2. Individual economic decision making Flashcards
What is rational behavior?
Acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction, or utility gained from the goods and services consumed
What is utility?
The satisfaction or economic welfare of an individual gains from consuming a good or service (can’t be measured directly)
What is marginal utility?
The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service
What is the hypothesis of diminishing marginal utility?
For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed
What is utility maximisation?
The idea that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions
What is asymmetric information?
When one party to a market transaction possesses less information relevant to the exchange than the other
What does the traditional economic theory assume and the conclusion of individuals making decisions?
The theory assumes that individuals will make rational choices
In reality, individuals have to make decisions based on imperfect information, which makes them prone to making a ‘wrong decision’
What is behavioral economics?
A method of economic analysis that applies psychological insights into human behavior to explain how individuals make choices and decisions
What is bounded rationality?
When making decisions, individuals’ rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available In which to make decisions
What is bounded self-control
Limited self-control in which individuals lack the self-control to act in what they see as their self-interest
What is cognitive bias?
A systematic error in thinking that affects the decisions and judgments that people make
What is availability bias?
Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events
What is anchoring?
A cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered (the so-called ‘anchor’). Individuals use an initial piece of information when making subsequent judgements
What are social norms?
Forms or patterns of behavior considered acceptable by a society or group within that scoiety
What are nudges?
Factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behavior in ways which comply with desirable social norms
