MicroeconomicsLesson 2 of 2 in the course Consumer Choices

Behavioral Economics: Loss Aversion, Mental Accounting, and Consumer Choice

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Traditional economic models often describe people as rational decision-makers who use available information to make consistent choices in their own best interests. Behavioral economics asks what this framework may leave out: the way people’s emotions and mental processes shape decisions.

In a traditional economic model, a person is assumed to consider relevant information and choose the option that best serves their interests. This approach is useful for analyzing choices, but it can have difficulty explaining behavior that appears inconsistent, such as reacting differently to similar amounts of money in different circumstances.

All flashcards

Behavioral economics
The study of economic decisions that incorporates psychological insights about context, emotions, and mental processes.
Loss aversion
The tendency for losses to have a stronger emotional impact than equivalent gains.
Nudge
A change in how choices are organized or presented that influences behavior without requiring a particular choice.
Mental accounting
The practice of assigning money to separate mental categories and treating those dollars differently.
Opportunity cost
The value of the next-best alternative forgone when making a choice.

Quiz questions

  1. What makes an arrangement a nudge?Answer: It influences choices through their presentation while leaving alternatives available.
  2. What is mental accounting?Answer: Treating money differently depending on the mental category assigned to it.
  3. A person has $1,000 in savings earning 2% and $1,000 of debt costing 15% annually. If they use the savings to repay the debt, how much does their annual financial position improve, ignoring other effects?Answer: $130
  4. Why might attending college have a lower time-related opportunity cost during a recession for someone who is unemployed?Answer: The person gives up less potential work income while studying.
  5. In standard economic analysis, what does it mean to treat money as fungible?Answer: A dollar has the same value regardless of its source or account.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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