Behavioural economics
- Created by: AJackman
- Created on: 08-05-17 17:38
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- Behavioural economics
- marginal utility theory
- consumers act rationally
- maximise own self interest
- Must have perfect knowledge AND the ability to calculate and weigh up consequence of each decision
- Utility is the satisfaction or economic benefit gained from consuming a good or service
- Utility can be measured in 'utils'
- total utility = total benefit from consuming a given number of units of a good
- Marginal utility = the additional satisfaction from consuming one more unit
- Utility is subject to diminishing returns
- More we consume the less additional utility gained
- Utility is maximised where MU = 0
- maximise own self interest
- Evaluation - it assumes ceteris paribus and that utility can be measured.
- consumers act rationally
- choice architecture
- framing
- Use of words and numbers to influence choice e.g.'just #3 a day" rather than #1000 a year
- nudges
- Use of persuasion to make people behave in a certain way e.g. traffic light labeling for foods
- mandated choice
- People are legally required to make a choice e.g. UK organ donation
- Restricted choice
- Giving a limited range of options or choices e.g. a restaurant menu
- default choice
- The default cause of action if nothing else is specified e.g. organ donation in Sweden
- Evaluation - critics argue that choice architecture and nudges are manipulative and interfere with an individuals freedom to choose
- framing
- Econs v.s human - Richard Thaler
- Econ - rational, controlled, slow thinking, self aware, rule following
- Human - intuitive, automatic, uncontrolled, fast thinking, unconscious and skilled
- Why we behave irrationally
- information failure
- Asymmetry - Seller has more knowledge than buyer e.g,. market for lemons
- info gaps - what people think they know isn't necessarily right e.g, Brexit
- technical knowledge - form of asymmetry e.g. buying a computer, car, mobile
- Financial costs of obtaining information e.g. a house survey or financial advice
- Moral hazard; one party takes risky decision because they know they are partly protected from risks
- information failure
- Bias in decision making
- Herbert A Simon
- People may try to behave rationally but their ability to is restricted
- The human mind has limited ability to process and evaluate information e.g. moon walking bear
- The available information is incomplete and unreliable
- the time available to make a decision is limited e.g. Black Friday deals
- Bounded rationality
- Our ability to be rational is 'bounded' or limited by our ability to process information
- Bounded self control
- Our ability to take a rational course of action may be limited by our human feelings e.g. paying for the gym in Jan but giving up in May!
- Humans may satisfice rather than maximise
- People may try to behave rationally but their ability to is restricted
- rule of thumb
- heuristics - thinking shortcuts individuals take e.g. always buy Apple
- anchoring
- Relying on certain pieces of information where we lack any other knowledge or experience
- availability
- If something is high profile or in the news it can influence our decisions
- social norms
- Other people influence our decision making
- Herbert A Simon
- Altruism
- concern for the welfare of others
- People are motivated to do the 'right thing'
- Effective altruism - ethical behaviour in the business world
- Behavioural Insights Team (BIT)
- Established in July 2010
- Advises government on behavioural economics and the use of nudges
- Richard Thaler advised David Cameron for a while
- Finding "intelligent ways to encourage, support and enable people to mkakr better choices for themselves
- marginal utility theory
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