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Behavioural economics - Coggle Diagram

- - - - Damages society
- - - - Usually it is difficult to be able to compare and analyse all choices available
      - Consumer is rarely able to evaluate choices effectively
    - - limited time for decisions
      - very time consuming to analyse all prices and data from all the products
    - - "humans are predictably irrational" - Dan Ariely
      - behaviour deviates from the assumptions of economists in predictable ways
  - - - leisure at expense of negative consequences (hyperbolic discounting)
        
        more likely when there´s a huge range of time between choice and consequence
  - - - studies show that human are generally social, caring and cooperative
      - we cooperate as long as others do (conditional cooperators)
    - - believe behavior is acceptable
- - - - decisions based on true and/or complete information on alternative choices.
    - - how much to consume
      - what to choose
    - - "consumers are aware of when the marginal utility of consuming one more unit is zero"
    - - stable over time
      - transitive
        
        If consumer prefers apples to oranges, and oranges to banana, he must prefer apples to bananas
    - - know what they prefer
      - can compare possible choices
        
        based on costs
        
        based on utility
    - - more utility
  - - - system 2
        
        conscious
        
        reasoned
        
        deliberate
        
        requires mental work
        
        stand by state; called upon
        
        economic models says people are guided by system 2
        
        turns impressions, feelings, etc, into beliefs that guide actions
        
        mistakes from system 1 causes behaviours that seem irrational to System 2 thinking
      - System 1
        
        very active
        
        reacts to environment
        
        with
        
        impressions
        
        intuitions
        
        feelings
        
        tends to do predictable mistakes
        
        automatic, effortles, not controlled thinking
      - Able to make decision making efficient
    - - Rules of thumb
        
        accurate principle
        
        term comes from the ways the thumb has been used for lenght estimates
        
        heuristic
        
        practical method, not particularly rational (mental shortcut)
      - Heuristic
        
        Anchoring heuristic; strategy to make guesses about things one doesn´t know
        
        people may not come with an accurate estimate (anchor not adjusted enough)
        
        people are always affected by anchors, even when there´s no relation
        
        consumer´s willingness and ability to pay is affected by anchoring
        
        e.g. when consumers are in unfamiliar market situation
        
        no idea of how much to pay, so business sets high anchor price
        
        Framing heuristic
        
        decision and thinking affected by the way in which problem is framed
        
        e.g. Disease Problem
        
        participants asked to asses two proposals for how to cure a disease: one framed in % of people that dies; two, percentage of people who would live
        
        people choose second proposal bc expressed in positive terms
        
        irrational response
        
        Availability heuristic
        
        People recall similar events from available memory to answer a event´s probability
        
        events affect thinking, especially risks
        
        the more easy to recall events, more common an event would be
- - - - entrepreneurs are given profits
        
        profits work as an incentive for investment in new businesses
      - profits are used
        
        to fund research
        
        development
        
        to find new market
        
        maintain competiveness
      - Wages can be tied to profit
        
        extra incentive
    - - Corporate social responsibility (CSR)
        
        Firms should and will take responsibility to look after stakeholders
        
        may involve higher short-term production costs
        
        higher wages
        
        environmental friendly equipment
        
        avoiding pollution
        
        spending in research and development
        
        circular production
        
        keep materials in use for as long as possible, contrasts "we take-make-waste"
      - Growth and market share
        
        large profit in the long run
        
        market share: percentage of a market that a firm control
        
        quickly growth
        
        able to gain major market share
        
        monopoly
        
        by merging with other firms
        
        aggressive pricing strategies
        
        other smaller firms can go out of business
        
        process may result in lower profits in the short run
        
        greater profits in the long run
        
        large revenues
        
        2 more items...
        
        attractive to investors
      - Satisficing
        
        satisfying policies that don´t offer maximisation (low profits)
        
        e.g. Owner of a small business wants to keep work-life balance
        
        less than required work to maximise profits
- - - - Physical positioning of product
      - language used to present choice
      - sequencing of various choise and range of offerings
    - - governments
      - businesses
      - other organizations
    - - an option is automatically set for consumers
      - option can be changed if its wished
      - Purpose
        
        no clear preference/ did use System 2, so choice is made for them
        
        choice should maximise utility
      - no agreement signed
    - - consumer choices are limited
        
        reducing the number of options can help consumers make better decisions
    - - better chance of consumers making decisions
      - organization forces consumer to make decision at a defined point in time
        
        reduces chance of procrastination on choice
        
        weighing uo options that could have been put off into the future
    - - how choice architecture can be crafted to make use of the cognitive biases
        
        better choices in lives
      - arrangement of choice architecture that alters people´s choices
        
        w/o limititing choices
        
        w/o changing incentives