Lecture 5

Question 1

What are the assumptions of the standard economic model?

Answer 1

• Consumers behave rational
• Consumers prefer more over less
• Consumers seek to maximize their utility
• Consumers act in self-interest

Question 2

What is utility?

Answer 2

Utility refers to the SATISFACTION that
a consumption provides to a consumer

Question 3

What experimental studies can be used as a method to measure consumer
preferences?

Question 4

What is the concept of nudges?

Answer 4

Nudges are interventions that aim at altering people’s behavior by
either harnessing their cognitive biases or responding to them

Question 5

How can nudges can be used to increase pro-environmental behaviour?

Answer 5

Examples:
- Eco-labeling
- Normative messages
- “Green” default options

Field Experiment with
hotel guests:
- Help save
the environment –> 35,1%
- + 75% of guests reuse
their towels –> 44.1 %

Question 6

Explain why insights from behavioural economics contradict the
standard economic model

Question 7

§ …list the features of discrete choice experiments

Question 8

How can
system 1 and 2 explain behaviour?

Question 9

Give examples of how nudges can be used to increase pro-environmental behaviors

Question 10

Can you explain the law of Diminishing Marginal Utility

Answer 10

As consumption of a good increases, the associated
marginal utility declines

Question 11

What is marginal utility?

Answer 11

The marginal utility of a good refers to the change in utility or satisfaction
due to the change in
consumption of that
good

Question 12

What are the preferences in the indifference curves?

Answer 12

Value judgment
represented by a choice between
two (or more) potential
alternatives

Question 13

What is the economic value in the indifference curves?

Answer 13

The economic
value of a particular item, or
good, for example a pizza, is
measured by the maximum
amount of other things that a
person is willing to give up to
have that pizza

Question 14

What are the budget constraints in the indifference curves?

Answer 14

• The budget constraint defines the feasible SET OF CONSUMPTION CHOICES facing a consumer
• This constraint depends upon the prices of goods in question and the income available to a consumer

Question 15

What are the influences of changes in income and changes in price?

Answer 15

Changes in income: shift to right

Change in price: change on axis

Question 16

What can be used as choice data

Answer 16

• Revealed preferences: real market data, where individuals have experienced
  the choice task
• Stated preferences: individuals are
  presented with hypothetical choice tasks
  and asked to express a preference

Question 17

What are revealed preferences

Answer 17

Real market data, revealed by actual behavior, i.e. choice to
purchase a product

ACTUAL BEHAVIOUR can thus be used, e.g. by looking at purchase
receipts, to define an ‘implicit’ demand curve for this individual

Reflects actual decision-making subject to budget constraint

Ultimately reflects ‘market experience’ with all relevant
circumstances

Question 18

What are stated preferences?

Answer 18

Choice modelling is increasingly preferred for studies of consumer
preferences, especially where data is not readily available

Choice-based models rely on stated preferences:
- Survey method: consumers make their choice from a
potential set of alternatives
- Explore the underlying determinants of purchasing decisions
- Alternatives can include both real and hypothetical products
- Can suffer from ‘hypothetical bias’ if not seen as realistic

Question 19

What are Discrete Choice Experiments (DCE)?

Answer 19

DCEs use sequence of choice tasks to collect preference
information

Individuals implicitly make TRADE-OFFS between the levels of
the attributes in the different
alternatives

Possible to consider
INTERACTIONS between attributes

Question 20

What are the features of DCEs

Answer 20

• Choice tasks: (set, situation, scenario) is a set of alternatives
  considered by a decision-maker
• Alternatives: described by different attributes and vary by
  attribute levels (e.g. organic: yes/no)
• Monetary value: included as one of the attributes, along
  with other attributes of importance

Question 21

How is Kahneman and Tversky’s dual process theory the foundation of behavioral economics?

Answer 21

Foundational work to Behavioral Economics

Found evidence that people use
short-cuts when they make
decisions under uncertainty

Question 22

System I thinking: fast thinking

Answer 22

Fast, auto-pilot, implicit, effortless, associative, difficult to control or modify, no self-awareness

Question 23

System II thinking: slow thinging

Answer 23

Slow, serial, explicit, effortful, logical & sceptical, deliberately controlled, with self-awareness

Question 24

System … runs the show, that’s the one you want to move

Answer 24

1 (fast thinking): 95% and system 2 (slow thinking): 5%

Question 25

What are heuristics?

Answer 25

Found evidence that people use SHORT-CUTS when they make decisions under UNCERTAINTY Our brain reacts in stressful situations in such a way that automatic patterns become more dominant. This means that external stimuli are answered with the existing patterns. The brain falls back on available, stored heuristics - system 1 largely takes over.

Question 26

How do the systems work together?

Answer 26

System 1 is always there and is always active. When it doesn't have an answer it will call on system 2 for help. Sometimes your two systems conflict and challange each other!

Question 27

In the exercise with the colours written in another colour, how do the systems play a role?

Answer 27

System 1: read out the words System 2: conscious, slows you down to concentrate on reading out the colours of the words

Question 28

What are conventional methods?

Answer 28

Conventional marketing research struggles to read consumers real behaviour because it relies on direct questioning which generates a response from our slow, rational mind (system 2) Our attention is largely activated by our quick, intuitive brain (system 1). People don't have full access to their psychological motivations and instead post-rationalise decisions when asked to explain a choice

Question 29

What are cognitive nudges?

Answer 29

- Descriptive nutritional labelling: info on calories, sugar etc. - Evaluative nutritional labelling: colour-coded nutrition info (green = healthy) - Visibility enhancements: make healthy choices more visible

Question 30

What are affective nudges?

Answer 30

- Healthy eating calls: ask if consumers want vegetables - Hedonic enhancements: make healthy foods more and unhealthy less appealing

Question 31

What are behavioural nudges?

Answer 31

- Convenience enhancements: healthy as default and unhealthy harder to reach (have to ask for) - Size enhancements: reduce size of packages and portions of unhealthy foods and bigger portions of healthy foods

Question 32

How does context affect accessibility?

Answer 32

We naturally assess: - Size, distance, and loudness - Similarity, surprisingness - Affective valence and mood E.g. presenting a muesli bar with vegetables of with snacks

Question 33

Give an example of nudging against food waste

Answer 33

Pilot study: ugly carrot --> more risk perception (system I) Construal Level moderates the influence of food aesthetics on purchase intentions and this effect is mediated by risk perceptions Abstract mindset --> increase purchase of ugly foods and vegetables

Question 34

Where is behavioural economics placed in the course scheme?

Answer 34

In between individual/micro level and household/meso level