Behavioural economics

Explain what behavioural economics studies and how its view of people differs from that of the rational decision-maker model.

Explain what a cognitive bias is and why we are "born with" them. Describe a bias you have experienced in a real or imagined purchase (a sale, a fashion trend, a repeated opinion) and how it changed your decision.

A shop displays a jacket with the sign "was $120\ \text{€}$, now $79\ \text{€}$", even though it was never actually sold for $120\ \text{€}$. Identify which psychological bias this sign exploits and explain how it works.

At a street market you ask the price of a lamp and the seller says "fifty, but for you thirty". Explain what the anchoring effect is and how the seller is using it: why does $30\ \text{€}$ seem cheap to you even though the lamp is worth $20\ \text{€}$?

The figure shows the result of a classroom experiment: group $1$ was first shown a backpack marked 'was $60\ \text{€}$' and group $2$ the same backpack marked 'was $30\ \text{€}$'; then everyone was asked to say how much they would pay for it.

1. a) Interpret the results: what effect is observed and what is it called?
2. b) What advice would you give a consumer to protect themselves from this effect?

One yoghurt is advertised as "$90\ \%$ fat-free"; another, identical, would say "contains $10\ \%$ fat". Most people perceive the first as healthier.

1. a) What does this example show about how the frame (framing) in which the same information is presented matters?
2. b) Give an example of framing in economic news ("unemployment falls" versus "employment rises only slightly") and explain what effect it has on the reader's mood.

'Losing $10\ \text{€}$ hurts more than finding them brings joy.' Explain which bias this phrase refers to and describe a situation in your everyday life where this bias changes a decision.

In an experiment, one group is given a mug and then asked for how much they would sell it; another group is asked how much they would pay for the same mug. Sellers ask, on average, twice as much as buyers offer.

1. a) Which behavioral economics bias does the result show? Name it and define it in your own words.

1. b) Which prediction of the classical rational model does this result contradict? Explain the contradiction.

Many people prefer $10\ \text{€}$ today over $12\ \text{€}$ in a week, but prefer $12\ \text{€}$ in $53$ weeks over $10\ \text{€}$ in $52$ weeks, even though the extra wait is the same: one week.

1. a) Explain what inconsistency those two choices show (we prefer immediacy to an exaggerated degree).
2. b) Relate this bias to how hard it is to save or study in advance, and mention one trick to overcome it (prior commitments, automating saving).

Carlos joins a gym in January and must choose between two subscription options:

• Option A (Fixed annual fee): $360\ \text{€}$ in a single non-refundable payment (equivalent to $30\ \text{€}$ per month).

• Option B (Flexible pass): $5\ \text{€}$ per individual session through reloadable passes with no minimum commitment.

Carlos plans to attend $3$ days a week (about $12$ times a month). However, aggregate statistics from the facility show that clients with his profile attend an average of $14$ times a month in January and February, but drop to just $2$ monthly visits from March to December. In addition, many admit that in the spring they go "reluctantly and feeling forced just to avoid throwing money away".

1. a) Calculate the cost per session that Carlos expects to pay based on his forecast under Option A, and compare it with the actual average cost per session he will end up paying if his actual attendance follows the statistical average over the $12$ months.
2. b) Explain how the overconfidence (or planning) bias and the sunk cost fallacy influence Carlos's behavior. Justify what decision a strictly rational consumer should make in March when evaluating whether or not to attend a specific session, distinguishing between sunk cost and opportunity cost.
3. c) A report concludes: "Gyms base their profitability on exploiting the predictable irrationality of their members". Justify why the company prefers to market Option A and predict what would happen to its revenue and capacity limits if the law required it to refund the proportional part of the fee in months without attendance.

You have been with the same mobile phone company for three years even though there are better deals, because switching "feels like too much hassle". Explain what the status quo bias (or default option bias) is and how companies take advantage of it with automatic renewals and bureaucracy for cancelling.

Two almost identical restaurants, one full and one empty: most people choose the full one. Explain what social proof is (we do what others do) and reason when it is a reasonable shortcut and when it can lead us astray.

A music app offers three free months and, after that, automatically charges $9,99\ \text{€}$ a month unless the user cancels.

1. a) Which biases does this strategy take advantage of? Name at least two and explain how they work.
2. b) Do you think it is ethical? Justify your answer.

In the school canteen, fruit is placed at eye level and sweets are placed in a secluded corner, without banning anything. Explain what a 'nudge' is and why this measure is an example of one.

An online shop shows "only $2$ left in stock!" and a fifteen-minute countdown to buy. Explain what emotions those messages trigger (fear of missing the opportunity, urgency) and why they push people to buy without comparing.

The supermarket places the more expensive branded products at eye level, the own-brand products on the lower shelves, and the sweets next to the till.

1. a) Identify which "choice architecture" techniques it uses and what biases they exploit.
2. b) Propose three specific habits for shopping rationally despite those techniques.

The Government wants more young people to save for retirement. One proposal is to automatically enrol them in a savings plan when they start work, with total freedom to opt out whenever they want.

1. a) Explain which bias automatic enrolment takes advantage of and why it is more effective than an information campaign.
2. b) Assess whether it is a legitimate paternalistic measure or an intrusion, defending your position.