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Behavioural Ecomnomics Flashcards

(62 cards)

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1
Q

Definition of Rational economic decision making

A

Economic decisions are based on logical decisions
Economic agents look to maximise the benefits that they receive from a decision

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2
Q

How does the hypothetical man think

A

Rationality - behaves rationally
Utility - aims to maximise personal satisfaction(utility)
Perfect knowledge - has perfect knowledge (benefit and cost)
Self interest - acts solely on self interest

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3
Q

What does economic incentives mean

A

A cost or benefit that influences economic agents to act in a certain way the incentives are often but not necessarily financial

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4
Q

Definition of cost

A

A sacrifice made when making a decision which van be financial but could be other things such as time

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5
Q

Definition of benefit

A

The utility or welfare received from making a decision

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6
Q

Definition of utility and types

A

The measure of satisfaction or happiness gained from the consumption of a good or service
Total utility: the aggregate sum of satisfaction gained from the consumption of a certain number of goods + service
Marginal utility: the additional satisfaction gained from consuming an extra unit of a good or service

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7
Q

What is the outline of the law of diminishing Goods

A

As the consumption of a good increases each additional unit produces less total utility than the item before this is known as the hypothesis of diminishing marginal utility
The first item should always be the most utility in theory

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8
Q

What are the assumptions of the utility theory

A

The utility theory assumes that consumers choose the basket of goods and services that will maximise their total utility
(They are subject to the constraints imposed on them by there income)
We also assume an individual prepared to pay the price given for a good must want it more then someone who isn’t willing to pay for the price for that good

Satisfaction from a good is determined by the amount payed

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9
Q

Definition of marginal benefit

A

Additional satisfaction or utility that an individual gains from consuming additional units of a good

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10
Q

Definition of marginal cost

A

Additional cost incurred by a firm producing an extra unit, or an individual buying an extra unit

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11
Q

The importance of information

A

To make rational decision we need to break aware of all facts
The mode; of perfect competition assumes that economic agents have perfect information about products price and factor price
In the absence of good quality information decisions are made with incorrect knowledge of facts

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12
Q

Definition of perfect information

A

All economic agents know all the associated costs + benefit of all products both present + future
This allows right decisions

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13
Q

Imperfect information definition

A

The information needed for an economic decision may be incomplete or asymmetric leading to sub optimal decisions
This leads to market failure

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14
Q

Definition of symmetric information

A

Occurs when both the buyer and seller have equal and well informed information of the good or services and the price in the market

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15
Q

Definition of asymmetric information

A

When either buyer or seller has more information than the other party in a situation or transaction

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16
Q

Definition of moral hazard

A

Economic agents have incentives to alter there behaviour when another economic agent bears the cost if the decision is bad

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17
Q

Definition of adverse selection

A

This occurs when a buyer has better knowledge/ information than sellers and can distort the usual market process

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18
Q

What does a rational consumer do to maximise utility

A

Rational consumers calculated marginal cost and benefit of a purchase
If the marginal cost is greater than the marginal benefit the consumer will not purchase another one of the product
If the MC < MB the consumer with purchase the product
When the MC = MB it is the optimum number to buy this maximises the net utility
The consumer will equate MB + MC across all purchasing decisions

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19
Q

What are issues with utility

A

Most goods we buy we may not know the exact utility it has

Once we have used a product or experienced it this can lead to consumers making poor decisions
when purchasing goods + service therefore not maximising utility

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20
Q

Defention of Decision utility

A

Is inferred from choices and used to explain why we make the choices we do

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21
Q

Defention of experience utility

A

Refers to the experience received from an outcome of a decision we have made

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22
Q

What else effects the rational consumer

A

Perfect information - has perfect knowledge
Rational behaviour - behaves rationally
Incentives - reacted to incentives to produce self interest
Maximising behaviour/ satisfactory behaviour - maximise personally satisfaction + happiness(utility)

PRIM

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23
Q

What is chore beliefs

A

Computational skills
Habit
Others
Risk adverse
Ethics

Beliefs

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24
Q

What are computational skills in chore beliefs

A

Decision making is often influenced by weak computational skills
Rational decision may not be taken because many individuals are unable to calculate possible values of outcomes

