U1 AOS1 - Lesson 10 - Behavioural Economics

Question 1

Bounded Rationality

Answer 1

Consumers are not always able to make the most rational/utility maximised decisions due to:

• Lack of information
• Complexity and cognative limitations
• Time constraints

Question 2

Bounded Willpower

Answer 2

Consumers don’t possess absolute self control over their decision making, and are emotional and often succumb to urges and impulses

Question 3

Bounded Self Interest

Answer 3

Consumers aren’t always driven by self interest, and do care about fairness when making decisions

Question 4

Status Quo Bias

Answer 4

When consumers stick with the same choice they have made previously, even though it is no longer in their interest to do so

Question 5

Herd Behaviour

Answer 5

When consumers copy the decision of others, and assume that the crowd is correct

Question 6

Anchoring Effect

Answer 6

When consumers’ judgements are influenced by an arbitrary startign vlaue or reference point

Question 7

Framing Bias

Answer 7

When information is presented in ways which distort or manipulate decision making

Question 8

Vividness Bias

Answer 8

When information is presented in a striking and emotionally charged way to make consumers focus on one thing, rather than cosidering all options

Question 9

Overconfidence Bias

Answer 9

Some individuals believe that they are better at making decisions than others, which results in decisions being made with limited knowledge

Question 10

Nudge

Answer 10

When consumers are gently steered or coaxed toward a wanted outcome, while still offering free choice

Question 11

Point of Difference Between Behavioural Economics and Traditional Economics

Answer 11

Traditional economics assumes that consumers are always able to make decisions that maximise their utility, while behavioural economics recognises that this is not always true.

Question 12

A retailer advertises two identical packs of cheese — one labelled 10 per cent fat, and the other labelled 90 per cent fat-free. This is an example of…

A. Status quo bias
B. Overconfidence bias
C. Framing bias
D. Vividness bias

Answer 12

C - Framing bias

Not vividness bias because it is not emotionally charged and does not try to eliminate other choices.

Remember… multi choice is economics is always the most correct answer

Question 13

Which statement in relation to behavioural economics is least correct?

A. Most consumers have bounded rationality and take shortcuts in decision making
B. Most consumers have biases that cause them to be irrational in decision making
C. Consumers only seek to maximise satisfaction and utility when making decisions
D. Sometimes, consumers think of other people when making decisions, even if this means a loss for themselves.

Answer 13

C

Bounded self interest means that consumers are not always driven by maximising their own satisfaction

Question 14

A consumer buying two large blocks of chocolate rather than fresh fruit for a snack, and then later feeling unwell is an example of

A. Status quo bias
B. Overconfidence bias
C. Market failure
D. Bounded willpower

Answer 14

B

The consumer believed that they would be able to manage the chocolate, but in fact ate too much - therefore is overconfident.

Bounded willpower would only apply if the consumer was actively seeking to reduce consumption of chocolate/unhealthy foods

Question 15

Which of the following is a nudge?

A. A law requriing all bike riders to wear helmets
B. Fines for leaving litter on the beach
C. A fitness club allowing free trial sessions
D. Automatic homework detention afterschool if tasks are not completed on time

Answer 15

C

All other options are harsher