Behavioral Economics Combining Psychology Economics Traditional Economics Traditional

Behavioral Economics Combining Psychology & Economics

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

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

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

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

How the human brain works

End Day 1

BEHAVIORAL ECONOMICS Re-cap People often make irrational decisions These irrational decisions are often predictable People can be “nudged” to make better decisions (or worse!)

Should Gov’t “nudge” people? 6 Areas to nudge people Ways to “Nudge”

A nudge to eat better…. .

A nudge to save more People tend to procrastinate when it comes to unpleasant tasks, • such as spending cuts or saving for retirement.

Reading: The Truth about Relativity http: //danariely. com/videos/

16% 0% 84% 68% 32%

Ted Video (17 minutes) http: //www. ted. com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions. html

Ted Video Recap Cognitive Limitations vs. Physical Limitations http: //www. ted. com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions. h

Behavioral Economics Recap 1) We can’t compute the value of something alone 2) We make decisions by comparing options • We need context => everything is relative • Our decisions change by what we compare 3) We avoid hard comparisons=> • we seek things that are easy to compare 4) We admit physical limitations but not cognitive limitations 5) Irrational behavior is predictable • It occurs over & over again => we are robotic

Which line is longer?

Which Line is Longer?

System 1 System 2 Ph. D in Psychology Noble Prize in Economics

Solve this problem Bat costs $1. 05 Ball costs $0. 05

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

System 1 vs. System 2 Decision Making https: //www. youtube. com/watch? v=Ji. Tz 2 i 4 VHFw&list=PLv. Fs. G 9 g. YFx. Y_l. Am 8 jnex 08 Lei. GMTi. ZQOW 5 minute summary