Concepts of accesibilty

1. BEHAVIORAL ECONOMICS
REVIEW
Ernesto Reuben

2. System 1 (Intuition)
 Fast
 Parallel
 Automatic
 Effortless
 Associative
 Slow-learning
 Emotional
System 2 (Reasoning)
 Slow
 Serial
 Controlled
 Effortful
 Rule-governed (deductive)
 Flexible
 Neutral
TWO COGNITIVE SYSTEMS
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3. Accessibility
 System 1 judgements are spontaneous
but the accessibility of
specific properties/interpretations
depends on context and
saliency
Reference-dependence
 System 1 judgements depend on the
contrast with their context
IMPORTANT CONCEPTS TO UNDERSTAND SYSTEM 1
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4. HOW DO WE FORM BELIEFS?
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New information
Cultural transmission
Own experience
Bears are
dangerous!
Prior belief
Prior belief
Stereotypes
 Accessibility
 Implicit and explicit
Updating process
Implicit
associations
Affective response ‒
Posterior belief
Explicit belief updating
‒ Bayes’ rule
‒ Conservatism
‒ Base-rate neglect

5.  Stereotypes are associations between
individuals/objects of a group and a
set of characteristics.
 Implicit associations are activated
automatically and might influence
people without their awareness
 Measures of implicit associations like the IAT are not very precise but they are
better than explicit measures for sensitive topics (e.g., to capture racism)
 Implicit associations are more likely to measure cultural rather than individual
attitudes
STEREOTYPES
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6.  Stereotypes can become self-fulfilling through various channels
 Costly performance-enhancing investments
 When anticipating discrimination due to a
negative stereotype about the performance
of one’s group reduces individual incentives
to invest in improving performance,
confirming the stereotype
SELF-FULLING STEREOTYPES
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7. BELIEF UPDATING
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posterior belief = new evidence × prior belief

8. BELIEF UPDATING
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Bayes’ rule
P(A|B) =
P(B|A)
P(B|A)P(A) + P(B|¬A) P(¬A)
P(A)

9. Base-rate neglect / representativeness
 Too much weight on new information
 New information is consistent with
important values/beliefs
 New information is salient and/or strong
(even if inaccurate)
 New information produces affect
Conservativism
 Too little weight on new information
 New information is inconsistent with
important values/beliefs
 New information is not salient and/or
weak (even if accurate)
 New information lacks affect
BELIEF UPDATING
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posterior belief =
new evidence× prior belief
posterior belief =
new evidence × prior belief

10. Overestimation
Overprecision
OVERCONFIDENCE
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Overplacement
Actual
distribution
Expected
distribution
Actual
performance in
the population
Your
performance
Expected
performance in
the population
Your
performance
Your
expected
performance

11. COMPETITIVENESS
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[adjective] a desire and/or ability to perform in competitions
Time difference when competing  faster
–0.050
+0.058
+0.201
+0.135
vs.
vs.
vs.
vs.
vs.
vs.
+0.016
+0.016
40%
66%
60%
34%
0%
10%
20%
30%
40%
50%
60%
70%
Men Women
Percent
Piece-rate Tournament

12. DECISIONS UNDER RISK AND UNCERTAINTY
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Expected utility
theory
 Decisions are made
based on utility
levels and objective
probabilities
 Incompatible with
observed behavior
 e.g., small-stake
risk aversion
U
$
U($)
The degree of risk
aversion depends on
the concavity of the
utility function

13. DECISIONS UNDER RISK AND UNCERTAINTY
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Prospect theory
 Descriptive model
of risky choice
characterized by a
value function
and a probability
weighing function
V
$
The value function
Risk aversion for gains
Risk loving for losses
Steeper slope for
losses than for gains
Explains:
 Loss aversion
 Endowment effect

14. DECISIONS UNDER RISK AND UNCERTAINTY
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Prospect theory
 Descriptive model
of risky choice
characterized by a
value function
and a probability
weighing function
1
1
0
½
½
Actual probability: p
Weighted
probability:
w(p)
The probability
weighing function
 Underestimation of
high probabilities
 Overestimation of
low probabilities

15. Reference-dependent risk attitudes
 Reference point for gains/loses corresponds to an individual’s expectations
DECISIONS UNDER RISK AND UNCERTAINTY
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 Mimics prospect theory for surprising events
 A silver medal when expecting a gold feels like a loss and a bronze medal when expecting no medal feels like a gain
 But makes different predictions for expected events
 Getting a gold medal when expecting a gold is neither a gain nor a loss

