Behavioural Economic Theory

Economics is traditionally based on the assumption that consumers always act rationally and with total self-interest, sometimes known as 'homo-economicus'. Behavioural economics challenges this assumption in a number of ways:

• Bounded rationality - Individuals don’t always make purely rational decisions, but try to be as rational as possible within certain limits
• Bounded self control - Individuals struggle to exhibit perfect self control, often trying to put in place frameworks to help
• Heuristics - Rules of thumb or shortcuts which allow problems to be solved and judgements to be made quickly
• Anchoring - When an initial piece of information (even if totally irrelevant) has an effect on subsequent decision making
• Availability bias - too much emphasis is put on certain events or information just because they have been experienced recently or come to mind more readily
• Social norms - Seemingly accepted standards of behaviour, which may be conformed to even when rationality would suggest otherwise
• Altruism - When people act selflessly with concern for the wellbeing of others
• Perceptions of fairness - When what an individual perceives to be fair gets in the way of utility maximising decision making

Each of these aspects of behavioural economic theory can result in consumers not acting as a traditionally rational economic decision maker.

This information can be also be found presented in the form of a handy infographic: