2.4 Behavioural Economics

Behavioural Economics
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Warm Up Activity
Think about the last big decision you made? How did you make the
decision? Was it a good decision?
Discuss your answer with a partner
Video Lesson
2.4 - Behavioural Economics

Bananaomics
Homo Economicus
"Standing alone, with money in his hand, ego in his heart, a calculator in his head and nature at his feet.
He hates work, he loves luxury and he knows the price of everything."
Source: " Kate Raworth "
Neoclassical Theory
The assumption that human behaviour is
completely rational and utility-maximising .
Are humans really like this?
Not Exactly
There is a lot of evidence suggesting that humans are not as rational as economic theory and models
suggest.
We are ...
Compassionate
Collaborative Complex
Video
Economic Man vs Humanity: a Puppet Rap Battle
Doughnut Economics Action Lab
Question
Which Phone should I buy? Homo Economicus will:
•Know exactly what she wants from her phone.

•Research the capabilities of all the different phones.
•Understand all the information that is provided.
•Be able to compare all the models.
•Know the prices of every phone on the market.
•Know how long each phone will last.
•Know what she will need from her phone in two years.
•Be able to know which phone makes her happiest.
Discuss
How realistic is each of those expectations? What problems would Homo
Economicus face?
Behavioural Economics
FOUNDED BY RICHARD THALER
Limited Consumer Rationality
Consumer Rationality Limitations
Limitations on consumer rationality contradict the idea that all consumers make rational decisions.
Limitations Include:
• Cognitive Biases
• Bounded Rationality
• Imperfect Information
• Bounded Self-control
• Bounded Selfishness
Cognitive Biases
Thinking patterns that result in limited consumer rationality.
Rule of Thumb - mental shortcuts (heuristics) for decision-making Framing - the way choices are presented as a simple
to help people make a quick, satisfactory, but often not perfect, change of the “frame” that may affect the choice made.
decision to a complex choice.
Example: Asking a child if they would prefer to put up
Example: As a rule of thumb, a company or group of people trust their toys or brush their teeth first.
people with more experience.
Anchoring - when people rely on a piece Availability - recalling examples of similar events from their
of information that is not necessarily relevant as a reference point available memory to make a current decision.
when making a decision
Example: The stock market has recently been going down, so I
am not going to put in any money.
Example: A car salesman has set a high price on a car as a
starting point. When they come down on the price, the consumer
believes they are getting a better deal.
Bounded Rationality
The idea is that consumers and firms are bounded by their knowledge, information, and ability and, therefore, cannot be
ideally rational.
The notion of bounded rationality is connected to the concept of imperfect information. Imperfect information occurs when
some knowledge about a market or transaction is incomplete or unknown.
For Example
When a typical consumer makes a decision about a purchase, they may
not have time to investigate all alternatives and their differences, or they
may not have the cognitive ability to understand the product, financials,
or competitors.
Bounded Self-Control
The idea that individuals, even when they know what they want, may not be able to act in their best
interests
The most common examples of bounded self-control are:

• Procrastination when studying for school or doing work on a business project.
• Addiction to certain substances
• Submitting to various temptations such as dieting or work out habits.
Bounded Selfishness
The idea that people do not always maximize utility or self-interest but also have concern for the well-
being of others.
The most common examples of bounded selfishness are:

• Volunteer Work
• Charity Contributions
• Purchasing ethically made or cruelty-free products despite higher cost
Behavioural Economics in
Action
Choice Architecture
The design of environments is based on the idea that the layout, sequencing, and range of
choices available affect the decisions made by consumers.
Types of Choices
Default Choice - When a choice is made by default, meaning that when given a choice, it is the option that is
selected when one does not do anything.
Example: When checking out on a website, the "subscribe to the newsletter" or "receive promotions" checkbox is normally checked by default.
Restricted Choice - When the choice of a consumer is restricted by the government or other authority.
Example: To travel on an airplane in the US, you must provide a driver's license or passport.
Mandated Choice - Choices made by consumers who are required to state whether or not they wish to take part in
an action. The choice must be made by law.
Example: During COVID-19, to travel to another country, people must have a vaccination passport.
Nudge Theory
Nudges (prompts, hints) are used to influence the choices made by consumers in order to
improve the well-being of people and society.
Nudges and Choice architecture may be used together to guide behaviour.
Examples of Nudges
• Ensuring that healthier food is on display in a school cafeteria
• Placing a fly or a golf hole in men's urinals
• Less expensive items are typically placed very high or low on grocery store shelves, while more expensive items are in the
middle.
Real World Application
Real World Application
Click on the button to read the article (Must be in presentation mode) .
With a partner or group:

• Summarize the point of the article
• Determine what behavioural economic strategies are being implemented.
• Explain your reasoning.
© International Baccalaureate Organization
This work has been developed independently from and is

not endorsed by the International Baccalaureate (IB)
The Rationality of Business
Objectives
Profit Maximizing
A possible objective of firms that involves producing the level of output where profits are
greatest.
The assumption of firms is that they are focused on profit maximization and will make all decisions
based on profitability.
Alternative Objectives
In reality, businesses typically have other objectives besides profit.
Corporate Social Responsibility - When firms aim to create and maintain an ethical and environmentally responsible image
Increasing Market Share and Growth - A strategy to increase power in a market by increasing the amount of overall sales.
Satisficing - A hybrid of the words "satisfy" and "suffice." This occurs when a firm strives to achieve several objectives rather than
simply focusing on one.
Video
3. NURTURE HUMAN NATURE - 3/7 DOUGHNUT ECONOMICS
DOUGHNUT ECONOMICS ACTION LAB
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Behavioral Economics Theory
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Behavioural Economics

This product has been developed independently from and

Discuss your answer with a partner

2.4 - Behavioural Economics

Economic Man vs Humanity: a Puppet Rap Battle

Doughnut Economics Action Lab

•Know exactly what she wants from her phone.

The most common examples of bounded self-control are:

The most common examples of bounded selfishness are:

Nudges and Choice architecture may be used together to guide behaviour.

With a partner or group:

This work has been developed independently from and is

3. NURTURE HUMAN NATURE - 3/7 DOUGHNUT ECONOMICS

DOUGHNUT ECONOMICS ACTION LAB

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