IB Economics 2.4 Behavioural economics

What are the assumptions about traditional consumer behavior?

Consumers are rational, utility maximiziing and are equipped with perfect information

What are the assumptions about consumer behavior according to the human model?

Consumers have:

- Bounded rationality

- Have incomplete information

- Not as intelligent as econs

- Limited ability to carry out complex calculations

- Social beings make decisions in a social context

- Changes taste over time

- May have self control

What are the 2 systems that explain how humans make decisions?

System 1: Fast thinking, sub-conscious system

Sysgtem 2: Slow thinking, controlled system

Define Corporate Social Responsibility (CSR)

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

Explain system 1 (automatic)

- Intuitive

- Gut instinct

- Uncontrolled

- Fast

- Immediate

- Impulsive

Explain system 2 (reflective)

- Deliberiate

- Unemotional

- Controlled

- Slow

- Logical

- Calculating

What limits human behavior in economics?

Bounded rationality, bounded self control, bounded selfishness

Define bounded rationality

A theory that states that consumer rationality is limited by imperfect information and time pressure. Leading to making choices based on satisfaction rather than optimal

Define bounded self control

Economic assumption that choices are consistent over time does not always hold true

Define bounded selfishness

The assumption that utility maximisation does not take into account cooperation or helping each other

Define choice architecture

The way that information is presented influences our choices.

What are the 3 types of choice architecture?

Default choice, restricted choice, mandated choice

Define default choice

Consumers go for the easier option. The default choice involves minimizing the cost of choosing

Define mandated choice

Situations where consumers are required by law to make a choice in advance

Define restricted choice?

Due to bounded rationality consumers may feel it difficult to make effective decisions due to number of choices being to large

What is nudge theory?

A theory that suggest that the choice architecture offered to people can be designed to encourage or nudge them to voluntarily choose the options that is better for them

Define cognitive bias

When individuals divert from rational choice and make decisions on non-economic factors