Behavioural Economics

Exam revision

Bounded rationality

A consumer's ability to make consistently rational decisions is compromised by the availability of information, the complexity of the decision, time constraints, and cognitive limitations

Heuristics

Mental shortcuts that help consumers make fast and frugal decisions

Satisficers

Consumers who make good enough decisions based on their circumstances, that don't often maximise utility

Utility maximisers

Consumers who make the best possible decision with the choice of goods and services, maximising utility

Bounded willpower

Consumers make impulsive decisions due to urges and appetites

Present bias

Consumers overvalue the present and undervalue the future, e.g., gambling and taking illicit drugs

Bounded self-interest

Consumers care about fairness and are not always driven by narrow self-interest to maximise self-benefit

Availability heuristic

Tendency for consumers to rely on and use information that is most convenient and accessible when making decisions

Herd behaviour

Where consumers follow what other people are doing instead of using their own information or making independent decisions

Overconfidence bias

Consumers often overestimate their ability to make good decisions, leading to regret later on

Vividness

Where consumers place too much weight on a small number of vivid observations when making decisions

Status quo bias

The tendency for consumers to stick with a particular choice even though the decision to do so is no longer in their self-interest

Anchoring/Reference dependence

Where consumers' judgments are affected by some arbitrary starting value (anchor)

Framing bias

How options or proportions are presented

Statistical framing

The use of stats to present options or proportions

Emotional framing

The use of sentiment to appeal to particular human emotions or feelings

Loss aversion

Where consumers feel losses more acutely than equivalent gains