04 Behavioral Economics

Question 1

What is Behavioral Economics?

Answer 1

Seeks to understand irrationality and to encourage rational decision-making

Question 2

What are Normative decision models?

Answer 2

Those that describe the behavior of a RATIONAL decision maker

Question 3

What are Descriptive decision models?

Answer 3

Those that describe the behavior of an ACTUAL decision maker

Question 4

Normative or descriptive, which is important?

Answer 4

Normative is important for modeling. Descriptive is important for measuring values in health and understanding consumer behavior

Question 5

What are the characteristics of a Normative Model?

Answer 5

Faithful to basic tenants of rationality (e.g. transitivity). Obey probability theory. Always result in optimal decision making (i.e. will maximize health, money, etc)

Question 6

What are the characteristics of a Descriptive Model?

Answer 6

Faithfully represent behavior of decision maker. May or may not have normative characteristics

Question 7

What kind of model is the Expected Utility Model?

Answer 7

Normative: Maximizes utility, it never squanders health, not susceptible to biases or heuristics

Question 8

What are Biases and Heuristics?

Answer 8

Biases in judgment reveal certain heuristics of thinking under uncertainty. Medical decisions are based on beliefs concerning the likelihood of uncertain events. When normative solution is known, B&H research is able to identify deviations from normative model

Question 9

What is Availability?

Answer 9

People assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind. A recent patient in the pharmacy complains of a rare side effect associated with a medication and the pharmacists belief in the probability of that side effect in other patients increases

Question 10

What is Framing?

Answer 10

Two alternative (but equivalent) ways of defining a choice lead to nonequivalent rates of choosing

Question 11

What is Loss Aversion?

Answer 11

Patients have a status quo (SQ) outcome in mind. Improvements from SQ are “gains”. Reductions from SQ are “losses”. Losses loom larger than gains. An equivalent gain is not equal to an equivalent loss

Question 12

What is the Allais Paradox?

Answer 12

We do not treat probabilities as given in the choices. We put greater weight on a treatment that reduces the chance of death from 0.01 to 0.0 than we put on a treatment that reduces the chance of death from 0.52 to 0.51. This is irrational

Question 13

How does changing the size of the choice set affect the Rational Theory of Choice?

Answer 13

Adding an alternative DOES NOT affect preference between other alternatives. If you prefer hamburger to hot dogs, then adding pizza to your choice set won’t change your preference for hamburger over hot dog

Question 14

How does changing the size of the choice set affect Behavioral Economics?

Answer 14

Changing the choice set DOES affect preference

Question 15

What is the Attraction Effect?

Answer 15

It is possible to influence choice of a medication alternative by introducing a certain kind of inferior alternative. Rational decision makers are not susceptible to this effect. The effect may be useful in directing prescriptions to particular medications that improve outcomes or cost less with the same outcomes. Does not prevent the rational decision maker from staying consistent with choice. Moves non-rational decision maker to a particular alternative. Could reduce side effects among patients

Question 16

What are Criticisms?

Answer 16

Implementing behavioral economics as policy may result in “creeping paternalism”. The State will “correct” for your biases. This has led to a new idea called “Asymmetric Paternalism”

Question 17

What are the goals of Asymmetric Paternalism?

Answer 17

To help the irrational consumer without harming the rational consumer. To occasion rational response without sacrificing freedom of choice

Question 18

What is a Status Quo Bias?

Answer 18

People are highly inclined to keep with customary (status quo) options. Employees are better savers when their employer automatically deposits a portion of their check into a retirement plan vs. the default being no contribution

Question 19

What is Time Preference?

Answer 19

Individuals place disproportionate weight on present relative to future costs and benefits. Caring more about the present than the future is rational but people discount the value of the future too much

Question 20

What are some Asymmetric Paternalism Examples?

Answer 20

Arranging food in a cafeteria such that healthy food is at the front. Replacing the default soda at a fast food restaurant with bottled water. Automatic scheduled visits and screening tests based on age. Second opinion default on certain medical tests

Question 21

There are two types of decisions, what are Normative?

Answer 21

How can decisions best be made? A normative decision maker is unaffected by Frame

Question 22

There are two types of decisions, what are Descriptive?

Answer 22

How are decisions actually made?

Question 23

What is the Ethical Dilemma with physician decisions?

Answer 23

If physicians are normative, then we can trust them to make the best decisions and we can respect their autonomy. If physicians are susceptible to bias, then how can we both respect their autonomy and help them make the best decisions?

Question 24

What are Sunk Costs?

Answer 24

The strong tendency to continue an endeavor once an investment in money, effort or time has been made. You bough nonrefundable tickets to a movie, the movie is horrible, you decide to sit through the movie anyways because you already bought the tickets

Question 25

What are Sunk Costs in Medicine?

Answer 25

Medical costs 5x higher in last year of life. High expenditures may signal sunk cost thinking and persistence of aggressive treatment. Greater suffering through mechanically supported, painful and prolonged dying process. Making physicians aware may bring this bias under control

Question 26

What are Social Norms?

Answer 26

Social norms are behavioral expectations of a particular group that can influence behavior of group members. If other physicians are doing it, then I should be too. Social norms may signal best practices of others who may have learned the hard way