Behaviour Economics

Economics 1/2

Traditional Explanations of Consumer Behaviour

Consumers act rationally and in their self-interest - assumed that consumer behave rationally or in a logical, self-interested and calculated way

Consumer make informed and smart decisions - consumers make informed decisions and that they had perfect knowledge

Maximisation of utility and marginal benefits from consumption - consumers consider the marginal benefits gained from each purchase they make

Consumer have ordered preferences

Bounded Rationality

describes the limits on human decision-making processes due to constraints on information, cognitive capacity, and time

The Nudge

It is a gentle strategy that helps to steer people’s decisions or behaviour towards a predictable and wanted outcome, while still allowing consumers to have free choice

Anchoring Effect

It affects how people rank presented options and make judgements, comparisons and assessments

• Decision impacted by the 1st information we receive

• The existed mental standard will impact on our decision making

Bounded Self-Interest

unlike the traditional economic theory believes, individual may not only be driven by self interest when making a decision. Decisions are also influeced by fairness, empathy or concern for others

Bounded Willpower

Despite putting up a fight, consumers get carried away and make irrational decisions. They are unable to resist temptation and perhaps act impulsively, later to regret their decision because it makes them worse off in the long run

Herd Behaviour Bias

People wanting to follow the trendsetters and the rest of their peers. This is a short cut and allows them to avoid coming to their own decision.

Status quo bias

Sometimes we make decisions based on certain bias, especially when there is no time to do the research. We follow the same decisions made previously

Framing bias

the idea that consumer decisions depends on how information is presented. It can be used to deliberately manipulate our decisions by positively or negatively affect our thinking and perception of value

Risk or loss aversion bias

Shows that people tend to place more importance on avoiding losses, than on making equivalent-sized gains. People have a risk aversion bias and as some say “losses loom larger than gains'“

Narrative Fallacy

Consumers can be sucked into various scams, simply becassue of the plausible and impressive way infomation is presented, often ignoring the absence of a more detailed and analytic approach. It occurs when the decsions makers put too much importnce on the story or narrative, rather than on the cold hard and relevant fact

Government Incentives

(Encourage consumption)

• Payment of subsidies

• Offer tax rebates

Government Disincentives

(to discourage consumption)

• Impose indirect taxes

• Laws, regulations and fines