Individual economic decision making

Question 1

What can make an economic agents decisions irrational

Answer 1

Charity/Altruism
Lack of self control
Bias in our decisions (over confidence)
Emotional reasons

Question 2

Bounded rationality

Answer 2

Decisions taken into account in the real world are under conditions where we have limited knowledge of the alternatives / the consequences, limited time to make the decision and a limited ability to decide (mental processing).

Question 3

Cognitive bias

Answer 3

A systematic error in thinking that affects the decision and judgement that people make. Especially when making quick decisions.

Question 4

Availability bias

Answer 4

Individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events. E.g. if you keep reading about car crime you’re going to believe that it is a big issue and worry about it affecting you

Question 5

Anchoring

Answer 5

Heavily relying on irrelevant pieces of information to help us make a judgement. Value is often set by anchors or imprints in our minds which we then use as mental reference points when making decisions. e.g. ‘big’ price drop campaigns by supermarkets

Question 6

Nudges

Answer 6

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

Question 7

What will happen if nudge policies don’t work?

Answer 7

Laws will be passed in their place to achieve the goal.

Question 8

Choice architecture

Answer 8

Framework where the choices can be set out and resented in different ways. The presentation has an impact on an economic agents decision making. E.g. a building design making it more attractive to take the stairs rather than use the lift in order to promote health.

Question 9

Default choice

Answer 9

Where an option is automatically selected unless you specify differently e.g. NHS organ donation is auto opt in so therefore you must opt out

In soma cases mandated choice which is law and you cannot proceed without government documentation giving consent of withdrawing consent.

Question 10

Framing

Answer 10

A frame is the way choices are described and presented. e.g. 90% fat free
It is often used to present goods in a positive or favourable way

Question 11

“rule of thumb”

Heuristics

Answer 11

A broadly accurate guide based on principle rather than theory e.g. turning a computer on and off if it doesn’t work properly.

Question 12

Risk aversion

Answer 12

Tendency to avoid situations where risk is possible, people are motivated by the desire to minimise potential loss/negative consequences.

Question 13

Risk seeking

Answer 13

Acept greater economic uncertainty in return for a higher potential return.

Question 14

IKEA effect

Answer 14

Individuals tend to place higher value on products that they have either partially or fully assembled themselves, no mater the final quality of the good.

Question 15

Scarcity bias

Answer 15

Higher value is thought to be put on an idem if it is believed to be rare.

Question 16

Sunk cost bias

Answer 16

A tendency to continue behaviour as a result of previously invested resources (time, money or effort)

Question 17

Imperfect information

Answer 17

Any information that’s missing, incomplete, or inaccurate.

Question 18

Asymmetric information

Answer 18

A specific type of imperfect information, where one party has more information than the other party. This can lead to a number of problems. For example, in the market for used cars, sellers often know more about the quality of the cars they’re selling than buyers do. This is because sellers know the history of the car, while buyers can only see the current condition of the car.

Question 19

What is utility?

Answer 19

The satisfaction gained from consuming a good or service.

Question 20

What is marginal utility (MU)

Answer 20

The additional utility gained from consuming one extra unit of a good or service

Question 21

What is total utility TU?

Answer 21

The overall utility gained from consuming a certain quantity of a good or service.

Question 22

Utility maximisation

Answer 22

Utility maximisation occurs when individuals allocate resources to goods or services in a way that maximises their total utility, given budget constraints (taking into account opportunity costs).