U1 AOS3 - Key Insights to Behavioural Economics Flashcards
(14 cards)
Bounded Rationality
Consumers are not always able to make the most rational/utility maximised decisions due to:
- Lack of information
- Complexity and cognative limitations
- Time constraints
Bounded Willpower
Consumers don’t possess absolute self control over their decision making, and are emotional and often succumb to urges and impulses
Bounded Self Interest
Consumers aren’t always driven by self interest, and do care about fairness when making decisions
Which of the following is a reason for bounded rationality?
A. Lack of self-interest
B. Lack of will-power
C. Time constraints
D. Emotion in decision making
E. Lots of information available
C
Time constraints mean that consumers may not be able to compare all options so may make a rushed decision that does not maximise their utility
Bounded rationality means that:
A. Consumers are only able to make rational decisions at certain periods of time
B. Consumers are never able to make rational decision
C. Consumers aim to make rational decisions but they are bound to their behaviour
D. In the traditional viewpoint, consumers always act rationally
E. Consumers aim to make rational decisions but they are not always able to, due to a lack of information, a lack of time or the decision being complex
E
Bounded self-interest implies that
A. Consumers never donate to charity
B. Consumers will only make decisions that benefit themselves
C. Consumers will only make decisions that benefit themselves, unless they lack the necessary information to decide
D. Consumers always have equity in mind when making decisions, so aim to maximise the utility of others always
E. Consumers are not narrow-minded about self-interest, so sometimes make decisions that are about fairness
E
New anti-smoking regulations have been introduced in Australia, with warning labels now required to be printed on the cigarettes themselves.
However, Terry continues to smoke cigarettes every day.
This is an example of
A. Bounded rationality
B. Bounded self-interest
C. Bounded will-power
D. Both A and C
E. All of A, B and C
C - unable to change decision making due to addiction
Not bounded rationality because Terry has the capacity to make a rational decision and their decision has been to continue smoking.
Daniel always has Greek yogurt for breakfast and was at the supermarket comparing his options.
Farmer’s Choice yogurt was $7 for the family-size tub while Green Pastures yogurt was only $6. Both tubs were the same size, but they were not filled equally. David, unaware of this fact, chose the Green Pastures brand yogurt.
This is an example of:
A. Bounded rationality
B. Bounded self-interest
C. Bounded will-power
D. Both A and C
E. All of A, B and C
A - David did not have all the information needed to make a rational decision that maximises his utility
Corrigan’s Cove restaurant in Batemans Bay, NSW, is well-known for its selection of seafood and promotes itself as using locally caught, fresh fish.
However, upon further investigation, Corrigan’s Cove owner, Andrew, admitted that by ‘fresh’, he meant ‘fresh frozen’.
This is an example of:
A. Bounded rationality
B. Bounded self-interest
C. Bounded will-power
D. Both A and C
E. All of A, B and C
A - the consumer did not have all the information to make a rational decision and were misled by the promotion of the seafood as ‘fresh’
Jenny is comparing electricity plans for her house. One power provider, Volter, is offering a renewables-only electricity plan. Volter owns a wind farm near Ballarat.
The renewables-only electricity plan is more expensive than SmokeStax’s generic power plan. Jenny chooses Volter’s plan believing that it is better for the environment and because she support renewable energy, but she remains on the same national grid as everyone else.
This is an example of:
A. Bounded rationality
B. Bounded self-interest
C. Bounded will-power
D. Both A and B
E. All of A, B and C
D - an example of bounded rationality as Jenny was led to believe that she was using only renewable power when it is more than likely she would have used some fossil fuel energy, given there is no way to control where power comes from on the grid. It is also an example of bounded self-interest, as she is willing to pay a premium to support the renewable energy project and the environment.
True/False:
Bounded self-interest means that consumers are not maximising their utility.
False. Bounded self-interest means that consumers are spending their income on goods/services that are not directly benefitting themselves. However, these consumers place value on these goods/services, such as having a cleaner environment or having a fairer society with less poverty. The consumer has decided that these values are important to them, and contribute to them maximising their utility.
How does a lack of time hinder decision making?
Consumers do not have the time to compare all options in depth to see which option suits their needs best. Consumers may miss important details or consequences of their decision.
Consumers may feel rushed, overwhelmed or under pressure to make a decision, so may be emotional or choose the option that looks best on the surface.
How does a lack of information hinder decision making?
Consumers cannot consider all options to see if there is a better option, so consumers may rely on assumptions.
Consumers may miss important details or consequences of their decision.
How does complexity hinder decision making?
Consumers may find it hard to compare options or to understand what each option means for them and the risks involved.
Complexity → overthinking and reluctance to make a decision
