Behavioural Economics Flashcards
(25 cards)
Traditional Economists argument of consumers
consumers will always act rationally and maximise utility(satisfaction) when amking decisions. This involves gathering up all information available
evaluating the information
taking time to weigh up all costs and beneifts before actualyl making decision
Behavioural Economicsts
consumers will not always act rationally to utilitymaximise instead will sometimes make irrationald ecisions
behavioural economics beleieve they make irration decisions due to
boudned rationality
bounded self control
altruism
heuristics
Bounded Rationality
consumer rationality is bounded by
TIme- consumers do not always have the time necessary to make perfectly rational utility maximising decisions
Choice-at times consumers are flooded with too much cjoice to comprehend
Information-imperfect info will hinder processs of making a utility maximisng deciison
info may be unclear
Altruism(bounded selfishness)
Traditional economic thought finds it difficult to explain altruism on the grounds of utility maximisation and self interested deciison making where deciisons are made with costs but no benefit is expected in return
-Behavioural economics disupute idea of deciisons being made only for utility or porfit maximisng purposes instead suggest moral values emotions playa part in explainign altrustic activity putting welfare gains of others ahead of their own
Bounded Self-control
even if consumers shave all the info available have weighed it up and know what a rationald ecision is they may not actually make it if their self control is bounded. If addicited to a good like cigarettes thay they know only does harm but cannot stop tehmselves
Heurisitics
rules of thumb
these are mental shortcuts simplifying and shortening the decision making process to provide a satisfactory outcome that may not maximise utility but willa dd enough utility to satisfy the consumer
what is cognitivie biases
behavioural economists willa rgue that emotional psycholgical and social factors can influence decision making insteaad of consumers always followin the traditional neo classical idea of rational utility maxmisng decisions.
examples of cognitive biases
anchoring
social norms
availabiltiy bias
frmaing
loss aversion and endownment effect
herding
Anchoring
Price anchoring is when a value is imprinted in the minds of consumers as a reference point to judge the value of the good ors ervice for example when shops display the recommended retail price on price labels whilst also showing the real discounted price
consumers are anchored by rrp price and by looking at real price they feel as though they are getting an excellent deal even though this price may not be good at value
Social Norms
This is where consumers make decisions based on society etiquette amd expectactions of how to behave given how other people in society act
Good example is the practice of tipping in restaurants which has become a social norm in many countries whereas the same practice does not extend when visiting someones house
availability bias
this occurs when consumers make deciisons based on the ease at which information is avaialble to them. A good example of this is when cosumers ignore the mutltitude of info to suggest that smoking is purely harmful and lead to premature death because that inidividuals have a grandmother who has smoked her whole life and continues to live eighties. This situation is an anomaly and contrary to the evidence but is weighted too heavily because of hoe easily that ecxxample enters an individuals minds
framing(cognitive biases)
This is the idea that conusmers are influencedby how infomration is presented tot hem for xample the way food packagining presents key info like low fat which may influence whether we buy product or not. once mroet the way questions are framed to us on surveys or ballots may impact our final answers
Loss Aversion and the endowment Effect
idea of consumers making deciisons avoids losses rather than acquiring exactly the same gains clearly weghing losses greater than gains. for instance indivduals prefer not to lose 1o sheet than find a one.
EG:when consumers decide what to do with savings. a rational decision might be buy shares if the shares are low risk with expected return with a miminal chance of loss. however the risk of any kin dof loss leads the individual to instead save it. Despire potential gain being at least as high if not significantly higher than any potnetisaal loss, the loss is weighed so heavily to influence a different decision being made
Herding
ideas following treads when making deciisons
for instance many investors start buying a certain share driving the price of the share up others may also decide to buy same exact share belieiving it to be right deciison. the dame can said for buying a house.
Particularly dangerious in financial markets where bubbles can form leadingg to an evnetul bursst of the bubble
choice architecture or nudge policies
can be used where an individuals choice is influenced by how information is presented
Behavioural nude policies type/pros (Framing)
Idea that consumers are influenced by how information is presented to them. For example the way food packaging presents key information .F or exxample the way food packaging present key info like low fat or low sugar can be used more to influence whether we buy that product or not. FI government want consumers to use gyms more tjhey would frame membership cost £1 a day rtather than £30 a month may ecnourage more people toa ctively exercise=
Nudges
this is where freedom of choice remains for consumers but certain options are easier to choose tan others. for example placing salad bars in the middle of restaurants and school canteens to encourage more consumption of fruit and vegetables. Building regulations could force the location of escalators towards the back of buildings providing a nudge for individulas to use stairs in this sense encouraging greater consumption of emrit goods.
Default Choice(behavioural nudge polciies)
encourage grrater enrollment for isntance
in pension shcemes which may be underconsumed in fm a default choice is given to consumers where they are automatically enrolled onto an in work pensions scheme having toa ctively opt out if they prefer to be outside of it.
same idea could be used for organ donationr ather than using opt in schemes whichc an be relatively ignored
mandated choice(behavioural nudge polciies)
where individuals have to actively make a decision about something. For example governments can use mandated chocie to force peopl to say yes or no regarding organ. this overcomes the problem of having opt in shcemes which are regularly ignored
nudge policies seek to infleucnce behaviour
by altering info language and presenttation but still allowing for freedom of choice
whereas shove policies such as traditional regulation taxationa dnd subisides sidstort incentives by altering price and thus aim to change consumer behaviour by providing incentives that makes them economically better or worse off.
cons of nudge polcieis
has its benefits in chaiging minor behaviour but these polcieis do not get to the heart of the problem and thus are unliekly tos ucceed in the long term if at l.
there is no guarantee that nudge policies will be successful with results highly unpredictable. the fact that consumers still have freedom of chocie to ignore policiy. there is potential for government failure where ccosts of policy outwiehg benefits due to administrating and enacting these policies
behavioural nudge polcieis evaluation
nudge polcies are short term ways to influence decision making they lose their impact over time as indivudals get used to various strategies used . int his sense again nudge polciies should be used alongside traditional polciies but essentially alongside information policis
anchor examples on savings
change in interest rate from 5.25-5
acts as an anchor
as I.R is low
consumers make irational deciisons
decide not to save
as rfs fallen only 0.25
ahcor influenced their perceptiont ehyw ill earn elss from savings
