4.1.2.3 ~ Aspects of Behavioural Economic Theory

• What are some problems with the utility theory? (Heuristics)

  • Limited time

  • Not all information is available at the time of purchase

  • Computation weakness

  • Too much data to analyse
• Behavioural economists argue that…

  Individuals suffer from ‘bounded rationality’ due to the utility theory
• What do individuals do rather than pursue a true rational decision?

  Satisfice
• What are bias reasons for bounded rationality?

  • Social norm

  • Habitual behaviour

  • Anchoring
• What are fair reasons for bounded rationality?

  • Donating to charity

  • Paying above the living wage

  • Bounded self-control
• What is marginal utility ?


  Benefit gained from consuming one additional unit
• What is total utility ? 


  Overall benefit gained from consumption
• What is the law of diminishing marginal utility 


  For each additional unit gained the marginal utility decreases (Pringle effect )