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25
What is habit in chore belies
Decision making is often based on habit Certain decisions become routine
26
What is others in chore beliefs
Peoples behaviour is influenced by other people Individuals are affected by watching/copying other people and need for approval
27
What is risk adverse in chore beliefs
People are adverse to risk they are more inclined to take decisions to avoid loss rather then make gains
28
What are ethics in CHORE
Ethics + self expectations influence people’s behaviour each person has there own set of values + responsibilities which will influence their decisions are given situation people can be altruistic + want to do the right thing decisions are often influenced by ethical rather than financial factors
29
What is belief
People need to believe that their decision will be effective people may not make decisions if they do not believe they will be influenced
30
What is satisficing
Making acceptable but not optimal decisions
31
Why are consumers not be completely rational
Cognitive limits Rule of thumb
32
3 main restrictions in rational economic decisions
The individuals inability to process + evaluate information The limited time available for many decisions The lack of information available
33
What is bounded rationality
Where individuals ability to make a rational decision is restricted by factors such as individuals inability to process + evaluate information limited time in which to make the decision + imperfect information
34
What is satisficing
Is accepting an outcome that doesn’t maximise utility but provides a reasonable level of satisfaction
35
What is bounded self control
Means the individual may not make rational decisions even when they are aware of there irrational decisions because they lack self control This could be making decisions based on short term utility at the expense of long term utility
36
What do economists recognise about bounded self control
It can lead to development of approaches that help improve social welfare
37
What is the bias decision making
A situation in which individuals tend towards a particular preference The decisions are therefore unlikely to be purely rational Despite the individual thinking they are weighing up the pros + cons of a decision
38
What is heuristics (rule of thumb) and examples
A heuristics is a mental short cut which allows us to make decisions efficiently + quickly It is broadly accurate guide which takes practical experiences into account when making decisions rather then theory Buying a new phone because it must be technically better then the one before
39
What is system 1 thinking
Thinking fast (intuitive , immediate , subconscious and automatic) Short-cuts are made in order to make decisions
40
What is system 2 thinking
Thinking is slower (rigorous,methodical, controlled, deliberate, effortful and conscious) It is more rational method that considers as much evidence as possible
41
What is anchoring
Anchoring is based on data This is the tendency of individuals to rely on particular pieces of information Especially in situations where they lack knowledge or experience It is particular or of priming effect whereby initial exposure to a number Serves as a reference point + influences subsequent judgment
42
What is availability
Availability is based on experiences When information is at the forefront of your mind it can overshadow other relevant information This occurs because people overestimate the likelihood of something happening Because a similar event has either happened recently Because we feel emotional about previous similar situation
43
What are social norms
Recognises the influences of others upon individuals decisions making Our day to day behaviour in market is influenced by social Norma’s norms which have become accepted by society may be shunned if not followed
44
Definition of altruism
Is the selflessness concerned for the well being of others where you are not influenced by consideration of personal advantage
45
Definition of fairness
Is the notion of what is right this can lead to people making a decision that doesn’t necessarily increase their own personal welfare or utility Peoples sense of fairness leads to irrational decision making
46
Definition of loss aversion
Refers to peoples preference to avoid losing compared to gaining the equivalent amount of it is the idea that people feel losses much more then gain
47
What is choice architecture
How choices can be influenced by the way which the various options are presented to the decision maker
48
Why does the government use choice architecture
It is used in an attempt to achieve what they perceive to be more socially desirable outcome
49
What are the forms of choice architecture
Reducing choice overload Overcoming bias against long term factors Using measures that are easily understood The way the choice is presented
50
What is reducing overload
It occurs when individuals cannot effectively process all the information needed to make choices
51
What is overcoming bias against long term factors in choice architecture
Individuals tend to underestimate the importance of long term factors when making decisions
52
What is making measures easy to understand
Comparing energy supplies in terms of monthly billing rather then kilowatt hours of energy
53
How are choices presented
Default Mandated Restricted
54
What is a default choice
A decision where an individual takes no action
55
What is restricted choice
When an individual can only select from a limited range of options
56
What is a mandated choice
Occurs when people are required by law to make certain decision
57
What is farming
The tendency for people to be influenced by the context in which the choices are presented when making decisions How choices are formed Including words used Affect the choices people make
58
What are nudges
Ways of influencing individuals choices in a particular decision/direction but without removing their freedom of choice
59
What is libertarian paternalism
Is the idea that it s both possible + legitimate for private + public instructions to affect behaviour while also respecting the freedom of choice
60
What are some of Thales findings about the economic policy
Critics of the use of nudges and choice architecture asserts that they are manipulative and interfere with an individuals freedom of choice People are always influenced by the context in which decisions are made complete freedom of choice isn’t always possible Thaler + sunstien argue that since people are unlikely to have complete information , unlimited cognitive ability and unrestrained will power They will inevitably make sub optimal choices and so using M nudges can improve people’s well being
61
Advantages of behavioural economics policies
There are very little costs associated with many behavioural economics policies ( so need to subsidies ) Doesn’t effect those being ‘nudged’ financially so could be deemed fairer to alternative polices Such policies make it easy to change behaviour - little effort required of person being ‘nudged’ (default choice) opting out Changing default can have advantage of becoming a social norm this can make it attractive for individuals to change their behaviour therefore lead to a long lasting behaviours in line with what is believed to be socially beneficial Once subsidy of tax is taken away does not effect income
62
What are disadvantages of behavioural economics policies
Behavioural economics may encourage governments to become too paternalistic in their policies attempting to nudge behaviour Do policy makers make better decisions that individuals Policy makers may also have bounded rationality suffer from biases + not have perfect computational skills Do nudges interfere with the freedom of choice Behavioural economics focuses too heavily on peoples vulnerability to fall for fallacies and their psychological biases - it can give the impression that consumers are dumb But in fact consumers using well - practiced rule of thumb might be operating rational ways There are limits to nudge theory it may be useful in changing minor behaviourist but no it in deep rooted psychological problems such as alcoholism + street violence Conventional policy’s interventions such as taxes, subsidies + regulation are often just as effective as nudges because price remains an important determinant of choices in the market

Economics (3 decks)

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