3.1 Behavioral Economics

• In behavioral economics, cognitive and emotional factors are believed to impact decisions
• What does behavioral economics assume about decision-making?

  Emotional factors play a role
• Cognitive biases are systematic patterns of deviation from rationality
• The availability heuristic involves judging the likelihood of an event based on how easily examples come to mind
• Behavioral economics uses mathematical modeling as its primary methodology.

  False
• What is an example of anchoring bias in pricing decisions?

  Pricing based on initial listing
• Behavioral economics has significantly impacted our understanding of how markets function.
• What is behavioral economics?

  Combines psychology and economics
• Behavioral economics uses mathematical modeling to study decision-making.

  False
• In behavioral economics, information is often incomplete or biased
• Match the cognitive bias with its definition:

  Confirmation Bias ↔️ Seeking information confirming beliefs

  Anchoring Bias ↔️ Relying on the first piece of information

  Availability Heuristic ↔️ Judging likelihood based on easy examples
• Anchoring bias involves relying heavily on the first piece of information received.


  True
• Behavioral economics challenges the traditional economic assumption that people make decisions based on logic and complete information
• What are cognitive biases in decision-making?

  Systematic deviations from rationality
• Relying too heavily on the first piece of information received is an example of anchoring
• Traditional economics assumes that markets are efficient, but behavioral economics recognizes that they can be inefficient due to cognitive biases
• Confirmation bias leads individuals to seek information that confirms their existing beliefs.


  True
• Behavioral economics has significantly changed our understanding of how markets function compared to traditional economics.


  True
• Behavioral economics analyzes how irrational behavior and incomplete information can lead to unexpected market outcomes.


  True
• Marketers can use behavioral economics principles to leverage cognitive biases and heuristics
• What is the primary focus of behavioral economics?

  Cognitive and emotional factors
• What methodology does behavioral economics use to study decision-making?

  Empirical experiments
• In behavioral economics, individuals may act altruistically or be influenced by social norms
• What is an example of the availability heuristic?

  Overestimating airplane crash frequency
• Behavioral economics predicts market outcomes based on rational actors and perfect information.

  False
• What is an example of loss aversion in marketing?

  "Limited-time offer"
• Order the following concepts based on their emphasis in behavioral economics

  1️⃣ Cognitive biases

  2️⃣ Irrational behavior

  3️⃣ Market inefficiencies

  4️⃣ Nudges
• Match the bias or heuristic with its marketing application:

  Anchoring Bias ↔️ High initial prices for discounts

  Framing Effect ↔️ Highlight positive product features

  Loss Aversion ↔️ Emphasize potential losses

  Scarcity Heuristic ↔️ Highlight limited availability
• Behavioral economics challenges the assumption that individuals always act rationally.


  True
• Behavioral economics assumes that information is always complete and accurate.

  False
• Behavioral economics recognizes that markets can be inefficient due to cognitive biases
• Match the marketing application with its corresponding bias or heuristic:

  Anchoring Bias ↔️ Setting high anchor prices

  Framing Effect ↔️ Describing "95% fat-free"

  Loss Aversion ↔️ "Limited-time offer"

  Scarcity Heuristic ↔️ "Only a few items left"
• Behavioral economics assumes individuals always act rationally.

  False
• What is a key focus of behavioral economics?

  Understanding irrationality and biases
• What is a key difference between traditional economics and behavioral economics regarding self-interest?

  Altruism is considered
• What is confirmation bias in behavioral economics?

  Seeking confirming information
• How does behavioral economics differ from traditional economics in its assumptions about decision-makers?

  Acknowledges irrationality
• Match the behavioral economics concepts with their examples:

  Rationality ↔️ Consumers choose the lowest price regardless of brand loyalty

  Behavioral Economics ↔️ Branding influences purchasing decisions
• Overestimating airplane crash frequency due to media coverage is an example of the availability heuristic.

  True
• Match the cognitive bias with its definition:

  Confirmation Bias ↔️ Seek information that confirms beliefs

  Anchoring Bias ↔️ Rely on the first piece of information

  Availability Heuristic ↔️ Judge likelihood based on ease of recall