Behavioural economics

Question 1

What did people assume when making early economic theories

Answer 1

Individuals are rational and self interested

Question 2

What is an economic man or homo economicus

Answer 2

A rational person who calculates the benefits and costs

Question 3

What is behavioural economics

Answer 3

It is a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions

Question 4

What is the first clash between traditional and behavioural economics

Answer 4

The traditional view is people use information skilfully to make rational decisions
The modern view is there is a limit to rationality and face a bounded rationality

Question 5

What causes bounded rationality

Answer 5

People are stopped from being rational from:
The ability for the brain to process info
The incomplete or unreliable info
The time available to make the decision
The environment where the decision is made
Bounded self control

Question 6

What is bounded self control

Answer 6

There is a limit to the amount of self control humans have over themselves depending on the conditions where the decision is made
e.g. New Years Resolutions
Impulse purchases

Question 7

What are the 2 different ways decisions are made

Answer 7

System 1 - Instinctive and emotional
System 2 - Slow thinking and logical]
Different decisions are made depending on which is used

Question 8

What do people do when faced with difficult or choice overload decisions

Answer 8

Use heuristics

Question 9

What are heurictics

Answer 9

They are mental shortcuts or techniques used to help individuals come to decisions quickly
e.g. Never eating in an empty restaurant

Question 10

What is the solution to information failure for behavioural economsists

Answer 10

to simplify or reduce the number of choices or information

Question 11

What is the second clash

Answer 11

Traditional view is people are rational when processing the information
Modern view is that humans have biases in their decision making

Question 12

What are the types of biases

Answer 12

Availability
Anchoring / framing
Loss Aversion
Social norm
Recency

Question 13

What is availability bias

Answer 13

It is when people make judgements about the probability of events by how easy it is to recall examples of events (the recency effect)
This is not a good way to the underlying probability of a such event occurring
e.g.
Where to travel following press reports of terrorism in countries

Question 14

What is Anchoring bias

Answer 14

This is the tendency to give too much weight to a single piece of info which is normally the first one, when making decisions
e.g. Charity donations form that lists £10, £15, £20

Question 15

What is framing bias

Answer 15

The way information is framed can effect the persons choice
e.g. yoghurt is 90% fat free not contains 10% fat

Question 16

What is loss aversion bias

Answer 16

This is the observation that people feel greater unhappiness from losing something than the happiness they feel getting the same item

Question 17

What is a social norm

Answer 17

It is a belief that is held by the group of people who we associate about how we should behave in a situation

Question 18

What is social norm bias

Answer 18

When people’s decisions are influenced by other people’s thoughts and beliefs
E.g. Herding - individuals in a group start to act collectively but without any one individual centrally directing the group

Question 19

What is clash 3

Answer 19

The traditional view that people are self centred and self interested and don’t care about others interests
The modern view is that people can act selflessly and put others above their self
e.g. charity donations

Question 20

What has the government set up for behavioural economics

Answer 20

They set up a behavioural insights team also known as the nudge unit

Question 21

What are the key principles of the Nudge unit

Answer 21

People will change their behaviour when given subtle nudges
Use of nudge policy is libertarian paternalism and is designed to change the behaviour for the better but still give freedom

Question 22

What is a nudge

Answer 22

It is a means of changing people’s behaviour in a predictable manner without removing their freedom of choice

Question 23

What is choice architecture and what does it do

Answer 23

It is the way a choice is presented and can affect the decisions people make

Question 24

What are examples of nudges to better health

Answer 24

Making junk food less accessible and healthy food more accessible
Telling patients what a hospital appointment costs to increase the chance that they go
Making people opt out of organ donation than opt in

Question 25

What are the advantages and disadvantages of nudges

Answer 25

People say that it takes away peoples freedom but limited cognitive ability and incomplete information means they will make sub optimal choices anyway May encourage the government to act too paternalistic Focuses on peoples weakness too much Limits to nudges Conventional policies are just as effective

Question 26

If a consumer experiences bounded rationality and the anchoring effect which good is he likely to base his view of the good off

