Unit 1 ASO3 - Behavioral and Tradtional Economics Flashcards
(18 cards)
Traditional economics
When making economic decisions, consumers:
-Behave rationally
-Are self-interested
-Want to maximise gains and pleasure or utility
-Dislike pain
-Have ordered priorities
-Have perfect knowledge or information relating to the decision
-Do not act on impulse
Why is traditional economics considered unrealisitic?
-Can be inconsistent and unpredictable
-Can make biased and irrational decisions
Behavioral economics
-Assumes that consumers do not always make rational and self-interested decisions. Instead, they often take shortcuts and have biases that affect their decisions because they:
- are often time poor
-Are sometimes lazy
-Have fake or incomplete information
-Have personal biases and perceptions
-Easily influenced by others’ opinions
-Lack analytical skills and academic ability to be able to weight up all the information
Bounded rationality
Consumers do not always undertake a proper cost-benefit analysis to improve the outcomes of their choices and, instead, settle for that will be reasonably satisfactory.
Bounded self-interest
-While consumers can be selfish this is not always the case. Their decisions can be affected by other beliefs like fairness and desire to help others.
e.g. unpaid voluntary work
Bounded willpower
occasionally, consumers don’t have necessary willpower or determination to make rational decisions. Instead, they end up taking the easy and less rational option, which may not be their best long-term decision and may regret their choice later on.
e.g. overindulgence in tasty food at a party.
Status quo bias
-A shortcut where consumers fail to examine all the options when deciding in a purchase - instead, sticking with what they have previously decided.
e.g. purchase the same brand cereal.
Overconfidence bias
In making decisions, consumers overestimate their current state of knowledge or skill thereby leading them to make ill-founded and irrational choices.
e.g. predicting homework tasks will take you less time to complete than it does.
Herd behavior bias
People wanting to follow the trend/setters and the rest of their peers. They don’t want to stand out and mimic or copy what most people are doing.
e.g. a popular trend in fashion.
Vividness bias
-Information presented in a striking way, causing people to focus too much on one thing, rather than consider all the other opinions that could be beneficial or increase satisfaction.
e.g. using highly charged, persuasive or vivid language.
Short-term or present bias
When making decisions, consumers bias towards those that provide more immediate benefits rather than being more patient and taking long-term assessments that may ultimately be more beneficial and rational.
e.g. taking $5 now, rather than waiting 2 weeks for $10.
Risk or loss aversion bias
-Some people make choices that place more weight on avoiding making loss rather than making an equivalent gain.
e.g. picking between two envelopes with one have nothing and another having $100.
The nudge
-A strategy that helps steer people’s decisions or behaviour towards a predictable and wanted outcome, while allowing consumers to have a choice.
e.g. lollies being at the front of a supermarket.
Incentives
-cash subsides
-tax write-offs
disincentives
-indirect taxes
-laws and fines
-government regulations
educational advertising campaigns
-tv commercial
-print ads
How do businesses seek to influence consumer behaviour?
-applying the right mix of the 5Ps of marketing
-using nudges to gently push consumers in required direction to purchase a good or service.
-utilising multi-branding to attract more customers and increase sales.
The 5ps in marketing
-product: a product that is better than the rest, meets a need, and solves a problem.
-price: must be profitable but also offers consumers value for money.
-people: able to enhance the consumers shopping experience.
-place: connivence for consumers and depends on the product and service sold.
-promotion: appropriate and positively engages the target consumer audience.
