includes word choices and it affects the choice consumers make

Question 22

what is an example of framing

Answer 22

if consumers are told the monthly payment for a good or service, rather than the aggregate yearly payment, they are more likely to purchase the good or service, since it seems more affordable.

Question 23

what are nudges

Answer 23

they aim to change the behaviour of consumers without taking away their freedom of choice, coming under the category of choice architecture.

Question 24

what is an example of nudges

Answer 24

rather than banning something like junk food, replacing it with healthier food is a nudge. This still allows consumers to make a free choice, but it alters their behaviour to choose the healthier option.

Question 25

what is a default choice

Answer 25

• when a consumer is automatically enrolled into a system, such as a pension scheme.
• Consumers are more likely to participate when they are automatically enrolled.
• It is the choice the consumer takes if they take no action.

Question 26

what is a restricted choice

Answer 26

a restricted choice is akin to the example of junk food and healthier food.

The choice of the consumer is restricted, but it is still there

Question 27

what is a mandated choice

Answer 27

mandated choice is when consumers are required to state whether they wish to participate in an action.

For example, in the UK everyone who applies or renews their driving licence is asked if they wish to sign up for organ donation.