1. AQA 1.2: Individual Economic Decision Making
1.2.3 Aspects of behavioural economic theory
How many African countries are members of the United Nations?
Is it more or less than 105?
What figure do you think?
Write down your answer individually.
AQA 1.2: Individual Economic Decision Making

2. 1.2.3 What you need to know
Bounded rationality and bounded self-control
Biases in decision making: rules of thumb, anchoring, availability and social norms
The importance of altruism and perceptions of fairness
Students should appreciate that behavioural economists question the assumption of traditional economic theory that individuals are rational decision makers who endeavour to maximise their utility. They should understand some of the reasons why an individual’s economic decisions may be biased

3. Behavioural economics
Behavioural economics looks at the psychological reasons behind why people make decisions
Bounded rationality suggests that when people make decisions they are limited by:
The information available to them
Their intellectual limitations
The time available to make decisions
Bounded self-control suggests that individuals have limited control over their decision-making and therefore make decisions that are not in their best interests
By recognising that people have limited control when making decisions we can adopt strategies that can help individuals improve their own welfare and therefore the welfare of society as a whole
Daniel Kahneman on behavioural economics.

4. Consideration of the influence of other people‘s behaviour
Social norms are the rules of behaviour that are considered acceptable within a social group
People who don’t follow social norms are often not accepted within the group
Therefore, individuals will attempt to ‘fit in’ with the crowd by following social norms
This might even mean that consumption of a good or service leads to marginal disutility
Nudge theory is an attempt to manipulate social norms through positive reinforcement in a non-coercive manner
How are universities using nudge theory to change social norms?
What is meant by the term marginal disutility?
To what extent are your decisions influenced by other people?

5. Consumer weakness at computation.
Often, people struggle with day to day computation, the ability to make correct decisions based on the information available to them
Individuals make judgements based on mental short cuts when uncertainty exists and when it is too difficult to compute the available information
An heuristic is a simple rule of thumb (a general rule followed by an economic agent when making decisions) that individuals use to make a judgement when undertaking decision-making
They normally focus on one aspect of a problem rather than looking at all the information available
Therefore, decision-making is flawed

6. Consumer weakness at computation
Tversky and Kahneman named three heuristics that can lead to irrational behaviour by individuals:
Availability – making judgements based on, particularly vivid, events we can remember rather than the information at hand e.g. we might fear flying due to excessive media coverage but the likelihood of a plane crash is negligible
Representativeness – categorising based on past information rather than on the information at hand e.g. a gambler might make a bet because they believe that they are in a run of good luck
Anchoring and adjustment – using an arbitrary starting number to estimate a different number. The starting number is the anchor and we tend to adjust an answer to be close to the anchor e.g. Is the population of Brazil higher or lower than 100m? What is the population of Brazil? Often people will give a figure close to 100m
Daniel Kahneman: We are beautiful devices.
What is the population of Brazil?

7. The importance of altruism and perceptions of fairness
Traditional economic theory is based on the fact that people are self-interested and their behaviour reflects this
Altruism occurs when economic agents help others at their own expense and believe in fairness in society
These contradictory ideas can be used to better understand economic models
Often, people give to others in order to feel good about themselves. Thus there is an element of self-interest
However, we also see selfless acts where people do not consider their own interests and act to benefit a group
This is often seen in the case of family but can also be seen within the workplace and society as a whole
This biases economic agents decision making, meaning it is more difficult to make assumptions about rationality

8. Self evaluate
Analyse whether you have been influenced by any of these ?
Social norms
Nudge theory
Computation
Availability
Representativeness
Anchoring
Altruism