Written by Tom Furber, an A-Level Economics tutor. | Published 27th September 2026.
Contents
What is behavioural economics?
Economics often makes the traditional assumption that individuals are rational, meaning they make choices that maximise their utility.
Behavioural economics looks at scenarios where this assumption does not hold. In other words, behavioural economics is about understanding why some consumers may not maximise their utility.
Bounded rationality
Bounded rationality means there are limits to the rationality of agents. In practice, agents may not always be rational for several reasons, including:
- Limited computational power of the human mind.
- If there is a complex calculation involved (weighing up the benefits and costs of different actions over a long time period), this could lead consumers to make mistakes.
- Difficulty of the problem faced,
- For instance, choosing between hundreds of alternatives or weighing up complex options.
- Time limits on some decisions.
An example of bounded rationality – chess
Consider a game of chess. In theory, each position may have one best move or a set of best moves.
Even though humans may want to play the best move, their limited ability to plan ahead and the vast number of alternative moves may lead to a wrong move.
Moreover, chess games are often time-limited and time pressure could also lead to a poorer choice of moves.
This kind of thinking could also apply to other agents in different ways. For instance, deciding whether to buy a house or not could be complicated for similar reasons.
In practice, chess players and consumers may use “heuristics”. These are rules of thumb about what generally makes a good chess move or what makes a good purchase. See more on this in the “rules of thumb” section.
Bounded self-control
In practice, there are limits (or boundaries) to how much self-control consumers have.
Consumers may be tempted to consume an unhealthy burger or a cigarette, even if they know it would make them worse off.
Consumers may become addicted to consuming certain goods such as alcohol.
This may lead economists to intervene in ways to restrict choice, removing tempting options off a menu or making them harder to access.
Another way to see this is what economists call “present bias“. Consumers may underweight the future effects of consuming a good. For example, the benefits of the going to the gym may occur in the future from improved health. However, the costs may come today, in the form of the gym membership and the effort required. This may lead to underuse of the gym.
Examples of decision making heuristics
Rules of thumb mean a guide or principle that may not always be accurate.
Examples of rules of thumb include:
- Eating five portions of fruit and vegetables each day.
- Have the same option as a restaurant each time (or conversely, a plan to try a different dish each time you visit).
- Maybe it’s a particular route you follow when driving to work or when going for a walk.
Anchoring is when consumers go off the first piece of information they receive.
- Think of any type of negotiation or bargaining scenario.
- Examples include a worker and firm bargaining over next year’s wage, haggling at a fruit and vegetable market or negotiating a deal on a car.
- The first piece of information, such as the list price of an item, may act as a reference point.
- This can lead to the final price, after negotiation, being close to the reference point.
- For example, suppose a car is on sale for £10,000. A consumer may offer £9000 and consider it a good deal. However the value of the car may actually be less than this.
- In the case of worker bargaining over wages, a reference point for next year’s wage may be the worker’s current wage. Workers may be unwilling to accept a pay cut and instead may be expecting a small percentage rise in the wage to account for inflation.
Availability is when consumers base their decisions on the most recent or memorable event.
- Consider rare events such as global pandemics. This could also apply to any kind of accident or extreme weather events.
- As a result of a pandemic, consumers may believe a global pandemic is more likely to take place, even if the underlying probability of such a pandemic has not changed.
- This could influence consumers’ behaviour. For example more bulk-buying of masks.
Social norms: A consumer may be more likely to do something that others are also doing.
- For example, to fit in with peers, consumers may buy the same phones, clothes, games consoles and so on.
- We could also see this with buying shares in a company. “Herd behaviour” can lead to some company shares being overvalued.
Tutor’s commentary: How to discuss heuristics / biases in essay questions
Suppose you would like to discuss behavioural biases in a 15 mark or 25 mark question. How can you write more about the bias in more detail?
One way is to refer to differences in demand curves.
For example, one demand curve could be under the assumption of rational behaviour.
The other demand curve can show consumer behaviour under the heuristic, in other words how consumers actually behave.
Altruism and perceptions of fairness
Altruism means doing something to benefit others.
- For example, the act of giving a gift may make the giver of the gift better off. This can also apply to charity work for example.
- At first glance, this may deviate from the standard assumption that consumers maximise their utility. By taking into account others’ welfare, consumers may not be maximising their own utility.
- However, there are different types of altruism. Person A could give a gift to person B, because the act of gift-giving makes person A feel good or because they receive some recognition for the gift, rather than purely because they care about another person.
- In this sense, some people could be altruistic for their own self-interest.
- In any case, some economists make person A’s utility dependent on the utility of person B as part of their modelling.
Perceptions of fairness may also influence consumer behaviour.
Consider the dictator game:
- Assume there are two players, player X and player Y.
- Player X gets £100 and can choose how much of it to give to player Y.
- A rational player, interested in maximising their own utility, would not hand over any money and keep the £100.
- However, in experiments, players do hand over some of the money, wanting a fairer distribution.
The ultimatum game is similar to the dictator game, but with one extra stage.
- Namely, person Y can choose to accept or reject X’s offer. If rejected, then both players end up with nothing.
- Suppose for example, X offers £1 out of the £100 to player Y.
- If Y accepts the offer, Y gets £1. Rejecting would mean Y gets £0, so it would be better to accept.
- However in experiments, many Y players reject low offers, seeing them as unfair.
This shows how fairness can influence behaviour.
The insights from these games can apply to several real world examples. These include salary negotiations between businesses and workers or trade deals between countries for example.
Tutor’s commentary: How to evaluate heuristics
These heuristics could be seen as being rational in many cases. For example:
- Rules of thumb could save valuable time and mental effort that could be better spent elsewhere.
- Restaurant queues could be a signal of the quality of the food. Therefore consumers may be more likely to go to busier restaurants to maximise their utility.
- Altruism with the expectation of something in return – reciprocity. For example a rich donor may make a donation so that they can gain social status or meet with people in positions of power.
For one-to-one support on how to improve your evaluation skills for topics such as behavioural economics, please check out my A-Level Economics tutoring.
Practice question on behavioural economic theory
Here is a practice question on the topic of behavioural economic theory. This is suitable for extra practice for students and teachers using the AQA Economics A Level exam board.
It features a short extract, followed by the practice question.
A consumer may choose to accept a £30 pair of shoes if it is discounted from £60, even if the true market value of the pair of shoes is £20.
Question: Explain possible reasons why consumers may not maximise their utility. (15 marks)
Related AQA Economics A Level style resources
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