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Rational Decision Making (Behavioural Economics)

Level:
AS, A-Level, IB, BTEC National
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 14 Apr 2019

Do we always engage in rational behaviour? Are all businesses looking to maximise their profits? Much of introductory economic theory assumes that all "agents" behave rationally. But behavioural economics theories challenge the assumption of pure rationality in our decisions.

Questioning rational behaviour

Economic agents:

  • Have limited capacity to calculate all costs and benefits of a decision
  • Are influenced by their social networks
  • Often act reciprocally rather than in their own pure self interest
  • Lack self control and seek immediate satisfaction
  • They are loss averse (losses matter more than gains)
  • They make different choices in cold & emotional states
  • Often fall back on simple rules of thumb when choosing
  • Satisfice rather than maximise
  • Have a strong default to maintain the status quo
Bounded rationality

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