Chapter 8 Behavioral Economics v2

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Rational
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maximize our chances of achieving what we want
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Systematic Errors
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meaning that people tend to repeat errors over and over, no matter how many times they encounter the same situation
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Neoclassical Economics
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Makes accurate predictions about human choice behavior, especially when it comes to financial incentives and how consumers and businesses respond to changing prices; fails to predict how humans deal with risk and uncertainty, choices that require willpower or commitment, and decisions that involved fairness, reciprocity, and trust
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Behavioral Economics
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attempts to make better predictions about human choice behavior by combining insights about economics, psychology, and biology.
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Neoclassical
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People’s preferences are completely stable & unaffected by context
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Neoclassical
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People are eager and accurate calculators
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Neoclassical
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People are just as good at assess future options as current options
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Neoclassical
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People have no problem resisting temptation
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Neoclassical
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People are almost entirely self-interested and self-centered
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Neoclassical
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People do not care about fairness and only treat others if doing so will get them something they want
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Behavioral
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People’s preferences are unstable & often inconsistent because they depend on context (framing effects)
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Behavioral
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People are bad at math & avoid difficult computations if possible
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Behavioral
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People place insufficient weight on future events and outcomes
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Behavioral
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People lack sufficient willpower and often fall prey to temptation
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Behavioral
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People often selfless and generous
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Behavioral
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Many people care deeply about fairness and will often give to others even when doing so yield no person benefits
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Heuristics
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low-energy mental shortcuts
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Cognitive Bias
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misperceptions or misunderstandings that causes systematic bias
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Confirmation bias
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Human Tendency to pay attention only to information that agrees with one’s preconceptions
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Self-serving Bias
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people’s tendency to attribute their success to personal effort or personal character traits while at the same time attributing any failures to factors that were out of their control
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Overconfidence effect
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refers to people’s tendency to be overly confident about how likely their judgements
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hindsight bias
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people engage in___________when they retroactively believe that they were able to predict past events
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availability heuristic
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Causes people to base their estimate about the likelihood of an event not on objective facts but on whether or not similar events come into mind quickly and are readily available in their memories
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planning fallacy
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tendency people have to massively underestimate the time needed to complete a task
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framing effects
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occurs when a change in context causes people to react differently to a particular piece of information or to an otherwise identical situation
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How people deal with goods and bads
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1. Judge good things and bad things in relative terms, as gains and losses relative to their current situation or status quo 2. Experience diminishing marginal utility for gains and diminishing marginal disutility 3. Experience loss aversion, losses are felt much more intensely than gains
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Prospect theory
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How consumers plan for and deal with life’s ups and downs as well as why they often appear narrow-minded and fail to “see the big picture”
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Anchoring
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irrelevant information can unconsciously influence people’s feelings about the status quo
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Mental accounts
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as if people arbitrarily put certain options into totally separate______________ that they dealt with without any though to options outside of those accounts
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Endowment effect:
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tendency that people have to put a higher valuation on anything they currently possess than on identical items they do not own but might purchase
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Status quo bias
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tendency people have to favor any option that is presented to them as being the default (status quo) option
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myopia
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our brains have a hard time conceptualizing the future
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time inconsistency
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tendency to systematically misjudge at the present time what you will want to do at some future time
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self-control problem
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major cause of time inconsistency
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fairness
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person’s opinion as to whether a price, wage, or allocation is considered morally or ethically acceptable
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Hindsight bias example
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Your uncle says that he knew all along that the stock market was going to crash in 2008
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Self-serving bias example
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When Fred does well at work, he credits his intelligence. When anything goes wrong, he blames his secretary
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Availability heuristic example
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Ellen thinks that being struck dead by lightning is much more likely than dying from an accidental fall at home
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framing effect example
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The sales of a TV that is priced at $999 rise after another very similar TV priced at $1,300 is placed next to it at the store
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status quo bias example
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The sales of a brand of toothpaste rise after new TV commercials announce that the brand “is preferred by 4 out of 5 dentists

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