1. Intro

Question 1

How does Camerer 1999 define behavioural economics

Answer 1

Behavioural economics improves the realism of the psychological assumptions underlying economic theory, promising to reunify psychology and economics in the process. Reunification should lead to better predictions about economic behaviour and better policy prescriptions

Question 2

What did Pareto and Slutsky say about economic theory?

Answer 2

It should rely on psychology as little as possible

Question 3

For classical utilitarians what does utility mean?

Answer 3

Utility refers to a psychological experience. Maximising utility and marginal utility should be the core of economics

Question 4

In the early 20th century what new definition of utility was made?

Answer 4

Utility acquired a new meaning of representation of complete and consistent preferences

Question 5

What is a complete preference?

Answer 5

For any outcomes a and b, either a }~ b or b }~ a or both

Question 6

What is transitivity?

Answer 6

If a }~ b and b }~ c then a }~ c

Question 7

When does a real valued utility function exist?

Answer 7

When the preference relation is complete and transitive

Question 8

When does u(a) >= u(b)?

Answer 8

If and only if a }~ b

Question 9

What was Friedmans instrumentalist methodology?

Answer 9

The idea that success of economic theory should be judged by accuracy of predictions in intended domain of application. Realism of assumptions isn’t required

Question 10

What created the rise of behavioural economics?

Answer 10

-Philosophical reaction- explanation but just prediction.
-Systematic failings of orthodox theory
-Realisation that greater psychological realism is at least partly compatible with formal modelling techniques and can give more generality

Question 11

What can be said if EV(L) is preferred to L, where EV(L) is the expected value of the lottery?

Answer 11

The agent is risk averse

Question 12

What is the EV(L)?

Answer 12

The expected value of the lottery. It is the probability weighted sum of consequences EV(L)= sum of Pi x xi

Question 13

What is EU(L)?

Answer 13

It is the expected utility of a lottery L and is the probability weighted sim of utilities of consequences EU(L)= sum of Pi x u(xi)

Question 14

Give the risk attitude of a person with linear convex and concave utility functions

Answer 14

Linear= risk neutral
Concave= risk averse
Convex= risk seeking

Question 15

Why is the utility function like a temperature scale?

Answer 15

Absolute levels have no significance
Ratios have no significance
Differences have no significance
But ratios of differences do have a meaning?

Question 16

Whet is a unit point triangle?

Answer 16

It is a triangle that can represent any such lottery with a point within it

Question 17

How many utility functions are there that represent an individuals preferences and why?

Answer 17

If there is ever one utility function that represents an individual’s preferences, then there’s an infinite number.
Because if v(.)=a+bu(.) with b>0 then the agents preferences also have an EU representation with v(.) as utility function. Known as uniqueness up to a positive linear transformation

Question 18

What is in the top left corner of a unit point triangle?

Answer 18

(x1,1)

Best outcome x1 occurs with probability 1

Question 19

What does EUT require indifference curves to be in unit probability triangle?

Answer 19

Upward sloping, parallel, straight lines