MICRO Behavioural Economics

Question 1

Econs vs Humans

Answer 1

• Econs are logical, rational and utility maximisers
• Humans are social, emotional, habitual, image conscious and satisfies.

Question 2

Information Failure

• Definition
• Causes

Answer 2

• Occurs when people have inaccurate, incomplete or misunderstood data and so make potentially ‘wrong’ choices.
• Complex information
• misunderstanding e.g. side effects
• asymmetric information
• misleading information
• cost of obtaining information
• uncertainty e.g. pension.

Question 3

Asymmetric Information

• Definition
• e.g.

Answer 3

• Occurs when somebody knows more than some somebody else in the market.
• Mechanics, used cars, mortgages (+borrower).

Question 4

Market for Lemons - Background

• Causes
• Interventions
• Evaluate

Answer 4

• George Akerlof 1970 paper “The Market for Lemons” - Asymmetric information = all cars sold at an average price = sellers withdraw good cars = reducing quality and average price = used cars under-consumed and under-produced.
• Legally must provide information e.g. millage, smoker, accident history.
• Hard to regulate, expensive.

Question 5

Rationality

Answer 5

Idea that when the price of a product exceeds the marginal utility gained from consuming that good of services consumers stop consuming.

Question 6

Bounded Rationality

• Definition
• i.e. x4

Answer 6

• The idea that cognitive, decision-making capacity of humans cannot be fully rational due to the limits that we face.
• Information failure, time, brain processing speed e.g. gambling, emotions.

Question 7

Bounded Self Control

• Definition
• Example

Answer 7

• Idea that consumers don’t stop consuming when the price of a product exceeds the marginal utility gained from consumption.
• e.g. over-eating and excessive investing.

Question 8

Cognitive Bias

• Definition
• Forms

Answer 8

Exists when someone thinks in a way that can be regarded as irrational or that goes against good judgment.

• Anchoring: using information as a reference point to help make an estimate of unknown info, e.g. automatically suggesting tip.
• Heuristics: rule of thumb
• Social norms: e.g. clothing and food.
• Confirmation bias: tendency to remember information that supports own view, e.g. choosing schools.
• Sunk cost bias: tendency to continue behaviour as a result of previously invested resources (time, money effort, e.g. brand loyalty.

Question 9

Altruism

• Definition and example.
• Inequality Aversion

Answer 9

• Humans tend to behave with more kindness and fairness than would be the case if they behaved rationally, e.g. ebay review.
• Humans do not like unequal outcomes, can be negative, i.e. forego a gain/reward so someone else won’t gain an even better reward.

Question 10

Choice Architecture

• Definition
• Types x5
• e.g.

Answer 10

Choice architecture: How government policymakers can lead people into making particular decisions.

- Delfut choice: idea that if a choice is already selected then consumers are more likely to chose it, e.g. auto-enrolment onto pensions.

- Framing: is the tendency for people to be influenced by the context in which the choice is presented, e.g. 90% fat-free vs 10% fat.

- Mandated choices: when people are required by law to make a choice, e.g. voting in Australia.

- Restricted choice: offering people a limited number of options so as to prevent being overwhelmed, e.g. policy requiring energy companies to restrict the number of options.

- Nudge: technique used to change someone’s behaviour in an easy and low-cost way, without reducing the number of choices available, e.g. food (eye level, brighter packages) and coloured pills for each day.

Question 11

Habitual Purchasing

Answer 11

A person’s repeated purchasing of a good or service, done out of habit.