Economics any
What does behavioural economics study?
How psychology affects economic decision-making and why consumers do not always act rationally.
What is bounded rationality?
Consumers cannot always make perfect decisions because they have limited time, information and mental capacity.
What is a cognitive bias?
A systematic error in thinking that affects decision-making.
What is the anchoring effect/bias?
When consumers rely too heavily on the first piece of information they receive.
What is a nudge?
A subtle way to influence behaviour by changing how choices are presented while keeping freedom of choice.
What is utility in traditional economics?
Utility means satisfaction or efficiency gained from consumption.
What are heuristics?
Mental shortcuts consumers use to make decisions more quickly.
What is availability heuristics?
Judging the likelihood of something based on how easily examples come to mind. e.g. shark attacks
What is framing bias?
When decisions are influenced by how information is presented.
Give one example of a shove strategy.
A sugar tax on soft drinks or increasing taxes on cigarettes.
Give one reason why consumers may make irrational decisions according to behavioural economics.
Emotions, habits, peer pressure, limited information or bias.
Give one example of bounded willpower.
Overspending on credit cards, gambling, not saving for retirement or illicit drug taking.
What is herd behaviour?
When individuals copy the actions of a larger group instead of using their own judgement.
What is loss aversion?
People feel losses more strongly than equivalent gains.
What is a smack strategy?
A punishment or penalty used to discourage certain behaviours, such as fines for drink driving.
What does traditional economics assume about consumers?
Traditional economics assumes consumers act rationally using full information to maximise utility.
What is bounded self-interest?
The idea that people care about fairness and helping others rather than only acting selfishly.
What is overconfidence bias?
When people overestimate their knowledge, skills or ability to predict outcomes.
What is present bias?
When consumers focus on short-term pleasure instead of long-term consequences.
Give one example of a government nudge strategy.
Putting fruit at eye level in cafeterias or making organ donation opt-out instead of opt-in.
Distinguish traditional economics from behavioural economics.
Traditional economics assumes consumers act rationally and make decisions using full information to maximise utility, whereas behavioural economics recognises consumers may be influenced by emotions, bias and limited information causing irrational decisions.
Distinguish bounded willpower from bounded self-interest.
Bounded willpower occurs when consumers fail to act in their long-term interests due to temptation or poor self-control, whereas bounded self-interest occurs when consumers care about fairness and helping others instead of acting purely selfishly.
Distinguish between availability heuristics and herd behaviour.
Availability heuristics occurs when consumers make decisions based on information that is easy to remember, whereas herd behaviour occurs when consumers follow the actions of others instead of making independent decisions.
Explain how anchoring may influence a consumer seeing a jacket reduced from $200 to $120.
The original price of $200 becomes the anchor, making the $120 sale price appear like a bargain even if it may still be expensive. Consumers focus on the discount rather than the true value of the product.
Explain why nudging can be an effective government strategy.
Nudging is effective because it guides consumers toward better decisions while still allowing freedom of choice. For example, placing healthy food at eye level encourages healthier eating without banning unhealthy foods.