Behavioural Economics | A-Level Economics Notes
These revision notes cover everything you need to know about Behavioural Economics for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is behavioural economics?
Behavioural economics is an area of economics that uses psychology to improve our understanding of decision making.
The traditional assumption is that economic agents are rational and maximise their utility but in reality decisions are often influenced by biases and emotion.
What is bounded rationality?
Bounded rationality is the idea that people do not always make completely rational decisions, due to human limitations.
This leads to satisfactory outcomes rather than optimal outcomes.
What are three causes of bounded rationality?
Bounded rationality is the idea that, in reality, people are unable to make rational decisions. Bounded rationality is caused by
- lack of time
- poor information
- computational weakness
What is bounded self control?
Bounded self-control is the idea that people lack the self-control to make certain choices even if they are optimal.
What are rules of thumb?
Rules of thumb (heuristics) are mental shortcuts that allow people to save time and mental effort when making decisions.
What are two examples of rules of thumb?
Two examples of rules of thumb are
- anchoring
- availability bias
What is anchoring?
Anchoring is when people rely too much on a single piece of information.
This can often be the first piece of information they notice.
What is availability bias?
Availability bias is when people make decisions after being influenced by recent or memorable events from their own life.
This can be misleading because an event might be memorable because it was so rare and this doesn't necessarily mean it is likely to happen again.