2.3

• Behavioural economics definition


  a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
• bounded rationality definition

  When making decisions, individuals rationality is limited by time, information and mental processing power - so they settle for satisficing
• what is satisficing?

  individuals choose the first option that meets their minimum criteria, rather than seeking the best possible outcome (good enough)
• Bounded self-control definition

  Where individuals have limited self-control to act rationally in their own interests (lack of willpower)
• what does rationality mean?

  Individuals make decisions that maximise their utility (satisfaction) based on their preferences, goals and information available to them
• in behavioural economics, individuals have limited self-control. in certain situations, individual may adopt less rational behaviour when faced with a variety of appealing alternatives
• what is heuristics?

  mental shortcuts or rules of thumb people use to make quick decisions - but can lead to bias or errors
• who came up with the thinking fast and thinking slow systems ?

  Daniel Kahneman
• what is system 1 thinking in behavioural economics?

  fast, automatic, intuitive and emotional thinking. it helps people make quick decisions with little effort - but it can lead to mistakes and biases
• what is system 2 thinking in behavioural economics?

  slow, deliberate, logical and effortful thinking. it involved more concentration and is less likely to make errors
• how does system 1 and system 2 work together is decision making?

  system 1 handles most day-to-day decision quickly, but when problems are complex or risky, system 2 can step in. however people often rely too much of system 1
• how can system 1 thinking contribute to market failure?

  can lead to irrational decision like overspending, under-saving, or falling for misleading adverts. these choices can reduce consumer welfare and lead to inefficient outcomes in the market
• bias definition

  to disregard opposing views and to allow personal opinions/prejudices to influence a judgement
• cognitive bias definition

  a systematic error in thinking that affects the decisions and judgments that people make
• rule of thumb definition

  Thinking shortcuts, or informed guesses, that individuals use to make decisions in order to save time and effort
• availability bias definition

  occurs when individuals make judgments about likelihood of future events according to how easy it is to recall examples of similar events - not actual data
• anchoring definition

  individuals rely too heavily on the first piece of information offered (the anchor). use an initial piece of information when making subsequence judgments
• confirmation bias definition

  the tendency to seek out, interpret, or remember information that supports their existing beliefs, and ignore or downplay evidence that contradict them
• social norms definition

  forms or patterns of behaviour considered acceptable by a society or group within that society
• nudges definition

  factors which encourage people to think and act in particular ways. nudges try to shift group and individual behaviour in ways which comply with desirable social norms
• What is a shove policy?

  more forceful government intervention that limits or changes behaviours through regulation and penalties
• Nudging examples

  • Campaigns
  • Having pictures on cigarette packaging
• altruism definition

  when people make decisions that benefit others at a cost to themselves, even without personal gain
• before behavioural economics, economists assumed that individuals were not altruistic
• what is maximising theory?

  economic theory that suggests individuals make decisions by maximizing utility or satisfaction
• fairness definition

  the quality of being impartial, just, or free of favouritism. it can mean treating people equally, sharing with others, giving others respect and time, and not taking advantages of them
• how does fairness influence decision-making in behavioural economics?

  people often make choices based on what they believe is fair, even if its nor in their own financial interest
• fairness is a normative statement - range of views to fairness