behavioural economics and biases

• Behavioral economists argue that emotional, social, and psychological factors can influence decision-making, leading to a departure from rationality
• Price anchoring involves imprinting a value in our mind as a reference point to compare prices
• What are cognitive biases in behavioral economics?

  Factors influencing irrational decisions
• Recommended retail prices on product labels create an anchor that influences our perception of value.
• Tipping in restaurants is a social norm, whereas gifting is common at dinner parties at someone's home
• What is the social norm related to tipping in restaurants?

  Tipping for good service
• Social norms influence our judgment of actions such as drink driving or not wearing a seatbelt.
• An example of availability bias is overestimating the risk of a shark attack because examples of shark attacks are easily recalled
• What is availability bias?

  Decisions based on easy examples
• How does framing influence decision-making?

  By presenting information differently
• Information framed as "low fat" or "low sugar" is more likely to influence consumption.
• Loss aversion describes our tendency to avoid losing something we attach value
• What is the endowment effect?

  Overvaluing what we own
• Choice architecture refers to how the location or presentation of choices influences our decisions
• Herd behavior in financial markets can lead to bubbles and crashes.
• Steps of how choice architecture might influence consumer behavior

  1️⃣ Position stairs near entrance

  2️⃣ Place escalators at the back

  3️⃣ Encourage use of stairs
• Give an example of choice architecture in a restaurant.

  Location of salad bar
• What is altruism in behavioral economics?

  Kindness without expectation
• Traditional economic thought struggles to explain altruism because it assumes individuals are always rational
• Match the behavioral economics concept with its example:

  Price anchoring ↔️ Recommended retail prices

  Social norm ↔️ Tipping in restaurants

  Availability bias ↔️ Overestimating shark attacks

  Loss aversion ↔️ Avoiding investment risks
• Behavioral economics suggests that emotions and moral values can drive charitable giving.