Behavioral Economics chapter 8 – Flashcards

ttempts to make better predictions about human choice behavior by combining insights from economics, psychology and biology.

are Rational meaning they maximize our chances of achieving what we want.

• People have stable preferences that aren't affected by context. • People are eager and accurate calculating machines. • People are good planners who possess plenty of willpower. • People are almost entirely selfish and self interested.

philosophy is Incentives Matter on Price and Drive the Supply and Demand.

has various behavioral drives

consumers buy what they see rather than being driven by incentive pricing

low energy mental shortcuts, it is superior to a perfect but costly alternative. are energy savers

brain naturally directs us to see an event

interpreting depth. ▪ These are hard wired to the brain and impossible to unlearn or avoid.

Specific areas deal with specific sensations, activities, and emotions e.g. vision, breathing and anger.

a gut decisions from the older parts of your brainto produce quick reactions.

undertake slow, deliberate and conscious calculations of costs and benefits.

the misperceptions or misunderstandings that cause systematic errors.

refers to the human tendency to pay attention only to information that agrees with one's preconceptions.

refers to people's tendency to attribute their successes to personal effort or personal character traits while at the same time attributing any failures to factors that were out of their control.

refers to people's tendency to be overly confident about how likely their judgments and opinions are to be correct.

refers to the ability of people to look back at a situation and know that they picked the right outcome, even though they did not.

causes people to base their estimates about the likelihood of an event not on objective facts but on whether or not similar events come to mind quickly and are readily available in their memories.

the tendency people have to massively underestimate the time needed to complete a task.

occur when a change in context (frame) causes people to react differently to a particular piece of information or to an otherwise identical situation.

o People judge good things and bad in relative terms as gains and losses relative to their status quo. o People experience both diminishing marginal utility for gains as well as for losses. o People experience loss aversion- for losses and gains near the status quo, losses are felt much more intensely than gains. ▪ People see life in terms of gains and losses relative to the status quo, businesses have to be very careful about increasing prices because once consumers become used to a given price they will view any increase in the price as a loss relative to the status quo price they are accustomed.

takes into account the fact people's preferences can change drastically depending on whether contextual information causes them to define a situation as a gain or loss

consumer can make a decision upon irrelevant information to anchor valuations.

people arbitrarily put certain options into totally separate mental accounts that they dealt with without any thought to options outside of those accounts.

the tendency that people have to put a higher valuation on anything that they currently possess than on identical items that they do not own but might purchase.

the tendency that people have to favor any option that is presented to them as being the status quo option. NOTHING CHANGES BIAS

the inability to conceptualize the future, compared with the future.

is the tendency to systematically misjudge at the present time what you will want to do at some future time.

It is driven by time inconsistency which makes it difficult to have self control since you do not know the outcome in the future.

are made ahead of time to prevent your future self from doing damage. e.g. Automatic Payroll Deductions to eliminates tax payment problems.

people are not always Self Centered or driven on Self Interest. People are driven by charity, fairness and love of others.