intro to behaviourial economics

• what do behaviourial economics question?

  question the assumption of traditional economic theory that individuals are rational decision-makers who endeavour to maximise their utility

  • It argues that many economic decisions made by an individual are biassed
• summarise behaviourial economics?

  assumes humans are complex

  -information overload can complicate decision making

  -consumers take risks, sometimes going against reason

  -emotions play a large role in the decision making process

  -ability to make the best decision is influenced by many biases

  -people care more about maximising self interest
• summarise traditional economics?

  assumes consumers are rational

  -driven by utility they get from consumption

  -make long term plans and follow them

  -take as much time as they need to absorb information

  -focus on facts in a logical manner

  -know exactly what they want and why they want it
• what does behaviourial economics recognise about human decision making

  human decision-making is influenced by cognitive biases, emotions, social, and other psychological factors that can lead to deviations from rational behaviour 
• what are the following limitations stopping individuals to make rationa decisions?

  • Bounded rationality 
  • Bounded self-control 
  • Biases 
• what can also cause people to make irrational decisions?

  Too much choice can also cause people to make irrational decisions
• what is the theory of bounded self control?

   bounded self-control suggests that individuals have a limited capacity to regulate their behaviour and make decisions in the face of conflicting desires or impulses

  • It recognises that self-control is not an unlimited resource that can be exercised endlessly without consequences 
• what does bounded self control state that humans are influenced by?

  Humans are social beings influenced by family, friends, and social settings. This often results in decision-making which conforms to social norms but does not result in the maximisation of consumer utility
• bounded self control leads to decision making based on?

  •  Bounded self-control leads to decision-making based on emotions, which may not yield the best outcome 
  • E.g People may indulge in impulsive spending, purchasing goods they did not originally intend to buy  
• why do businesses market on the lack of bounded self-control?

  • Businesses use marketing to capitalise on the lack of bounded self-control of individuals when appealing to their target audience to maximise sales
  • E.g. Supermarkets place a range of items at the checkout register to encourage impulse purchases
• what are the types of bias?

  rule of thumb

  anchoring and framing

  availability bias

  social norms
• what is the rule of thumb?

  • This is when individuals make choices based on their default choice based on experience
  • E.g. Individuals may also order the same pizza anytime they order from Pizza Hut, However, the best choice may be to buy the new tasty option, which is available at 50% discount
• what is anchoring?

  individuals rely too heavily on an initial piece of information (the "anchor") when making subsequent judgements or decisions

  • E.g. When buying a used car, the seller may initially suggest a price of $10,000. Even if you know the market value is lower, the anchor of $10,000 might still influence your perception and as a result, the consumer ends up paying a higher price than intended
• what is framing?

  Framing refers to how the presentation or wording of information can significantly influence people's choices or judgements

  • The same information can be framed in different ways, leading to different outcomes
  • E.g Consumers are more likely to purchase a product that states ‘80% fat free’ than ‘20% fat’ 
• what is availability bias?

  people rely on immediate examples or information that comes to mind easily when making judgments or decisions

  • It leads individuals to overestimate the likelihood or importance of events or situations based on how readily available they are in their memory
  • influenced by personal experiences, vividness of the information, media exposure, and emotional impact
• what are social norms?

  • These are the informal rules that govern behaviour in groups and societies
  • E.g Consumers buy expensive goods to display wealth or social status rather than for practical reasons
  • The perception is that owning luxury goods equates to success and status
• what is altruism?

  • Altruism is the idea that behaviour benefits a group at the expense of the person performing it
  • E.g. Giving charitable donations or volunteering 
  • many charitable economic decisions have no economic benefit for the decision-maker
• what does altruism and perception go against?

  • This explains why individuals make decisions that do not always align with maximising their own personal benefits and is in contrast to what rational self-interest theory would suggest
• what can altruistic decision making be influenced by?

  • Altruistic decision-making can be influenced by
  • The pressure to conform to social norms
  • E.g Following ethical and conscious shopping trends may nudge consumers towards sustainable options 
• what perceptions can influence decision making?

  • perception of fairness and morals