Aspects of behavioural economic theory

• Bounded rationality


  The idea that people may try to behave rationally but the ability to do so is severely restricted
• Three main reasons for bounded rationality


  • the human mind has limited ability to evaluate and process information
  • the available information is incomplete and often unreliable
  • the time available to make decisions is limited
• Rules of thumb


  Thinking shortcuts or informed guesses that individuals use to make decisions in order to save time and effort
• Anchoring


  The tendency of individuals to rely on particular pieces of information when making choices between different goods and services
• Availability bias


  When people make judgements about the probability of events by recalling recent instances
• Social norms


  When individuals are influenced by others when decision making
• Altruism and fairness


  Individuals are motivated to do the right thing even if it means laying for a good or service
• What are people labelled as due to bounded rationality and self control?

  They are labelled as predictably irrational