4.1.2.3 ASPECTS OF BEHAVIORAL ECONOMIC THEORY

Define behavior economics

Behavioral economics combines psychology and economic theory to study why people often make irrational economic choices instead of acting like perfectly rational decision makers

Who came up with the idea of thinking fast vs thinking slow?

Daniel Kahneman

What was system 1 and system 2 - Daniel Kahneman?

System 1 - fast, automatic, emotional, subconscious

System 2 - slow, deliberate, analytical, effortful

Is "jury service" system 1 or 2?

System 2

Is "speed-dating" system 1 or 2?

System 1

Is "sports team selection/trails" system 1 or 2?

Both

1 - coaches immediate judge natural talent

2 - analysis, planning

What are heuristics?

Mental shortcuts that many people use in their day-to-day lives to simplify complex decisions

What do heuristics help with?

Saving time and energy

Why is habitual behavior important?

It turns repetitive actions into automatic routines, which saves mental energy and reduced daily decision fatigue

What type of system is habitual behavior?

System 1 - thinking fast

Would there be lower quality decisions in system 1?

Yes there could be as you are thinking fast

• although it it is habitual, you know what to expect

Bounded rationality recognizes that human decision making is limited by what?

• information asymmetry

• cognitive limits

• time constraints

Explain how the concept of bounded self control may be relevant in consumers' choices in consumption of high calorie coffee drinks

• coffee shops intentionally make high calorie drinks highly visible, appealing and easy to purchase

• this overpowers consumers rational long term health based decisions

What is availability bias?

Occurs when individuals make judgments about the likelihood of future events (eg. A recent theft in the area, the odds of winning the National lottery)

Give some relevant availability heuristics of households making a decision on a family holiday?

• destination safety

• review recency

• past experiences (good experience = encouraged to visit again)

• advertising impact

In the UK, what's the average percentage of the community who are immigrants?

The foreign born population makes up 19% of the UK's total population (10.7 million people living in the UK were born abroad)

On average what's the percentage of people who are unemployed in the UK?

The average unemployment rate is 4.9% for people aged 16 and over (1.78 million unemployed people)

What is the unemployment rate for 16-24 year olds?

16.4%

What is confirmation bias?

The tendency to keep only information that matches what one already believes

What do people base “confirmation bias” on?

News headlines/reviews - people only focus/read/base their decisions on what they already believe

Give 3 examples of on confirmation bias?

• elections (reject critical stories as fake)

• sports (blame losses on referees)

• daily life (remember the negative things, ignoring the positive)

What is less aversion?

Loss aversion is a cognitive bias where people feel the emotional pain of a loss about twice as intensely as the joy of an equivalent gain

Examples of loss aversion

• investing

• shoppers respond much better to “save £10 by not missing out” than “earn £10 by buying this”

What is anchoring bias?

A cognitive shortcut where people rely too heavily on the first piece of information they encounter, when making decisions (estimates/judgements)

Give 3 exmaples of anchoring bias?

• real estate (the initial offering price sets the expectation)

• Apple products (premium pricing like the Apple Watch sets a high price anchor)

• Mcondalds coffees (Maccies anchors consumers to low cost expectations, making a Starbucks coffee feel expensive)

Explain how social norms affect behavior/habits/individual choice of consumption?

Social norms create unspoken cultural rules and expectations that we follow to feel accepted by a group

Give examples of social norms

Queuing etiquette, public health habits (wearing a mask during pandemic), not smoking in public spaces, recycling litter

Give an example of a positive social norm

Refraining from smoking in a public space

Give an example of a negative social norm

Excessive partying/binge drinking

Why is the anchoring heuristic considers to be a crucial part of negotiation between economic agents?

The first offer sets thr baseline for the entire negotiation (once the first number is out, the whole conversation gets stuck floating around it)

Give 1 exmaple of anchoring (in terms of a designer bag)

Walking into the store and seeing a designer handbag reduced from £500 to £250 (when the price is dropped, shoppers see this as a bargain - but would see it as expensive if £250 was the original baseline)

Give another example of anchoring bias? (credit card bias)?

£1000 is owed on a credit card balance

£20 minimum payment (per month)

People just pay this minimum payment, which is what credit card providers want, rather than someone just paying the £1000 off

What are 2 things anchoring depends on?

The consumers mood and their personality

What is altruism?

The unselfish concern for the well-being/welfare of others (actions that benefits others, at a personal cost/risk to oneself)

If being are altruistic, what happens to their consumption?

Purchasing motivations shift from pure self interest to social responsibility/care for others (eg, volunteering)

Apart from humans, who else displays altruism?

Animals (when they act to help others at personal cost/risk to themselves)

Which animals display altruism?

Bats, meerkats, dolphins, whales

What are social norms?

Informal/unwritten rules that guide people’s decisions in society

Is vaping rational? (on one hand/on the other)

• on one hand it is rational (said to cause less health effects than smoking)

• on the other hand it is not rational (lack of information about true effects)

So what are 3 types of biases to remember?

• availability bias

• confirmation bias

• anchoring bias

What are some ways to reduce cognitive biases?

Slow down, seek opposing views, question assumptions