BEHAVIORAL ECONOMICS ch 8 COMPARING BEHAVIORAL ECONOMICS WITH
BEHAVIORAL ECONOMICS ch 8
COMPARING BEHAVIORAL ECONOMICS WITH NEOCLASSICAL ECONOMICS Neoclassical Economics People have stable preferences that aren’t affected by context People are eager and accurate calculating machines People are good planners who possess plenty of willpower People are almost entirely selfish and self-interested LO 1 8 -2
COMPARING BEHAVIORAL ECONOMICS WITH NEOCLASSICAL ECONOMICS Behavioral Economics Focusing on the mental process behind decisions Improving outcomes by improving decision-making LO 1 8 -3
Heuristics are energy savers Riding a bicycle with steering heuristics Guesstimating ranks with the recognition heuristics The implications of hardwired heuristics OUR EFFICIENT, ERROR-PRONE BRAINS LO 2 8 -4
Brain Modularity System 1 and System 2 Cognitive Biases Confirmation Bias Overconfidence Effect Availability Heuristic Planning Fallacy Framing Effects OUR EFFICIENT, ERROR-PRONE BRAINS LO 2 8 -5
People judge good things and bad things in relative terms, as gains and losses, or status quo People experience both diminishing marginal utility for gains as well as diminishing marginal disutility for losses People experience loss aversion PROSPECT THEORY LO 3 8 -6
Losses and shrinking packages Framing effects and advertising Anchoring and credit card bills Mental accounting and overpriced warranties The endowment effect and market transactions Status quo bias PROSPECT THEORY LO 3 8 -7
Myopia Time inconsistency Self-control problems MYOPIA AND TIME INCONSISTENCY LO 4 8 -8
Fighting self-control problems with pre-commitments Hiding the alarm clock Automatic Salary Early payroll deductions smoothing withdrawal penalties Weight-loss competitions MYOPIA AND TIME INCONSISTENCY LO 4 8 -9
Field evidence for fairness Giving to charity Obeying Fixing the law prices Purchasing the “Fair-Trade” products FAIRNESS AND SELF-INTEREST LO 5 8 -10
Experimental evidence for fairness The dictator game The ultimate game The rules How players Behave Why the threat of rejection increases cooperation Implications for market efficiency FAIRNESS AND SELF-INTEREST LO 5 8 -11
NUDGING PEOPLE TOWARD BETTER DECISIONS Behavioral economics sought to explain a number of behaviors Used to “nudge” people towards choices that are better for themselves and others 8 -12
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