Rational Decision Making Flashcards
What does the concept of bound rationality suggest ?
That consumers opt to satisfice rather than maximise.
Explain the difference between traditional economic theory and behavioural economics
- Traditional: consumers are rational
- Behavioural: social, economic and psychological factors are considered in decision making.
What does behavioural economics examine ?
The limitation of the assumption individuals are perfectly rational.
How is behavioural economics implemented in the real world ?
- A growing area of study
- Governments including the UK are beginning to use behavioural economics to create more effective economic policies.
What three fundamental assumptions does the traditional economic theory rely on ?
- Economic agents are rational
- People make decisions based on self-interest
- People will change their thoughts and beliefs based on new information.
How does behavioural economics challenge the traditional economic theory ?
- Challenge them as they are not realistic
- Explores the impact of social, psychological and emotional factors on decision making
- They make more realistic predictions about the decisions individuals make.
Why might consumers not act rationally ?
- The time available to make decisions is limited
- Not all information is available, and the information may be incorrect
- People may not be able to process and evaluate large amounts of data
*People may not be good at calculating the cost of alternatives.
Definition of bound rationality
- Limits on decisions
- Means people tend to satisfice rather than spend ages trying to make a rational decision with maximises utility.
What biases stop people from thinking in an economical way ?
- Rules of thumb
- Anchoring
- Availability bias
- Social norms
- Habitual behaviour.
How do governments use behavioural economic theory to help them form policies ?
- Default options
- Framing
- Nudges
- Restricted choice
- Mandated choices.
Explain default bias in choices
- People prefer to carry on behaving as they always have
- Repeated choices often become automatic as default choices don’t involve cognitive effort.
Examples of default bias
- Choice of daily breakfast cereal/razor.
Explain framing
- Framing a question in a different way often generates a new response by changing the comparison set it is viewed in.
Examples of framing
- Framing of privacy settings on social networks
- Presumed consent for human organ donations.
Definition Asymmetric Framing
Involves an obvious inferior 3rd choice or hyper-expensive 3rd option rather than a simple expensive/cheap option can guide consumers to more expensively-priced items.
