Class notes
College aantekeningen Seminar Economics & Psychology of Risk & Time
- Course
- Institution
- Book
A summary of the lectures of this interestin course, including all the formulas
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
SV Gedragseconomie (Prof. Ranoua Bouchouicha)
-
Summary of economic and psychology of social norms and strategic behavior (slides + notes + book)
Seller
Follow
irisveldman1998
Reviews received
Content preview
College 1Behavioral economics: improve economic analysis by incorporating psychologically more realistic
assumptions about human behavior
‘standard’ assumption: don’t always hold
- Rational
- Behave as planned
- Egoistic
Framing important in behavioral economics
Time preferences: preference changes over time, depends on patience
College 2
Excluding probability triangles
Risk averse: prefer EV of prospect over prospect itself (concave function)
Risk seeking: prefer risky prospect over EV of prospect (convex function)
Risk neutral: indifferent between EV& prospect (linear function)
Risk attitudes are determined by how much extra utility people derive from additional outcomes
Independence axiom: if prospect X preferred to prospect Y, then (p:X,(1-p):Z) preferred over (p:Y, (1-
p):Z) for all p & Z
u( x )' '
Absolute risk aversion: AR ( x )=
u(x )'
u ( x) ' '
Relative risk aversion: RR ( x ) = ∗x
u (x) '
r
RR ( x ) =AR ( x )∗x= ∗x=r
x
Certainty equivalent (CE): certain amount that makes indifferent between prospect and certain
amount
1
( )
macht utility function
CE=E U
Rabin’s paradox: risk averse small stakes implies implausible degree big stakes
Allais paradox: overweight certainty= certainty effect
Disappointment theory:
- Outcome >EV: elation
- Outcome<EV: disappointment
Rank-dependent utility (RDU):
- Overrate small probabilities: optimism
- Underrate large probabilities: pessimism
, RDU steps
1. Rank outcomes from best to worst
2. Probability of outcome itself or better outcome (=q)
3. Probability strictly better outcome (=b)
4. Determine decision weight: π i=w ( q ) + w(b)
5. Transform outcomes by utility function and multiply resulting utility with decision weight
Expected utility reigning normative theory of decision making under risk
College 3
Reference dependence: utility of prospect depends on the reference point: U
Important to study role framing= mental accounting
Cumulative prospect theory (CPT) extends RDU by incorporating reference dependence
Probability weighting: different for gains & losses
- Gains: w+(p)
- Losses: w-(p)
- Both assumed to be inverse S-shaped
o Large probabilities underweighted
Pessimism gains
Optimism losses
o Small probabilities overweighted
Optimism gains
Pessimism losses
Diminishing sensitivity:
- Concave gains: risk aversion
- Convex losses: risk seeking
Loss aversion: ratio left derivative & right derivative. Loss hurts more than gains gives you pleasure
Different utility functions for gains, losses and loss aversion
Disposition effect: sell rising assets to quick and keep losing assets too long
Loss aversion only when both gain& loss possible
Endowment effect: value owned goods higher
WTA-WTP disparity:
- WTA: willing to accept not to have
- WTP: willing to pay
- Disparity: higher valuation under WTA than under WTP
Scale compatibility: importance of one aspect of option is enhanced by compatibility with the
decision a person is asked to make
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller irisveldman1998. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.96. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
77988 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now