2.4 Critique of maximising behaviour of consumers and producers (HL only)

Rational consumer choice (HL only)

What is rationality?

Watch the video below and answer the following questions?

• What is the assumption of consumer behaviour? What is their overall objective?

• How are they able to achieve it?What do we mean by ranking your preferences? Consistent preferences? Perfect information?

What is irrational behaviour and why does it happen?

• Biases—rule of thumb, anchoring and framing, availability.

Rule of thumb or heuristics is an approach to problem solving that employs a practical method that is not guaranteed to be optimal, perfect, or rational, but is nevertheless sufficient for reaching an immediate, short-term goal or approximation. Where finding an optimal solution is impossible or impractical, heuristic methods can be used to speed up the process of finding a satisfactory solution. Sully used heuristics!

Anchoring:

We are often overly influenced by the first thing (maybe price) we see. "sales prices" make us think we are getting a bargain when we aren't

Behavioural economics in action (HL only)

Framing:

How something is explained, determines how we see things. 80% recovery rate v 20% death rate..... 

Availability bias: recent events etc are overestimated. People afraid of flying after a crash.. An under-estimation of events that may occur later in our future-such as retirement.

Bounded rationality