Behavioural Econommics | 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 are the 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 act in a way that they know is in their own best interest.
What is rule of thumb?
Bounded rationality leads to the idea that people rely on rules of thumb to make decisions. Rules of thumb (heuristics) refer to mental shortcuts which allow people to save time and mental effort when making decisions, however this can also lead to imperfect outcomes, and biases.
What is anchoring?
Anchoring is a type of bias and happens when people rely too much on a single piece of information, frequently the first piece of information, when making decisions.
For example, people may go with the first price they see in the first shop they see instead of looking around and comparing.
What is availability bias?
Availability bias is when people make judgements about the probability of future events based on their own memories of similar events. The recent occurrence of a particular event, and its consequences, is not necessarily a good guide to the probability of such events occurring in the future.
For example, a memory that it rained the last time you went somewhere should not affect the forecast there in the future.
What are social norms?
Social norms are the views that are held by the people around us, and the idea that this influences our decision making.
What is altruism?
Altruism is the idea that self-interest is not always the primary motive for economic activity. For example, a business may prefer to pay their staff well despite the ability to pay them the market equilibrium.
What is framing?
Framing is the idea that people are affected by the way a choice is presented or worded to them. This means that governments and organisations are increasingly relying on choice architecture as a way to improve outcomes in society.
What is choice architecture?
Choice architecture is the idea that choices can be influenced by the way options are presented to someone. Governments can use choice architecture in an attempt to achieve what they perceive to be a more socially desirable outcome.
Choice architecture includes the use of default choices, mandated choices, restricted choices, and nudges.
Default choices are choices that are automatically made unless someone opts out.
Mandated choices are choices that must be made and cannot be ignored.
Restricted choices reduce the number of available options which makes it easier for agents to make an informed decision.
What are nudges?
Nudges are methods used to alter people’s behaviour without removing their freedom of choice.
Banning unhealthy food would not be a nudge. An example of a nudge would be placing healthy food at the front of a shop and placing sugary energy drinks at the back of the shop.
Summary questions
- What are the three causes of bounded rationality?
- What is bounded self control?
- What is rule of thumb?
- What is anchoring?
- What is availability bias?
- What are social norms?
- What is altruism?
- What is framing?
- What is choice architecture?
- What are nudges?
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