Chapter 8. Behavioral Economics

Chapter 8Behavioral Economics Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Comparing Behavioral Economics with Neoclassical EconomicsNeoclassical EconomicsPeople have stable preferences that aren’t affected by contextPeople are eager and accurate calculating machinesPeople are good planners who possess plenty of willpowerPeople are almost entirely selfish and self-interestedLO1Behavioral EconomicsFocusing on the mental process behind decisionsImproving outcomes by improving decision-making Comparing Behavioral Economics with Neoclassical EconomicsLO1Our Efficient, Error-prone BrainsHeuristics are energy saversRiding a bicycle with steering heuristics Guesstimating ranks with the recognition heuristics The implications of hardwired heuristics LO2Brain ModularitySystem 1 and System 2Cognitive BiasesConfirmation Bias Overconfidence EffectAvailability Heuristic Planning FallacyFraming EffectsOur Efficient, Error-prone BrainsLO2Prospect TheoryPeople judge good things and bad things in relative terms, as gains and losses, or status quoPeople experience both diminishing marginal utility for gains as well as diminishing marginal disutility for lossesPeople experience loss aversion LO3Losses and shrinking packages Framing effects and advertising Anchoring and credit card bills Mental accounting and overpriced warranties The endowment effect and market transactions Status quo biasProspect TheoryLO3Myopia and Time InconsistencyMyopia Time inconsistency Self-control problems LO4Fighting self-control problems with pre-commitments Hiding the alarm clockAutomatic payroll deductions Salary smoothingEarly withdrawal penalties Weight-loss competitions Myopia and Time InconsistencyLO4Fairness and Self-InterestField evidence for fairnessGiving to charity Obeying the lawFixing pricesPurchasing the “Fair-Trade” productsLO5Experimental evidence for fairnessThe dictator gameThe ultimate gameThe rulesHow players BehaveWhy the threat of rejection increases cooperation Implications for market efficiency Fairness and Self-InterestLO5Nudging People Toward Better DecisionsBehavioral economics sought to explain a number of behaviorsUsed to “nudge” people towards choices that are better for themselves and others