Syllabus points
- Explain why consumers and firms may not behave as rational maximisers.
- Explain bounded rationality, bounded self-control and bounded selfishness.
- Explain choice architecture: framing, nudges, default choices and anchoring.
Why the standard model is challenged
Traditional theory assumes people are fully rational utility maximisers with perfect information. Behavioural economics argues that real decisions are shaped by limited information, limited willpower and concern for others — so people are only *boundedly* rational.
Key definitions
| Term | Exam-ready definition |
|---|---|
| Bounded rationality | People aim to make good decisions but are limited by information and cognitive capacity, so they "satisfice" rather than optimise. |
| Bounded self-control | People often lack the willpower to act on their long-term interests. |
| Bounded selfishness | People care about fairness and others, not only their own gain. |
| Nudge | A small change to how choices are presented that steers behaviour without banning options. |
| Anchoring | Relying too heavily on an initial reference value when deciding. |
Choice architecture
Because presentation affects choices, governments and firms can design the choice environment:
- Framing — the same option described as "90% fat-free" versus "10% fat" changes take-up.
- Default choices — automatically enrolling people (e.g. into a pension) raises participation because inertia keeps them in.
- Nudges — placing fruit at eye level, or reminders, guide behaviour while preserving freedom.
- Anchoring — a high "recommended" price makes a lower price feel cheap.
Behavioural insight: change the *default* or the *framing* and you change behaviour, even when prices and incomes are unchanged.
Worked example
To raise pension saving, a government switches from an "opt-in" to an "opt-out" scheme: workers are enrolled by default but may leave. Participation jumps, because bounded self-control and inertia mean few actively opt out. No one is forced — the default is simply changed.
Common exam mistakes
- Describing behavioural economics as "irrational" behaviour — it is *boundedly* rational.
- Treating nudges as bans; nudges preserve choice.
- Ignoring evaluation: nudges can be weak, manipulable, or raise ethical concerns.
Exam technique
Use behavioural economics as a powerful evaluation tool across the course: it explains why price signals and traditional policies sometimes fail, and why cheap "nudge" interventions can complement taxes and regulation.
Quick revision
- Bounded rationality, bounded self-control, bounded selfishness.
- Choice architecture: framing, defaults, nudges, anchoring.
- Nudges steer without removing choice — cheap but sometimes limited.