Behavioural economics uses psychology to explain why real people do not always choose what the rational model predicts. The guide names four limits.
Four limits on rational choice
Bounded rationality
People try to choose well but lack time, information and brainpower, so they settle for good enough.
Bounded self-control
People know what is best for them and still do not do it: the unused gym pass.
Bounded selfishness
People care about others too: they tip, donate and share.
Imperfect information
People do not know every price or the true quality, so they choose wrongly.
Remember it as: Rationality: cannot work it out. Self-control: knows, still does not do it.
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A bias is a shortcut that pushes a choice away from the best one. The guide names four.
The four biases
| Bias | What happens | Example |
|---|---|---|
| Rule of thumb | You decide by habit or a simple rule, not by comparing. | Always buying the same cereal without checking prices. |
| Anchoring | The first number you see sets what feels cheap or expensive. | "Was €90, now €60" feels like a bargain. |
| Framing | The way a choice is presented changes the decision. | "90% fat-free" sells better than "10% fat". |
| Availability | What comes to mind easily feels more likely. | After a plane crash on the news, people drive instead. |
Also worth knowing: Two more that papers accept: social conformity (doing what others do) and inertia (sticking with what you have).
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Paper 3 asks you to link one limitation to a market outcome. Follow the same three steps every time.
From a limitation to an outcome: gym members
What the model expects
A rational person pays for a gym only if they will use it enough to be worth the fee.
The limitation
Bounded self-control: members know exercise is good for them but put it off.
The outcome
People keep paying for memberships they hardly use: spending does not match the utility they get.
The points to remember
- Name the limitation with its term.
- Say what a rational consumer would have done.
- Explain the outcome in the market: too much, too little, or the wrong choice.
Paper 3 asked this in May 2022, for 4 marks.
With reference to the use of cars in India, explain how one limitation of the assumptions of rational consumer choice might result in the over-use of cars in New Delhi.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | One limitation explained and linked to the over-use of cars |
| 1–2 | The limitation or the link to car use, not both |