ECON3323 Behavioral Economics: Introduction – Flashcards

- Describes the world as it is. - Can be confirmed or refuted. - Is centered on fact.

- Describes the world as it should be - Cannot be confirmed or refuted with data. - Is opinion (perhaps widely accepted opinion, but still opinion)

describes how individuals actually make decisions.

describes how individuals should make decisions. In general, a theory can be both normative and descriptive, if people behave as they "should" according to the theory.

Economics developed a theory of consumer behavior (as a rational utility maximizer) that is comprehensive, elegant, & capable of making accurate aggregate predictions. Generally it's both a normative and descriptive theory Most basic assumptions of neoclassical economic theory are considered not only true (in the sense that these assumptions actually describe behavior) but desirable.

It is possible to make objections: -on descriptive grounds (I agree that people should act in this particular way, but I don't think that is how they act. -on normative grounds (I don't agree that people should act this particular way)

Theory: People as utility maximizers -Descriptive Objection: I don't think people actually act this way. -Normative Objection: I don't think people should act this way.

Theory: Individuals are risk-averse (from the assumption of declining marginal utility of consumption) -Descriptive obj: I agree that (or say nothing about whether) people should derive declining marginal utility from consumption, but I don't agree that people actually act risk-averse Normative: I don't agree that individuals should act in a risk-averse manner.

Not everyone acts as economists would predict. Is this a problem for the econ theory of consumer behavior? -if deviations from the theory are random, then no (still would make good predictions in the aggregate) -If deviations from the theory are systematic and reliably in one common direction, then yes.

When the theory is wrong, when deviations are systematic, we ask: Is this a descriptive problem with the theory, or a normative one? It's certainly a descriptive problem; it may also be a normative one. In this class, we will focus on descriptive problems with economic theory.

A field of economics that attempts to: 1) identify areas in which standard economic theory fails to make accurate predictions of human behavior 2) understand the cause of these deviations, primarily using insights from psychology 3) Amend the theory to make better predictions of human behavior.

-When asked a hard question, we answer a simple question. -We're not natural statisticians -We put too much weight on initial judgements or initial data. -We find coherent stories to be most convincing, regardless of how complete they are -we are lazy -and more

Identify the conditions in which we (society in general and each of us specifically) -Systematically make decisions that violate economic theory -Influenced by outside parties to make non-rational decisions. -Most likely to make "good" decisions, in the sense that these decisions genuinely maximize our utility.