Behavioural Economics And Economic Policy 2.4 Flashcards
What is choice architecture ?
Choice architecture refers to the way choices are presented to the consumers. The different designs affect the choices consumers make. Well-designed choice architectures can help consumers avoid making irrational decisions and poor choices. This could improve consumer welfare. For example, a consumer might be offered fewer choices to avoid the cost and consideration it takes to consider an extra choice.
E.g. countries with an opt-out organ donation have higher rates of rates of organ donation than countries with opt-in systems. This is because of the perceived effort of signing in or out of the system
What is framing ?
Framing is a way by which consumers are influenced by the context of how a choice is presented. The context is made includes word choices and it effects the choices consumers make, for example, if consumers are told the monthly payment for a good or service, rather than the aggregate yearly payment, they are more likely to purchase the good or service, since it seems affordable
What is nudging ?
Nudging aims to change the behaviour of consumers without taking away their freedom of choice. For example rather than banning something like junk food, replacing it with healthier food is a nudge. This still allows consumers to make a choice. It is a form of choice architecture
It is sometimes argued that nudges are manipulative and consumers don’t get a free choice with them. However, due to imperfect information that exists between consumers and firms, nudges help prevent consumers making irrational decisions, so their welfare is maximised
What are the 3 different types of choices ?
Default choices
Restricted choices
Mandated choices
What is a default choice ?
A defuse choice is when a consumer is automatically enrolled in a system, such as a pension scheme. Consumers are more likely to participate when they’re automatically enrolled. It is the choice the consumer takes if they take no action
What is a restricted choice ?
A restricted choice is akin to the junk food and healthier choice. The choice of the consumer is restricted but still there
What is a mandated choice ?
A mandated choice is when a consumer is required to state whether they wish to participate in an action. For example, in the UK everyone who applies to renew their driving licence is asked if they wish to sign up to organ donation
