Unit 1 AOS 3: Behavioural Economics

What is Behavioural Economics?

The study of why people behave as economic agents, exploring the complexities in decision-making.

What are the key assumptions of traditional economics regarding consumer behavior?

Consumers behave rationally, act in self-interest, maximize gain while minimising pain, have ordered priorities, make logical not rash or decisions acted on impulse, and possess perfect knowledge.

What factors prevent consumers from being rational?

Consumers have incorrect information, personal biases, are influenced by others, and lack analytical skills to make reasonable decisions.

What is bounded self-interest?

Consumers consider fairness and helping others, not just self-benefit.

What is status quo bias?

Consumers stick with familiar options rather than examining all choices.

What is bounded willpower?

Consumers lack the willpower to make rational decisions, opting for the easy choice.

What is herd behavior bias?

Consumers follow what others are doing instead of making their own rational decision.

What is framing bias?

Decisions are based on how information is presented, not just the facts.

What is the anchoring effect?

Over-reliance on the first piece of information encountered, even if it is irrelevant or misleading.

What is overconfidence bias?

Overconfidence in making good decisions, even without sufficient justification.

What is vividness bias?

Focusing on one aspect of a decision while overlooking potentially more beneficial options.

What is short-term/present bias?

Preferring immediate rewards over long-term benefits.

What is risk/loss aversion bias?

Prioritizing avoiding losses rather than making gains.

What is narrative fallacy?

Being misled by stories, ignoring relevant facts and information.

What strategies does the government use to influence consumer behavior?

Incentives (e.g., subsidies) —> encourage behaviour

Disincentives (e.g., taxes) —> discourage behaviour that lowers society wellbeing

Educational advertising campaigns —> improve the knowledge of decision makers, allowing them to make more rational + beneficial decisions

What strategies does the government use to reduce tobacco consumption?

Laws restricting packaging, advertising restrictions, information campaigns, and excise taxes.

What strategies do businesses use to influence consumer behavior? And why do businesses use these strategies?

• Marketing, nudges, and multi-branding.

• To influence consumer behaviour in order to drive up company sales + profits

What are the 5 Ps of marketing?

Product, Price, People, Place, and Promotion.

What is a nudge?

A subtle strategy that alters consumer behaviour without forcibly restricting choices.

What are some strategies used by the government to reduce alcohol consumption?

1. Indirect taxes

• Following traditional theory, less attractive for consumers 

• However some consumers still make not informed nor rational decisions due to having limited willpower to resist alcohol consumption

2. Random breath testing of drivers

3. Educational advertising campaigns

What are some strategies used by the government to improve the health system?

1. Private health insurance tax rebate

2. Free provision of COVID-19 vaccinations + informative advertising

Product

• The product is expected to offer benefit, solve a problem, make life easier and superior to an alternative (e.g. performance, reliability, warranty, appearance)

Price

• Many businesses may offer special offers, incentives such as discounts or specials → to appeal to more customers + gets rid of rival competitors

• Whilst also being able to make a profit

People

Employ staff that are very knowledgeable, helpful, efficient, patient, friendly and trustworthy

Place

• Storefront

• Greater convenience → online shopping

Promotion

• Used to increase consumer awareness regarding a good + service

• Examples include: advertisements on TV, radio, buildings, billboards, magazines and newspapers

• Internet-based marketing: websites. Social media, video marketing, influencer marketing, green marketing (to appeal to environmentally conscious consumers) and viral marketing (encouraging people to pass information regarding the product)

Can you list some examples of nudge marketing strategy:

• Placing healthy food on eye-level → prompting shoppers to buy them more often

• Placing unhealthy treats near checkout queues to appeal to impulsive consumers (bounded willpower, present bias)

• Placing quantity limits (e.g. Only 3 left in stock) → designed to give an appearance of scarcity, motivating quick increased sales

• Advertising in big print

List the key insights of behavioural economics: