Behavioural Economics

Question 1

What is rational behaviour?

Answer 1

Acting in pursuit of self-interest to maximise their own utility by making logical, sensible decisions.

Question 2

What is utility?

Answer 2

Enjoyment/satisfaction derived from consumption of a good or service.

Question 3

What is marginal utility?

Answer 3

Enjoyment/satisfaction from consuming one more unit.

Question 4

When is total utility maximised?

Answer 4

When marginal utility = 0

Question 5

What is diminishing marginal utility?

Answer 5

The marginal utility obtained from consuming a good or service falls as consumption increases.

Question 6

What is asymmetric information?

Answer 6

When one party to a transaction possesses less information that is relevant to the exchange.

Question 7

What is adverse selection?

Answer 7

When the wrong product gets chosen.

Question 8

What is bounded rationality?

Answer 8

When your ability to behave rationally is restricted by the limited information you have or your ability to understand the information, or the amount of time you have to make a decision. You want to behave rationally but these 3 things inhibit your ability to do so, instead you satisfice.

Eg. takeaway, burger at a sports fixture, order the wrong thing a menu

Question 9

What is bounded self-control?

Answer 9

This is when you know what the right choice to make is but you lack the will power to make the right decision.

Eg. abandoning diet plans, promising to drink less but then not

Question 10

What is anchoring?

Answer 10

The tendency to rely too much on the first piece of information offered- using an initial piece of information when making judgements. People may not make the right decision because of the irrationality of using the anchor.

Eg. quotes for a new kitchen/extension

Question 11

What is loss aversion?

Answer 11

People are more sensitive and responsive to losses than gains. People may make a safe decision instead of the best decision to avoid risk.

Eg. choosing the same thing at a restaurant, bring a bag to the supermarket to avoid having to pay for one, buying/selling stocks

Question 12

What is thinking fast?

Answer 12

Intuitive, instinctive and automatic thinking

Question 13

What is thinking slow?

Answer 13

Concentrating, taking mental effort

Question 14

Examples of thinking fast

Answer 14

Buying a coffee, lunch order, putting the binds out

Question 15

Examples of thinking slow

Answer 15

holidays, universities, marriage

Question 16

What are heuristics?

Answer 16

Mental shortcuts people use in their day to day lives to simplify complex decisions aka rules of thumbs.

Question 17

Examples of heuristics

Answer 17

drinking at the weekend, buying the cheapest option, choosing the most popular brand

Question 18

Are heuristics useful?

Answer 18

They can save time and effort

Question 19

What’s the problem with heuristics?

Answer 19

Lead to sub-optimal decisions.

Eg. if you always buy the cheapest option you may not be satisfied

Question 20

What is availability/recency bias?

Answer 20

This occurs when individuals makes judgements about the likelihood of future events according to how easy it is to recall examples of similar events.

People put too much probability of an event happening because they can vividly remember it happening.

eg. lottery winners, lane travel after a recent crash, polls of best/favourite movies/actors/footballers

Question 21

What is scarcity bias?

Answer 21

The more difficult it is to acquire an item, the more we value it, so we want it more resulting in mental impulses to buy.

EG. limited time offers, high demand, going quickly, 1 remaining.

Question 22

What is cognitive bias?

Answer 22

A mistake in reasoning or other mental thought process occurring as a result of using rules of thumb or holding on to preferences and belief regarding contrary information.

Question 23

What is status quo bias?

Answer 23

People prefer things to remain the same and change as little as possible as changing the status quo is likely to make things worse. ie. stick to what you know

Question 24

What is memory bias?

Answer 24

This influences what and how easily one remembers- people process accurate memories with significant emotional events eg fish and chips by the seaside and bad memories with certain products/places.

Question 25

What is in-group bias?

Answer 25

Forcing tighter bonds with friends similar to ourselves.

Question 25

What is observational selection bias?

Answer 25

Someone noticing things not noticed before assuming that the frequency of the observation has increased.

Question 26

What is positive expectation bias?

Answer 26

The sense that luck will eventually change for the better often fuelling gambling addictions.

Question 27

What is post purchase rationalisation?

Answer 27

Believing that the purchase of something expensive or unnecessary as a good idea after purchase- involved justifying a bad decision.

Question 28

What is neglecting probability?

Answer 28

Inability to grasp a true sense of danger. Leading to overreacting/over-insuring yourself for everything. Overstating risk- not going somewhere as a result of an isolated crime eg. not leaving your hotel on holiday/choosing not to go somewhere Understating risk- consumption of demerit goods, ignoring best before dates

Question 29

What is negativity bias?

Answer 29

People may pay more attention to bad news than good news and hold onto it, negative outweighs the positive eg. one bad review at a restaurant.

Question 29

What is bandwagon effect bias?

Answer 29

Herd-like behaviour- following a general trend in society regardless of whether it is right for them.

Question 30

What is confirmation bias?

Answer 30

When people seek out or evaluate information in a way that fits with their existing thinking and preconceptions eg. political views

Question 31

What is current moment bias?

Answer 31

Preferring pleasure now rather than the future. Short term over the long term focus. eg. blowing all your money on the first day of the holiday.

Question 32

What are social norms?

Answer 32

Patterns of behaviour considered acceptable by a society or group within that society- massively influence behaviour rather than your own rational thought process.

Question 32

What is altruism?

Answer 32

The concern of the welfare of others. Doing something for the benefit of others rather than your own benefit. eg. volunteering, donating to charity

Question 33

Negative social norms examples

Answer 33

Excess alcohol consumption Peer pressure- smoking/drugs

Question 34

Positive social norms examples

Answer 34

Healthy eating and exercise Eco-friendly Rise of equality/falling discrimination Queuing Not smoking in public places

Question 35

What are nudges?

Answer 35

Factors that encourage people to think and act in a particular way. The try to shift group and individual behaviour in ways which comply with desirable social norms.

Question 36

What is framing?

Answer 36

Proposes that individuals make decisions based on how information is presented rather than the facts themselves. Presented positively- people are more likely to be influenced Often used by businesses to make people more likely to buy their products Eg. high salt foods presented as low in sugar, or 90% fat free, showing calorie intake per "serving"

Question 37

What are mandated choices?

Answer 37

Situations where people must decide in advance whether they wish to participate in particular action as they are required by law. People are required by law to make a choice. Eg. compulsory voting/vaccinations

Question 38

What are restricted choices?

Answer 38

Offering people a limited number of options so they are not overwhelmed by the complexity of the situation. Too many choices can lead to poor decision making or no decision as all. If there is a restricted more manageable list people are more likely to make a better informed decision.

Question 39

What is changing the default choice?

Answer 39

The default choice is the selected option is a consumer does nothing. Studies show that people rarely change the default choice so the nature of the default strongly affects consumer behaviour. If the default choice is changed then so will consumer behaviour. Eg. auto-enrolment in pensions, 15 years ago people had to opt-in but many people did not do this so by changing the default to an opt out pensions scheme meant that more people save as very few people change the default choice. eg. changing the default in restaurants so that meals don't come complete eg. organ donations- now opt-out only so only people who choose to opt out will not have their organs donated.