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Summary behavioural economics
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A summary of the UU course 'Behavioural economics'
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Behavioural economics Dinsdag 11.00-12.45 hoorcollege
Donderdag 13.15-15.00 werkcollege 80% aanwezigheid voor effort requirement
Paper 35% feedback deadline 6 oktober 17.00u, eind deadline 16 oktober 23.59u
Endterm 65%
Week 8
Behavioral policy = economic policy informed by behavioral theory, also called libertarian or
light/soft/asymmetric paternalism (=making people’s lifes better).
Nudge agenda = a series of policy proposals by behavioral economists, improving people’s
choices and thereby their well-being at minimal cost without interfering with their freedom.
They want to guide individuals in making the most optimal decisions, but they would never
suggest a dictatorship, someone making decisions for them. Critics say that the nudge
agenda is ineffective and dangerous, as the bureaucrats trying to improve people’s choices,
may be no matter in the decision-making than the people whose choices they are trying to
improve.
Choice architecture = the environment in which choices are made, the way choices are
presented to individuals.
A paradigmatic nudge has several properties:
It aims to help people make better decisions themselves (rather than making
decisions for them).
It imposes little to no costs on those who are exposed to it.
It has little or no effect on the choices of those who already are rational and well-
informed.
The effect on the choices of those who are not yet rational and well-informed is
potentially beneficial for them.
Behavioral welfare economics proposes interventions increasing welfare:
Default options: options that will be selected in case the decision-maker fails to make
an active choice. Because of status-quo bias, people stick with the default even when
it is costless to make an active decision. If someone chooses a default option, more
people will end up with the option that is best for them.
SMarT (Save More Tomorrow) Program: giving workers the option of committing in
advance to allocating a portion of their future raises towards savings, encouraging
them to save more for retirement. This works, as workers may find it easier to save
future salaries instead of money currently in their pocket.
Colling-off periods: a period, after a decision, to think about eventually reversing your
decision. As people in a hot emotional state sometimes make suboptimal decisions,
this can work.
The nudge agenda is enormously influential, by the development of BI (Behavioral-Insights)
teams (=nudge units) across the world, which are organizations with the task of translating
insights from the behavioral sciences into policy proposals. The first was in Great Britain,
followed by 200 others around the world.
,A different approach is the economics of happiness, with as a starting point the fact that
people’s choices do not always reflect a transitive, complete preference ordering. An
important man in this approach is Bentham. Happiness is the main thing that matters in life,
so it is the main way to think about welfare. It is quite an old study, although it is often called
a ‘new science’.
Paradox of happiness = happiness increases with income in any cross-section but does not
appear to be rising over time, even during economic growth.
The economy of happiness has benefitted from the rise of positive psychology, the study of
positive and desirable mental states.
Happiness is:
Positively associated with income, but the marginal happiness of income is
diminishing.
Negatively associated with unemployment.
U-shaped in the circle of life, so young and old people are happier than middle-aged
people.
Positively associated with marriage, but that could be because happier people are
more likely to get married.
Determined by social comparisons.
Not really influenced by disability, as people adapt to it.
Economics of happiness tries to use this to maximize the happiness of all people.
Introduction of the book Nudge by Richard H. Thaler and Cass R. Sunstein
The authors describe the importance of choice architecture, arguing that framing can
significantly impact the decisions people make.
Individuals often make irrational or suboptimal choices due to cognitive biases and
heuristics.
Libertarian paternalism: you can guide people towards better choices without limiting their
freedom to choose.
The introduction sets the stage for a discussion on the intersection of behavioral economics
and public policy, arguing that policymakers and institutions should use insights from
behavioral economics to design choice environments helping individuals making better
decisions.
, Week 7
Two famous games are played with a proposer and a responder:
Ultimatum game: a proposer makes an offer, and the responder accepts the offer or
rejects the offer, leading to an outcome of zero to both the proposer and the
responder. Results show that offers of 40-50% almost never are rejected, and below
20% are rejected half of the time.
Dictator game: a proposer makes an offer, which will happen for sure. The only Nash
equilibrium is where the proposer keeps everything for himself. Evidence shows that
people in this game give less than in the ultimatum game, but still give 10-30%. This is
explained by social preference.
Both games often only look at dollar amounts, but if you don’t look at utility, you don’t even
know which game is played.
Pure altruism: fundamentally care about how well-off the other person is.
Impure altruism: doing ‘good deeds’ makes you feel good about yourself = warm-glow giving
Social preference: people’s utility could be influenced by the level of other’s utility; in which
case you are altruistic. If another’s utility negatively influences it, you are envious.
Rawlsian preferences: trying to maximize the minimum utility = preferences for fairness.
Inequality averse: trying to minimize the difference between the best and worst off.
People tend to reward and punish intentions. You exhibit positive reciprocity when you
reward players with good intentions, and negative reciprocity when punishing players with
bad intentions.
Trust game: a sender and a receiver both get an initial amount. In the first stage, the sender
sends some share of the amount to the receiver (=investment). It is multiplied by some
factor, so the receiver receives more. In the second stage, the receiver returns to the sender
some share of the total allocation.
Evidence shows that senders send on average about half of their initial allocation and that
receivers return a little less than what was invested. A receiver returning something of the
investment back has positive reciprocity.
Public good game: n players are given an initial allocation. All players move simultaneously,
choosing to transfer a share of their allocation to a public account, which is multiplied by
some factor between 1 and n.
So long, sucker game: player 1 must choose whether it is player 2 or player 3 who gets a $0
payoff. This player decides which of the other two players gets the $30 payoff and the $10.
Talk may, even when cheap, promote reciprocity.
Social framing effects: if the prisoner’s dilemma was called the ‘Stock Market Game’, 26%
were willing to cooperate, while in the ‘Community Game’ 45% were, because labels as the
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