Research methods 13 | The implications of psychological research for the economy. Flashcards
What is bounded rationality in behavioral economics?
When individuals make decisions based on limited information and cognitive capacity, rather than being fully rational.
How does ‘nudging’ influence economic behavior?
It involves small changes in choice architecture (e.g., default options) to guide decisions without restricting freedom.
Explain one example of a cognitive bias affecting financial decisions.
Loss aversion – people prefer avoiding losses over acquiring equivalent gains (e.g., holding onto losing stocks).
How does mental accounting affect consumer spending?
People categorize money into mental ‘accounts’ (e.g., savings vs. leisure), leading to irrational spending habits.
What is the anchoring effect in pricing?
Consumers rely heavily on the first piece of information (e.g., original price) when making decisions.
How does social proof influence market trends?
Individuals mimic others’ behavior (e.g., buying stocks because others are), leading to herd behavior.
What psychological factors improve workplace productivity?
Autonomy, recognition, intrinsic motivation, and work-life balance.
How can governments use behavioral insights to increase tax compliance?
By framing messages to emphasize social norms (e.g., ‘Most people pay taxes on time’).
What is prospect theory’s role in investor behavior?
People weigh potential losses more heavily than gains, leading to risk-averse or risk-seeking choices.
Give an example of how heuristics may lead to market inefficiencies.
Overconfidence bias – investors overestimate their knowledge, causing speculative bubbles.
Why is behavioral economics important for public policy?
It helps design interventions (e.g., automatic pension enrollment) that align with human decision-making flaws.
What ethical issue is associated with nudging?
Critics argue it may manipulate choices, reducing autonomy if not transparent.
