Download Behavioral Economics

Behavioral Economics
A branch of economics that studies the
psychology of decision-making to explain
consumer behavior.
Behavioral Economics
Similarities with standard economics:
• Individuals are assumed to have welldefined agendas
• Rely on mathematical models of
behavior
• Test theories empirically
Behavioral Economics
Differences from standard economics:
• Focus on how consumers make decisions
• Inclusion of attitudes towards fairness
and status
• Greater use of experiments
• Focus on when behavior deviates from
the standard theory
• No single unifying theory
Incoherent Choices
Reference point – The point from which
a person makes a consumption decision
Incoherent Choices
Anchoring – when choices are linked to
prominent but patently irrelevant
information
Incoherent Choices, cont.
Endowment effect – when people tend
to value something more highly when
they own it than when they don’t
Incoherent Choices, cont.
Default effect – when confronted with
many choices people sometimes avoid
making a choice and taking the default
option
Incoherent Choices, cont.
Narrow framing – the tendency to group
related items into categories, and, in
making a choice consider items in the
same category while ignoring items in
different categories
Imagine that you have decided to see a
play where admission is $10 per ticket.
As you enter the theater you discover
that you have lost a $10 bill. Would you
still pay $10 for ticket for the play?
Imagine you have decided to see a play
and paid the admission price of $10 per
ticket. As you enter the theater you
discover that you have lost the ticket.
The seat was not market and the ticket
cannot be recovered. Would you pay $10
for another ticket?
Rules of Thumb
When a generalized rule is used to set
strategy when faced with a complex set
of choices.
Social Motives
A prize of $100 has been given to Fred.
He will make an offer to share the prize
with you. If you accept the offer Fred
gets to keep his share of the prize, if you
don’t accept he loses the prize. Fred
offers to give you $5, would you take it?
You will only play this game once.
Social Motives
Ultimatum game – one player offers to
give a second player some share of a
fixed prize, the second player then
decides to accept or reject the proposal.
Dictator game – a player divides a fixed
prize between himself and another
player who is a passive participant.
Neuroeconomics
Studies the human neural system with
the object of discovering new principles
of economic decision making
Neuroeconomics
• Much of the brain implements
“automatic” processes, which are faster
than conscious deliberations
• Behavior is strongly influenced
by finely tuned affective (emotion)
systems