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: I NDIVIDUAL E CONOMIC D ECISION
M AKING
1.2.3 W HAT
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
B EHAVIOURAL
Daniel Kahneman
on behavioural
economics.
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
C ONSIDERATION OF THE INFLUENCE OF OTHER
PEOPLE ‘ S BEHAVIOUR
How are universities
using nudge theory
to change social
norms?
What is meant by
the term marginal
disutility?

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
To what extent are your decisions
influenced by other people?
C ONSUMER
.
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
.
C ONSUMER

Daniel Kahneman:
We are beautiful
devices.
What is the
population of
Brazil?
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
T HE IMPORTANCE OF ALTRUISM AND
PERCEPTIONS OF FAIRNESS







Traditional economic theory is based on the fact that people are selfinterested 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
S ELF
EVALUATE
Analyse whether you have been influenced by any of these ?
Social norms
Nudge theory
Computation
Availability
Representativeness
Anchoring
Altruism