Decision Making Approach

• Scarcity


  Requires economic agents (i.e consumer, producer and the government) to make choices due to limited resources and unlimited wants
• Economic agents


  Strive to make rational decisions to maximise their decisions
• Constraints


  The limitation and restrictions that economic agents are currently facing, which determine the choices available
• Expected Benefits


  Intended consequence based on anticipated outcome of a decision
• Expected Costs


  Implicit costs (opportunity cost) and explicit costs (monetary payments)
• Information


  Could be quantitative and qualitative, used by economic agents to make sound decisions and gauge if objectives have been met
• Perspectives


  Economic agents may need to consider the possible impacts of their decision on others
• Marginalist Principle


  Economic agents should increase an activity if marginal benefit exceeds marginal cost, reduce if marginal cost exceeds marginal benefit, and choose the level where marginal cost = marginal benefit to maximise self-interest
• Intended Consequence


  Outcomes anticipated by economic agents before making the decision
• Unintended Consequence


  Outcomes not intended or not anticipated in the economic decision, either not related to the objective or related but not anticipated
• Changes


  Aims, Constraints, Costs, Benefits, Information, and Perspective of economic agents can change over time, requiring review or change of decisions
• Cognitive Bias


  Systematic error in thinking that affects the decisions and judgments of economic agents, caused by mental shortcuts due to complexity and information overload
• Cognitive Bias


  • Decisions made by consumers, producers and government can be guided by emotions, limits on the ability to process information as well as social pressure rather than rationality
• Sunk Cost Fallacy


  Phenomenon where a person is reluctant to abandon a course of action because they have heavily invested in it, even when abandonment is more beneficial
• Applications of Sunk Cost Fallacy

  • Sentosa Islander Card
  • ERP
  • Fines for using PMDs on roads & footpaths
• Loss Aversion Bias


  Tendency for people to prefer avoiding a loss over making an equivalent or greater gain
• Applications of Loss Aversion Bias

  • Contractual telco data plans
  • Highlighting savings for products
  • Taxing the use of plastic bags
  • Productivity & Innovation Credit (PIC)
• Salience Bias


  Tendency for people to focus on information that is more prominent (salient) over other less prominent but equally relevant pieces of information
• Applications of Salience Bias


  • Manufacturers highlighting specific product features
  • Public education campaigns on reducing sugar consumption