Behavioural Economics

Behavioural Economics

Combines economics and psychology to explain why consumers often make irrational decisions influenced by biases, emotions and social factors.

Traditional Economics

Assumes consumers are rational, fully informed and always act to maximise utility and self-interest. You cannot predict human behavior just using math’s, which is what is involved with traditional economics.

Bounded Rationality

Consumers cannot always make fully rational decisions because of limited information, time, cognitive ability and complexity.

Bounded Willpower

The notion that consumers do not possess absolute self-control when confronted and make decisions that are not in their long-term interests.

Bounded Self-Interest

Consumers are social beings and as such care about fairness, and are not always driven by narrow self interest to maximise their personal benefit.

Availability Heuristic

A tendency for consumers to rely on, and use information, that is easiest to remember or access when making decisions.

Herd Behaviour

Consumers follow the actions or choices of others instead of making independent decisions.

Overconfidence Bias

Where consumers often overestimate their ability to make good decisions.

Vividness

Consumers place too much importance on memorable or dramatic information or observations when making decisions.

Status Quo Bias

The tendency for consumers to stick with a existing choices or habits even though the decision to do so may no longer be in their best self-interest

Anchoring Effect

Consumer decisions are heavily influenced by an initial piece of information or “anchor”.

Framing Bias

The way information is presented affects consumer choices.

Loss Aversion

A cognitive bias whereby consumer feel losses more acutely than equivalent gains. They prefer certainty over risk.

Utility

The satisfaction or benefit gained from consuming a good or service.

Homo Economicus

The traditional economic assumption that consumers are perfectly rational and always maximise utility.

Present Bias

Consumers prioritise immediate rewards over long-term benefits.

Expected Value

The probability-weighted average outcome of a decision

Nudge

A subtle and low-cost strategy used to influence behaviour without removing freedom of choice.

Choice Architecture

The way choices are organised or presented to influence decision making.

Soft Paternalism

Government intervention that guides behaviour while still allowing freedom of choice.

Hard Paternalism

Government intervention that restricts or forces behaviour for consumers’ own benefit.

Incentive

A factor that encourages a particular behaviour.

Positive Incentive

A reward or benefit used to encourage behaviour.

Negative Incentive

A penalty or cost used to discourage behaviour.

Sugar Tax

A tax imposed by the government on sugary drinks designed to reduce consumption and address obesity-related negative externalities.

Market Failure

When resources are allocated inefficiently by the market.

Consumer Behaviour

The way consumers make decisions about spending and consumption.

Economic Reasoning

Using economic concepts and logic to explain decisions and outcomes.

Procrastination bias - Businesses

Businesses can use procrastination bias by making subscriptions or memberships sufficiently difficult or time-consuming to cancel.

Present bias - Businesses

Businesses use present bias by encouraging consumers to focus on the immediate benefits of a purchase while ignoring the future costs or financial consequences.

Availability Heuristic - Businesses

Businesses use availability heuristic by making their products or advertisements highly memorable, so consumers are more likely to recall and choose their brand when making decisions.

Status quo bias - businesses

Businesses may exploit this by making existing plans or subscriptions the default option, reducing the likelihood that consumers will switch or cancel.

Bounded Willpower - Businesses

Bounded Willpower - Businesses