Behavioural Econ w/Biases

• Behavioral economists


  Would argue that there are some times where consumers don't make rational decisions on their own utility maximizing decisions based on the information around them
• Cognitive biases


  Emotional, social and psychological factors that can influence decision making and prevent rationality and utility maximization
• Price anchoring


  • A value is imprinted in our mind as a reference point to compare prices to
  • Recommended retail prices create an anchor in our mind and we compare the actual price which is often lower, making us think we're getting a great deal
• Social norms

  • Our decisions are influenced by rules that society has dictated
  • For example, tipping in restaurants but not at a dinner party
• Availability bias


  • We make decisions based on how easy it is for us to conjure up examples, even if those examples completely inflate the real probability
  • For example, avoiding swimming in Australian seas due to perceived high risk of shark attacks, when the actual probability is very low
• Framing


  • We are influenced by the way in which information is presented to us
  • For example, being more likely to consume a product if 'low fat' or 'low cholesterol' is advertised heavily
• Loss aversion

  • We don't like to give up things we value, even if the potential gain outweighs the risk of loss
  • Leads to the endowment effect, where we attach too much value to something we own compared to something we could gain
• Herd behavior


  • We make decisions based on what others around us are doing
  • For example, investors buying a stock because others are doing so, leading to bubbles and crashes
• Choice architecture

  • Our decisions are influenced by the location or placement of something
  • For example, the placement of salad bars, hand sanitizers, stairs vs escalators
• Behavioral economics can give better understanding of altruism and selflessness, which traditional economics struggles to explain
• Behavioral economics can give better understanding of firms making employment decisions even when there is no profit-maximizing need to do so, which traditional economics cannot explain