Read the introductory content and then try this interactive match up activity on behavioural economics.
Governments and policymakers understand that relying on traditional economic assumptions, such as the rationality assumption, may not be the most effective way to influence behaviours. As a result, the ideas of behavioural economics can be used to develop policies that may be better at influencing the decisions of consumers and firms.
Below, a variety of policy approaches are covered which take into account individuals’ bounded rationality when they make decisions.
Nudge: A technique used by choice architects to change someone’s behaviour in an easy and low-cost way, without reducing the number of choices available.
Default choice: The default choice or default option is one that a consumer “selects” if he or she does nothing.
Restricted choice: Restricting the number of available choices to an individual may make consumers more likely to actually make a decision, resulting in a more efficient outcome. This is because limited time and capability for cognitive processing means individuals often struggle to make decisions when faced with lots of options.
Mandated choice: A situation or scenario in which people must make a decision in advance with respect to whether they wish to participate in a particular action.
Information provision: Improving the access to information to reduce information asymmetries and allow individuals to make more informed, efficient decisions.
Commitment devices: Devices that can be used to commit people to make better (e.g. healthier) decisions. These might involve a financial penalty if you don’t complete a task – invoking loss aversion!
Framing: A technique used by choice architects to present information in a certain way to encourage or discourage an action from being taken. Positive framing focus on positive consequences to encourage certain choices, whilst negative framing focuses on negative consequences.
Social norm priming: Cues that work subconsciously to encourage individuals to behave in certain ways based on societal norms. For example, this may involve informing individuals that there are high recycling rates in their town to encourage them to recycle more due to social pressure.
Now try the 'Match Up Activity' below to test your application of these key phrases to some examples.
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