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Rational Decision Making

This document discusses rational decision making and behavioral economics. It introduces the concepts of marginal benefit and marginal cost in rational decision making. Behavioral economics questions whether people make marginal decisions for every choice. The document then discusses behavioral nudges as alternatives to standard government interventions in markets. It provides examples of behavioral nudges such as eliminating choices, financial disincentives, providing information, changing defaults, and using social norms to influence choices.

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Charles Boyle
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17 views

Rational Decision Making

This document discusses rational decision making and behavioral economics. It introduces the concepts of marginal benefit and marginal cost in rational decision making. Behavioral economics questions whether people make marginal decisions for every choice. The document then discusses behavioral nudges as alternatives to standard government interventions in markets. It provides examples of behavioral nudges such as eliminating choices, financial disincentives, providing information, changing defaults, and using social norms to influence choices.

Uploaded by

Charles Boyle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 6- Rational Decision Making

Learning Objective
Questioning Rational Behavior – Bounded
Rationality
Decision at the Margin
Marginal in economics means having a little more or a little less of something

•Marginal benefit – is the


change in total private
benefit from one extra unit
•Marginal cost – is the
change in total private cost
from one extra unit
Rational consumers and
producers are assumed to
calculate the marginal cost
and benefit of each
decision.

Behavioral economics questions and challenges the use of marginal decisions or


every choice.
alternatives to using standard government
interventions in markets to influence the choices that
people make in their everyday lives.

Eliminating or restricting choices

• Banning smoking in public places and in cars where children are


passengers
• Banning takeaways close to schools
Behavioral • Laws on using tanning salons - e.g. a ban on under 18s using
them

nudges Financial disincentives to take a particular course of


action (standard intervention in the price
mechanism)
• Higher taxes on cigarettes / fuel / congestion charge
• Vouchers for healthy behaviour choices
• Mobile phone apps that penalise people for not taking a course
of action (based on the idea of loss aversion)
• Positive gameification - using games with rewards that respond
to good behaviour
• People more likely to change their behaviour if they get
immediate and relevant feedback on the benefits of doing so
Nudging behaviour by provision of information

• Calorie counts on menus

Changes to environment / changes to the default choice

• This is known as choice architecture - choice architecture" is the way choices


are presented - e.g. the layout of supermarkets
• Designing buildings with fewer lifts
• Chunking - supplying prescription drugs in different colours to encourage
people to complete their course of treatment

Behavioral
• Making salad the default side option instead of chips
• Changing the default options on a web site or a mobile phone

nudges Using social norms

• Social norms are implicit or explicit behavioral expectations or rules within a


society or group of people
• Providing information about what others are doing e.g. timely, personalised
messages about other people paying their taxes, donating their organs
• Use the power of social norms to demonstrate that most other people are
behaving differently i.e in a more socially acceptable way for example, better
behaviour on public transport (see this example from Singapore)
• Humans are social beings whose behaviour is often strongly influenced and
shaped by the behaviour of others especially in close-knit social networks /
smaller communities. Behavioural economics does not assume that humans
make choices in isolation, or to serve their own interest
Framing Effect
Exam Style Questions

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