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Behavioural Economics 101

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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

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.

Editor's Notes

  • People are risk averse for winning. But if you shift the reference point to frame wins as breaking losses even they will end up being risk seeking instead
  • People are risk averse for winning. But if you shift the reference point to frame wins as breaking losses even they will end up being risk seeking instead
  • Paying seven dollars for a beer at a resort is annoying but expected; paying that at a bodega is an outrage! This is the essence of transaction utility.
    Suppose Dennis says he would only pay $4 for the beer from the bodega, but $7 from the hotel. His friend Tom could make Dennis happier if he bought the beer at the store for $5 but told Dennis he had bought it from the hotel. Dennis would get to drink his beer thinking the deal was fine.
    Econs think of acquisition utility, but people get their pleasure and incentive to purchase from the transaction utility
  • The existence of budgets can violate another first principle of economics: money is fungible, meaning that it has no labels restricting what it can be spent on.
    Money in a checking account is slightly more out of reach than cash, but if there is money in an account labeled “savings,” people are more reluctant to draw that money down. This can lead to the odd behavior of simultaneously borrowing at a high rate of interest and saving at a low rate,
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