ECON UNIT 1 AOS 3: Behavioural Economic Theory

Question 1

What are the key elements of the behavioural economic theory?

Answer 1

1. Bounded rationality - limits to consumer rationality: not always with complete information, take short cuts for convenience etc.
2. Bounded willpower - limits to determination to make rational decisions, prompting them to take the easy and less rational option, even if it is not in their long term self interests
3. Bounded self interest - consumers are not completely selfish and may desire to help others, even if it is not in their self interests

Question 2

What are some common decision making errors and biases?

Answer 2

Availability, herb behaviour, overconfidence bias, vividness, status quo bias, anchoring effect, framing bias, loss aversion, present bias

Question 3

How does the government use nudges to influence consumers and/or businesses?

Answer 3

Alters the environment or presentation of choices to make a particular option more likely, without removing choice or using force - people can still opt out or choose differently

Examples: Default enrolment in superannuation and allowed to opt out, healthy foods at eye levels

Question 4

How does the government use shoves to influence consumers and/or businesses?

Answer 4

Makes a choice more difficult or less convenient, nudging people away from it by increasing effort, but still legal and allowed - people can choose the option, but it comes with a hassle

Examples: Limiting store opening hours for alcohol sales, requiring people to fill out longer forms to access sugary drink vouchers

Question 5

How does the government use smacks to influence consumers and/or businesses?

Answer 5

A ban, fine, or legal penalty that forces or prohibits a certain behaviour. This command and control approach, not based on subtle influence - people do not have the freedom to choose the penalised option

Example: Fines for not wearing seatbelts, banning single use plastic bags, compulsory superannuation contributions from employers

Question 6

How do businesses use the behavioural economic theory to influence consumers?

Answer 6

• 5Ps of Marketing: Product, price, people, place and promotion - leave a good impression to encourage them to use their business again
• Multi-branding: One company owns many others under different names to drive up consumer sales
• Nudges: On company websites and normal retail shops, processes and features are made to leave a good impression, to encourage them to use their business again