Critique of Maximising Behaviour
Traditional economic theory assumes that consumers maximise utility and firms maximise profits — the 'rational economic agent' model. Behavioural economics challenges this assumption, arguing that real decision-making is subject to bounded rationality, bounded self-control, and bounded selfishness. Nudge theory proposes that choice architecture can guide people toward better decisions without removing freedom of choice.
Key Terms & Definitions
Rational Economic Agent
A theoretical construct assuming individuals make decisions that maximise their utility (satisfaction) given their budget constraints.
Bounded Rationality
The idea that cognitive limitations, lack of information, and time constraints prevent fully rational decision-making.
Bounded Self-Control
The tendency for individuals to act against their long-term interests due to present bias and lack of willpower.
Bounded Selfishness
The observation that people are not purely self-interested — they exhibit altruism, fairness, and social preferences.
Nudge Theory
A behavioural economics concept where small changes in the choice environment (choice architecture) guide people toward better decisions without coercion.
Choice Architecture
The design of the environment in which people make choices — including defaults, framing, and the order of options.
Default Option
The pre-selected option in a choice set — people tend to stick with defaults due to inertia (status quo bias).
Present Bias
The tendency to overvalue immediate rewards relative to future rewards, leading to short-sighted decision-making.
IB Diagram
Accurate IB-style diagram — straight lines, labelled axes
IB Diagram
Behavioural Demand — Anchoring Bias (HL)IB standard: straight lines · P on Y-axis · Q on X-axis · labels at end of curves · dashed drop lines to axes