economics sac 3

traditional economics

assumes that people are rational, self-interested and always try to maximize utility

behavioural economics

combine psychology and economics to understand why people don’t always make rational decisions

behavioural economics vs traditional economics

traditional economics focus on “how people should act.” whereas behavioural economics focus on how “people actually act”

bounded rationality

a consumer’s ability to make rational decisions is compromised by the availability of information, the complexity of the decision, the brain’s cognitive limitations and time constraints

bounded willpower

the idea that consumers do not absolute self-control

bounded self-interest

the idea that consumers care about fairness and are not always driven by self-interest to maximise their personal benefit

status quo bias

this is an emotional bias that outlines an individual’s preference for current state of affairs

• this means that consumers are unlikely to challenge the “status quo” and they will prefer the current state, even if it is more rational to make a decision that results in change

conspicuous consumption

the purchasing pf expensive goods in order to seek “status” or satisfaction from being seen consuming such goods by other people

veblen goods

these are goods that have increase in the quantity demanded as the price increase

present bias

the tendency for a consumer to greater importance on the current rather future benefits when making decisions

overconfidence bias

consumers overestimate their ability to make good decisions