Behavioural economics

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  • 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
      • Evaluation - it assumes ceteris paribus and that utility can be measured.
    • 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
    • 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
    • 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
      • 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
    • 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

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