Behavioral Economics Combining Psychology Economics Rational Behavior Economics

Behavioral Economics Combining Psychology & Economics

Rational Behavior Economics Traditional economics is based on the assumption that people make rational decisions where the MB ≥ MC . . .

Irrational Behavior? Lesson: . We Discount Negative Outcomes We overestimate Positive Outcomes

Behavioral Economics • Study of the social, cognitive & emotional factors which influence economic decisions making • Uses psychological experiments to test human behavior

Intro. Reading 4 min. Rational Behavior Video: https: //www. youtube. com/watch? v=wp. MLYh-UIs. A

Relativity 16% 0% 84% 68% 32%

Lesson: The “decoy” will often determine which option you pick! We rarely choose things in absolute terms We need to compare choices (things are relative!) We avoid hard comparisons We fear LOSS more than we value GAIN called loss aversion)

Ted Video (17 minutes) What we need to make decisions http: //www. ted. com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions. html

Behavioral Economics Recap 1) We admit physical limitations but not cognitive limitations • Our eyes, brain (cognition) , memory have serious limitations 2) Our irrational decisions are often predictable & repeatable 3) We can’t compute the value of something alone • • We make decisions by comparing options: Our decisions change by what we compare (everything is relative!) 4) We avoid hard comparisons: • • we seek things that are easy to compare “default” option should be to join (organ donation, 401 -K plan)

Cognitive Limitations vs. We don’t accept Physical Limitations We accept overtime

Which line is longer?

Got Awareness? • http: //www. youtube. com/watch? v=Ahg 6 qcgoay 4