Answer 26

The first one

Question 27

What will a consumer always attempt to do

Answer 27

Maximise their total utility

Question 28

What is income

Answer 28

Income is a flow of money going to factors of production e.g. wages, Rental income, Interest savings, dividends

Question 29

What is wealth

Answer 29

It is the current value of a stock of assets owned by a person e.g. Savings, Property, shares, pension schemes

Question 30

What are the 2 measures of income inequality

Answer 30

Gini coefficient Palma Ratio

Question 31

What is the Gini coefficient

Answer 31

Overall measure of income inequality Between 0 and 1 0 - no equality 1 - Perfect equality

Question 32

What is the Palma Ratio

Answer 32

Ratio of income of the top 10% of income households divided by the income of the poorest 40%

Question 33

Causes of wealth inequality

Answer 33

Age - Older means they have more chance to gain assets Inheritance

Question 34

Causes of income inequality

Answer 34

Gap between high and low paid jobs Regressive impacts of indirect taxes Less generous welfare benefits system - welfare cap Unaffordable housing for buying and renting Wealth inequality

Question 35

Which countries have a gini coefficient higher than 0.5

Answer 35

South Africa Mozambique Angola

Question 36

Which countries have a gini coefficient lower than 0.3

Answer 36

Croatia Slovenia

Question 37

What are the 4 largest taxes

Answer 37

Income VAT National Insurance Corporation

Question 38

What is the gini coefficient for the UK in 2022

Answer 38

0.343

Question 39

What % of the UK population receive more benefits than they pay in tax

Answer 39

52%

Question 40

What the trend in income inequality over the last 10 years

Answer 40

Relatively stable but high

Question 41

What is causing the widening gap between high paid and low paid jobs

Answer 41

Increasing scale and depth of working poverty Decline in full time employment in manufacturing Decline in trade union membership Bonus culture Rise in executive pay relative to median incomes Zero hour contracts Education

Question 42

What is the UK's median and mean disposable income

Answer 42

Median - £32,349 Mean - £39,328

Question 43

What is the UK personal allowance

Answer 43

£12,570

Question 44

What are the UK tax rates

Answer 44

20% between £12,570 and £37,700 40% between £37,700 and £125,000 45% beyond £125,000 National Insurance - 13.25% VAT - 20%, Different depending on good

Question 45

What policies can reduce inequality

Answer 45

Higher marginal tax rates on income and wealth: more progressive Increase in the legal minimum wage Rise in the relative level of benefits Measures to increase employment rates Subsidies on energy bills, childcare Rent control to tackle unaffordable housing Laws to tackle discrimination in labour markets Universal Basic Income

Question 46

What are benefits to increasing national minimum wage

Answer 46

Improves work incentives and labour productivity Lifts people out of working poverty which reduces welfare benefits Higher consumer spending Reduces the unemployment trap

Question 47

What are costs to increasing national minimum wage

Answer 47

Job losses in labour intensive industries - real wage unemployment Risk of cost push inflation Reduced price competition for UK exporters Escalator effect

Question 48

Whats the problems with making taxes more progressive and making regressive taxes smaller

Answer 48

Less Incentives - Laffer Curve Regressive taxes are big revenue earners for the government

Question 49

Whats the problem by increasing benefits

Answer 49

Poverty Trap Bigger costs on governments

Question 50

Whats the problem with minimum wages or maximum bonuses

Answer 50

Less incentives Change in employment

Question 51

What are the problems with legislation

Answer 51

Cost to businesses Enforcing them Government failure

Question 52

Whats the relationship between income and wealth inequality

Answer 52

Mutually reinforcing

Question 53

What are the 4 main types of wealth

Answer 53

Physical Pension Housing Financial

Question 54

What are the consequences of wealth inequality

Answer 54

Unequal distribution of property, causing some to live in low-quality homes The fall of social mobility via the wealthy affording better education, health Impact on income inequality, as wealth creates income Only the wealthy can afford to take big risks as entrepreneurs

Question 55

What are the consequences of income inequality

Answer 55

Sense of unfairness, especially if associated with discrimination Impact on aggregate demand Impact on economic growth and performance Impact on social indicators, such as crime, education, physical health, mental health