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Behavioural Economics 101

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Introductions to Behavioural Economics based on my readings of Misbehaving and Thinking Fast & Slow

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Behavioural Economics 101

  1. 1. Misbehaving As well as, Thinking Fast and Slow Tarek Amr
  2. 2. Definitions Utility: Utility is an economic term introduced by Daniel Bernoulli referring to the total satisfaction received from consuming a good or service. Surplus: Consumer surplus occurs when the price for a product or service is lower than the highest price the consumer would pay. Producer surplus occurs when goods are sold at a higher price than the lowest price the producer was willing to sell for.
  3. 3. Probability = 30% Probability = 20% $ 900 $ 800 Whichonewillyouchoose?
  4. 4. Probability = 100% Probability = 50% $ 500 $ 1200 Whichonewillyouchoose?
  5. 5. Prospect Theory (By Daniel Kahneman & Amos Tversky) Diminishing Returns & Risk Aversion
  6. 6. Probability Weighting (By Daniel Kahneman & Amos Tversky) Think of people as if they are uncalibrated classifiers
  7. 7. Risk (Aversion vs Seeking) Probability = 100% Probability = 50% $ 500 $ 1200
  8. 8. Risk (Aversion vs Seeking) Probability = 100% Probability = 50% $ 500 $ 1200 People are risk-averse for gains, but risk-seeking for losses.
  9. 9. Endowment effect People valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned.
  10. 10. Endowment effect People valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned. Seller Buyer
  11. 11. Market with known values We can buy your token for: $ 1 $ 2 $ 3 $ 4
  12. 12. Market with known values We can buy your token for: $ 1 $ 2 $ 3 $ 4 Buy token (N/4 Transactions)
  13. 13. Market with unknown values We is the value of the mug: ?? ?? ?? ?? Much less transactions
  14. 14. Seller Buyer Buyer Utility Reservation Price Winning Bid SellerSurplus BuyerSurplus
  15. 15. Definitions Acquisition Utility (?): Acquisition utility is based on standard economic theory and is equivalent to what economists call “consumer surplus”. Transaction Utility (?):‍ It is defined as the difference between the price actually paid for the object and the price someone would normally expect to pay, the reference price.
  16. 16. Problem with assigned budgets
  17. 17. Game: of mean⅔ Guess a number from 0 to 100 with the goal of making your guess as close as possible to two-thirds of the average guess of all those participating in the contest.

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