Aspects of behavioural economic theory
Cards (8)
- Bounded rationality and self-controlIt is assumed that individuals are rational decision makers who strive to maximise their utility; this is not always the case. Consumers are unable to self-control with some decisions, causing them to make irrational decisions.
- Bounded rationality and self-control examplesEg.1) The law of diminishing marginal utility states that every extra unit consumed brings a smaller benefit to the consumer. If the example is food, we know that some people will still eat more than what gives them optimal benefit.Eg.2) The short and long term view: consumers may understand that an action taken now would benefit them in the future, however they may be put off when thinking of the consequences in the short-term.
- Acting rationally means making a decision that results in the most optimal level of utility or benefit for the consumer.
- Consumers do not always act rationally.
- HeuristicsShort-cuts to avoid taking too long to make the decision, and they avoid the problem of having imperfect information or limited time. E.g. common sense or intuition. These, however, lead to irrational decision making.
- Social normsThe behaviours of other people affects how the consumer acts; this is a form of bias. Consumers may be unwilling to change from this if it means going against the norms of their society.
- AnchoringA type of bias created by the human tendency to rely on the first piece of information they are given. E.g. if a car's original price is high, but it is on sale for lower, consumers will be inclined to think this is reasonable, even if the lower price is higher than the car's value.
- AvailabilityA type of bias towards events that were recent, personal or memorable. This is because they overestimate and cause emotional responses affecting how they act as a consumer. E.g. if someone they know was in a plane crash, they would be biased to think that taking a plane to holiday is dangerous even though the chances are very rare.