Behavioural Economics
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.
Normally in economics we assume all agents are acting rationally
Rational Decision Making
A decision that an allows an economic agent to maximise their objective, by setting marginal benefit of an action to its marginal cost.
Factors that rational agents consider
- Value
- Need
- Satisfaction - Marginal Utility
- Price
- Comparison to substitutes
Anchoring
A cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered (the anchor). Individuals use an initial piece of information when making subsequent judgements.
Social Norms
Forms or patterns of behaviour considered acceptable by a society or a group within that society.
| Regular Economics | Behavioural Economics |
|---|---|
| Rational | Automatic |
| Controlled | Uncontrolled |
| Effortful | Effortless |
| Deductive | Intuitive |
| Slow thinking | Fast thinking |
Restricted Choice
Offering a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many decisions, people may make a poor decision / no decision.