16. t
D
1
0
Exponential discounting
 The discount rate is approximately
1 – δ for all time periods
 Dynamically consistent
 Preferences do not change over time
unless new information arrives
INTERTEMPORAL CHOICE
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𝑈𝑈0 = 𝑢𝑢0 + 𝛿𝛿𝑢𝑢1 + 𝛿𝛿2𝑢𝑢2 + ⋯ + 𝛿𝛿𝑇𝑇𝑢𝑢𝑇𝑇
D(t)=δt

17. Present-biased preferences: quasi-hyperbolic discounting
 Weighs more the present if β < 1  impatient for choices that involve the
present but patient for choices
that involve only the future
 The discount rate is approximately
1 – βδ if t = 0 and 1 – δ if t > 0
 Implies
 Non-stationarity
 Time inconsistency
 Demand for commitment
t
D
0
1
INTERTEMPORAL CHOICE
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𝑈𝑈0 = 𝑢𝑢0 + 𝛽𝛽𝛽𝛽𝑢𝑢1 + 𝛽𝛽𝛿𝛿2𝑢𝑢2 + ⋯ + 𝛽𝛽𝛿𝛿𝑇𝑇𝑢𝑢𝑇𝑇
β = ½
β = 1
β = ¾

18.  If benefits are in the future but costs are in the present, present-biased
individuals want to postpone paying the costs
Naïve individuals
 Are present-biased β < 1 and incorrectly believe that
they will not be present-biased in the future βe = 1
 Tend to always procrastinate
 Sophisticated individuals
 Are present-biased β < 1 and correctly anticipate that they will be present-
biased in the future βe = β
 Might not procrastinate as much depending on the distribution of costs and
benefits over time
PROCRASTINATION AND PRESENT-BIASED PREFERENCES
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19. Reduce immediate costs
 Buy a gym membership (reduce daily cost of going)
 Transportation subsidies
Increase immediate rewards
 Exercise with a friend
 Pay people to exercise
Commitment  reduce your future choices
 Remove ice-cream from your house
 Impose yourself binding deadlines
WHAT CAN YOU DO TO SELF-REGULATE?

20. Altruism
∂Ui/∂π¬i > 0
Derive utility from the payoff
of others
Envy / Spite
∂Ui/∂π¬i < 0
Derive utility from a higher
payoff compared to others
SOCIAL PREFERENCES
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Outcome-based models: Ui = Ui(πi, π¬i)
Inequity aversion
∂Ui/∂π¬i > 0 if πi > π¬i
∂Ui/∂π¬i < 0 if πi < π¬i
Dislike differences between
my income and the income
of others
Quasi-maximin preferences
∂Ui/∂π¬i > 0
∂Ui/∂π¬i >> 0 if π¬i = min{π1,…,πN}
People care about the sum of all
payoffs (efficiency) and the payoff
of the poorest

21. Moral judgements are influenced
by System 1
 They are often immediate and
susceptible to emotions
Five foundations of moral values
 Care/Harm
 Fairness/Cheating
 Loyalty/Betrayal
 Authority/Subversion
 Purity/Degradation
MORAL VALUES
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22. Social norms
 A preference to comply with the expectations of
others and to punish intentional deviations from
the norm
 Conditional on expecting that
 Sufficiently many others comply with the social
norm  empirical expectations
 Sufficiently many others think you should comply
with the norm  normative expectations
 Social norms can be misperceived
 pluralistic ignorance
SOCIAL NORMS
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23. Nudging [to push someone gently]
 Policies that help you improve your behavior without
(greatly) limiting your choices  libertarian paternalism
 Good tool to address problems of internalities (conflict
between systems 1 and 2)
 Decisions with delayed consequences, that are complex or
overwhelming, and for which there is little scope to learn
 Common tools for nudging include:
 Changing the choice and salience of alternatives, deciding
the timing of choices and deadlines, decision aids, default
options, and using information about social norms
NUDGES
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24. Automatic enrollment
 Optimal when:
 Preferences are similar  a default is
attractive to many
 Little procrastination  it is not too costly to
change for those with different preferences
Active choice
 Optimal when:
 Preferences are different  a default is
attractive to few
 Lots of procrastination  it is costly to change for
those with different preferences
GOOD NUDGING
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Problem
Identify specific cause
Welfare analysis

25. Theoretical benchmarks
 Use a behavioral theory and a well-defined
welfare criterion to evaluate the optimal policy
 What if the model is wrong? How do we know what
is considered welfare-relevant?
Measure social welfare
 Use direct or indirect measures of social welfare
(e.g., subjective well-being or willingness to pay)
 Issues of reliability and comparability of subjective
measures. Incentivized measures assume individuals
are sophisticated enough.
APPROACHES TO SOCIAL WELFARE
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26. TWO COGNITIVE SYSTEMS
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27. I value for feedback, please fill out the
course evaluations
YOUR EVALUATIONS
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