Unit 2.4: Behavioural Economics (HL)

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What is behavioural economics?

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Behavioural economics considers how psychology affects economic decision-making and offers an alternative approach to classical economics.

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What is rational consumer choice in behavioural economics?

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Behavioural economics offers a different view on consumer decision-making by considering an alternative to the classical economic perspective where people try to maximise their utility from their available income.

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What are biases in decision-making?

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Biases are factors that influence individuals in decision-making situations and take them away from rational judgments, often influenced by heuristics.

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What is anchoring bias?

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Anchoring bias is a reference point in an individual’s mind based on the first piece of information they experience, strongly influencing their decisions.

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What is framing bias?

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Framing bias is how decisions made by individuals are affected by how choices are presented to them.

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What is availability bias?

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Availability bias considers how individual decision-making is affected by information that comes easily into someone's mind, often based on recent events.

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What is bounded rationality?

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Bounded rationality is the theory that individuals make decisions that offer a ‘good enough’ outcome rather than an ‘optimal’ or utility-maximising outcome.

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What is bounded self-control?

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Bounded self-control is when individuals consume beyond the point where they maximise their utility when consuming a good.

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What is bounded selfishness?

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Bounded selfishness means individuals make decisions that benefit other people as well as themselves.

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What is imperfect information?

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Imperfect information occurs when consumers do not understand or know enough about the product they are buying and are unable to make an informed valuation.