College aantekeningen
EC345: Weeks 1-5 notes
- Vak
- Instelling
Leture, seminar and reading notes for weeks 1-5 of behavioural economics
[Meer zien]Voorbeeld 4 van de 36 pagina's
Voorbeeld 4 van de 36 pagina's
In winkelwagen
In winkelwagen
gesponsord bericht van onze partner
Verkoper
Volgen
bethwalton
Voorbeeld van de inhoud
W1: IntroductionWhat is behavioural economics?
● Economic analysis that applies psychological insights to behaviour to explain
economic decision making
○ Psychological underpinnings of economic analysis
● Objective: modify, supplement and enrich economic theory by adding insights
from psychology
○ Starting point: standard economic theory
○ Builds on economic theory to introduce concepts such as altruism,
envy, time-inconsistency
History
● Economics and psychology were not separate
● Adam Smith: Theory of Moral Sentiments “we suffer more… when we fall
from a better to a worse situation, than we enjoy when we rise from
a worse to a better” → loss aversion
● Jeremy Bentham: Principle of Utility → psychological underpinnings of
utility
● Francis Edgeworth: Theory of Mathematical Physics → envy in utility
● Neoclassical revolution separated psychology and economics
○ Economics is a natural (not social) science
○ Psychology has unstable foundations
● Rejection of the hedonistic assumptions of Benthamite Utility functions
● Neoclassical economists removed psychology from economics
● Criticism of the neoclassical economy in the early part of the 20th century
● Irving Fisher and Vilfredo Pareto speculated about how people feel and think
about economic choices
● Keynes appealed to psychological insights
● Katona, Leibenstein, Scitovsky and Simon looked at psychological measures
and bounds on rationality
○ Did not fundamentally alter the direction of economics at the time
● What changed → acceptance of models like expected and discounted utility
○ These normative and descriptive models highlighted their limitations
and drew criticism
● Allais (1953) looked at the anomalous implications of expected and subjective
utility
, ○ Strotz (1955) questioned experimental discounting
● Kahneman and Tversky (1979) developed a theory for simple lotteries and
state probabilities that expected utility theory did not support
● Thaler (1981) looked at dynamic inconsistency and discounted utility
How does it work
● Identify normative assumptions used, e.g. expected utility
● Identify anomalies that demonstrate violations, rule out alternative
assumptions (need to prove external validity)
● Use anomalies to create alternative theories that generalise existing models
● Construct economic models of behaviour using the behavioural assumptions
from step 3
○ Derive new implications and test them
● Experiments play a large role in the initial phase of behavioural economics
○ Helpful for distinguishing behavioural explanations from standard ones
● Experimental and behavioural economics are clearly linked
○ Experiments have produced empirical regularities that support
behavioural economics
○ Methodological field that can be widely applied → not part of
behavioural economics
Behavioural economics methods
● Most common method: experimental economics
○ Helps to distinguish behavioural explanations from standard ones
○ Field data (survey data)
○ Field experiments (artefactual, framed, natural)
■ Observe how individuals behave in the real world → decisions
have real consequences
● Observational studies use survey-based data
○ Can comment on general patterns of behaviour
● Computer simulation (agent-based modelling)
● Brain scans (neuroeconomics)
Summary
● Behavioural economics should enhance, not replace traditional economics
● Adding non-traditional assumptions doesn’t abandon traditional methods
● Implications of non-traditional assumptions should be studied using
mathematical methods, tested using standard stats and metrics and judged by
standard scientific criteria
, W2: Decision under uncertainty
Expected utility theory
● With uncertainty, an agent chooses between uncertain outcomes/lotteries
(probability distribution over possible outcomes)
○ Situation of risk: agent knows what could happen/how likely it is
○ Situation of uncertainty: don’t know the possible outcomes/probabilities
○ Prospect: probabilities things will happen/monetary payoffs if they do
● Expected utility theory: if an agent’s preferences can be represented by an
expected utility function, we need to know his preferences over uncertain
outcomes and payoffs from the outcomes
○ Proposed by Bernoulli (1738)
● Assumption: procedure invariance → preferences over prospects are
independent of the method used to elicit them
● Assumption: description invariance → preferences don’t depend on how
distributions are described
Required axioms
● Completeness: we can always compare preferences between two prospects
○ At least one of ^x ⪰ x or x ⪰ x^ holds
● Transitivity: if we prefer bundle 1 to 2, and 2 to 3, then we prefer 1 to 3
○ Individuals are consistent with preferences and avoid preference cycles
● A preference relation is rational if it is complete and transitive
● Continuity: if X > Y > Z, the agent is indifferent between Y and some weighted
average of X and Z
○ Given a good, medium and a bad good, there’s a weighted average of
the good and bad that's exactly as good as the middle
● Independence: for any lotteries X, Y and Z, X > Y if and only if any mixture of
X and Z is also preferred to the mixture of Y and Z with the same weights
○ Preference over 2 lotteries isn’t affected by a third
● Fulfilling these 4 axioms gives the expected utility theory
The Theory
● If your preferences satisfy those 4 axioms, it is
possible to assign a real number ui to outcomes so
X ⪰Y if and only if U ( X) ≥ U (Y )
● Convex indifference curves → concave utility
functions
● Risk aversion: someone prefers a certain amount of
money to a prospect with the same expected value
○ Concave utility function
−u ' '(w)
● Absolute risk aversion: Ra (w)=
u ' (w)
, ○ Positive for risk averse individuals
−u ' '( w)w
● Relative risk aversion: Rr =¿
u ' (w)
Anomalies/deviations from EUT
Shows inconsistency of choices with those predicted by expected
utility theory
Allais Paradox
● Most people choose A and D
○ Violates independence
○ Not consistent with EUT
● Most people chose A over B → u( A)>u (B)
● Most choose D over C → u(D)>u(C )
● A over B gives
○ 0.89 u(5 mil )+ 0.11u (5 mil)>0.89 u(5 mil)+0.1 u(15 mil)+0.01 u( 0)
○ Simplify to 0.11 u(5 mil)> 0.1u (15 mil) EQ1
● D over C gives
○ 0.1 u(15 mil )+ 0.89u (0)+ 0.01u (0)>0.11u (5 mil)+0.89 u(0)
● 0.1 u(15 mil )> 0.11u (5 mil) EQ2
● Equation 1 and 2 directly contradict each other
○ Individuals choose the certain amount in bargain 1 when there is a 1%
chance of getting 0
○ The the second lottery, they pick the gamble with the lower probability
but higher potential winnings
● Certainty effect: people favour outcomes that are seen as certain vs possible
○ Also known as the common consequence effect
● Reflection effect: choices are partly made by measuring relative deviations
from current wealth
● Substitution axiom shows common attitudes towards risk that are not
explained by EUT
● Allais paradox can be caused by people trying to avoid potential
disappointment
○ Disappointment causes indifference curves to fan out, rather than
being parallel
○ If disappointment increases sufficiently, they no longer fan out
■ Less chance of winning = less disappointment
Ellsberg Paradox
● Expected utility theory predicts: if individuals
choose A, they should choose C
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper bethwalton. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €11,11. Je zit daarna nergens aan vast.
Is Stuvia te vertrouwen?
4,6 sterren op Google & Trustpilot (+1000 reviews)
Afgelopen 30 dagen zijn er 81311 samenvattingen verkocht
Opgericht in 2010, al 14 jaar dé plek om samenvattingen te kopen