Y12 Booklet 3: Behavioural Economics Flashcards
What theory does Adam Smith refer to as a guiding force in economics? What does this look like?
“Invisible hand”
in a free market, doing what’s in our self-interest often leads to the best for others, e.g. selling a good to make money, means others can buy and use that good
What do we assume all humans are? Why aren’t they actually this?
rational utility-maximisers
“bounded rationality”
What is “bounded rationality”?
humans face 3 obstacles to perfect rationality:
- limited capability to process information
- information may be incomplete or unreliable
- limited time constraints to make choices
What is “utility-maximising”? And what is “utility-satisficing”?
only settling for maximum available utility
settling for just an acceptable amount of utility
What is “bounded self-control”? Examples?
having good, utility-maximising intentions
but lacking the self-discipline to achieve it,
so ultimately choosing utility-satisficing instead
e.g. losing weight, revising, quitting smoking
What are the 4 decision-making biases?
Heuristics
Anchoring
Availability Bias
Social Norms
Heuristics
a “mental shortcut” or “rule of thumb”
a generalised thought process, sacrificing some accuracy for speed
e.g. “five-a-day”
Anchoring
when a piece of information influences an agent’s perceptions and frame of reference
e.g. first prices in negotiations, “x% off sales”
Availability Bias
when an agent is influenced by recent evidence into misjudging the likelihood of something
e.g. fall in demand for plane tickets after a major crash
Social Norms
when an agent is influenced by or follows behaviour which is customary and “normal” in society
e.g. fashion, smoking
What is altruism?
increasing utility of another person for no personal benefit
What are the 5 choice architecture tools?
Framing
Default Choice
Mandated Choice
Restricted Choice
Nudges
Framing
the context in which information is presented
e.g. a subscription service in “x p/day” > “£y /month”
Default Choice
a pre-set choice, which requires a conscious decision to change
e.g. default “yes” to organ donor scheme, takes effort to opt out
Mandated Choice
an unignorable decision where there is no default
e.g. T&Cs on a website
Restricted Choice
a limited no. options to prevent overload of information/confusion
e.g. government only offers 5 pension options, not 100s
Nudges
when an individual is encouraged to change their behaviour in a predictable and unrestricting way
e.g. moving impulse-buy chocolates further away from checkouts
Evaluative points for Choice Architecture
+ low cost of implementation = low opportunity cost
- freedom to choose = risk of bad choice?
- not effective for deep-rooted behaviour (e.g. smoking)
- is “shove” > “nudge”? some may need more solid intervention
- nudges can be seen as patronising/controlling
What is “libertarian paternalism”?
a philosophy which promotes freedom of choice (libertarian), whilst attempting to encourage better choices (paternalism)
