Behavioural Economics

Question 1

What is Rational Consumer Behaviour?

Answer 1

Decision-making process that is based on making choices that maximise utility.

This assumes:

• Consumers make all choices independently

• Consumers have fixed and consistent preferences

• Consumers have full information

• Consumers always make the optimal choice given their preferences

Question 2

What is Irrational Consumer Behaviour?

Answer 2

When people make systematic and
persistent deviations from rational choice.

This is because:

• Humans are emotional, impulsive and can lack self-control

• Humans are social and belong to many networks

• Humans can be altruistic, generous and forgiving

• Humans have limited time, energy and brain power

• Humans have regrets and also have a strong sense of loss aversion

Question 3

Why may some customers be Irrational?

Answer 3

Habit , influenced by others , weak competition and default bias

Consumers may be irrational because they follow patterns of habitual behaviour or stick to what they know (default bias)

Bonus: humans are risk averse

Question 4

What is Choice Architecture?

Answer 4

This refers to how decisions are presented and influenced by the way options are organised, leading to certain decisions over others.

Question 5

What is Framing?

Answer 5

Presenting information in a way that influences people’s perceptions or decisions, often emphasising specific aspects to shape how a decision is made.

Question 6

What is Anchoring?

Answer 6

Cognitive bias where an initial piece of information (the “anchor”) influences how people make subsequent judgments or decisions, even if the anchor is irrelevant or
inaccurate.

Question 7

What are Nudges?

Answer 7

Subtle pushes or prompts (nudges) to influence and guide people toward making better decisions without limiting their choices or using direct enforcement

Question 8

What is Bounded Rationality?

Answer 8

Is the idea that the cognitive, decision-making capacity of
humans cannot be fully rational because of a number of limits that we face

Question 9

What is Bounded Self-Control?

Answer 9

Consumers have good intentions but may consume more than
is rational (eg at a restaurant or pub); this may be because they value the present more than the future; they want instant rewards