Booklet 5-Behavioural economics

• Altruism


  Selfless concern of wellbeing of others
• Anchoring 


  Individuals relying on information. due to a lack of understanding e.g shops having recommending retail prices
• Availability bias

  Information at forefront of your mind overshadows relevant information e.g thinking planes are dangerous as you see a crash on the news when in reality the chances are extremely low
• Behavioural economics 


  How psychological factors influence economic decision making
• Bounded rationality 


  People make decisions based on limited info and cognitive abilities
• Bounded self-control


  Individuals struggle to make choices due to limited willpower and impulsiveness
• Choice architecture 


  way choices are structured to individuals to influence their decisions
• Choice overload


  Individual faced with too many choices leading to decision paralysis
• Default choice


  Option that is automatically selected if individual doesn’t make a decision. Requires individual to opt out of the decision
• Framing

  Influencing choice via way of words and numbers
• Herding behaviour


  Individuals following actions of others
• Heuristics


  Mental shortcuts that individuals use to make decisions quickly
• Loss aversion 


  When people value loss higher than they value gains
• Moral hazard


  Increased risk taking behaviour when individuals are unworried about the consequences
• Nudge


  Policies to influence choices
• Rational choice


  Make decisions that maximise utility (act in self interest)
• Restricted choice 


  Reduced options for individuals to choose from
• Social norm


  Socially accepted by people. e.g people spending large proportions of income of luxury clothes in order to appear wealthy for social approval
• Cognitive biases


  Social emotional psychological factors influence decision making
• Total utility 


  The total satisfaction from a given level of consumption
• Marginal utility 


  The change in satisfaction from consuming an extra unit
• Imperfect information


  Where a lack of information leads to inefficient resource allocation due to sub optimal decision making
• Asymmetric information 


  Where one party has better information than another. leads to moral hazard as the other party tends to make unfavourable decisions
• Mandated choice 


  Government forcing the individual to make a decision e.g organ donation
• paternalism


  Where the government restricts freedom of choice of people in their supposed interest
• Bounded rationality describes the way that humans make decisions that depart from perfect economic rationality since we are limited by our mental capacity, the information available to us, and time.