1 - introduction (part 1)

Question 1

what is experimental economics - used to study human behaviour

Answer 1

• uses controlled experiments, where researchers create decision environments and study behaviour
• uses labs
• isolates causal effects and tests economic theories in controlled environments

Question 2

what is behaviour economics

Answer 2

• combines insights from psychology and economics to understand how individuals make decisions in real world situations
• uses more realistic psychology than standard econ to explain behaviour

Question 3

what is the difference between experimental economics and research that uses observational data

Answer 3

experimental
- data is collected from created/controlled environments

observational
- data is collected from real-world, naturally occuring

Question 4

what are pros and cons of experimental research

Answer 4

• pro = controlled so can generate a causal effect, specifically designed to answer the research question
• random assignment of subjects to treatment = causal when no systematic differences
• replicable - easily repeated
• con = not real-world situation

Question 5

what does behavioural economics attempt to do

Answer 5

improve the psychological realism, predictive power and policy application of foundations of economic theory

Question 6

what is orthodox economics

Answer 6

• is the traditional standard economics approach
• emphasises rational decision making
• assumes that people make decisions based on self interest and perfect information

Question 7

expain what the basic assumption of orthodox economics is
constrained maximisers

Answer 7

• they choose the option that maximises an objective function that captures their objectives
• from what they can choose, they choose the option that maximises their utility

Question 8

what are the 2 different interpretations of utility maximisation?

Answer 8

maximising…
* utility as pleasure
* utility as measure of preference satisfaction

Question 9

what are the formulations used:

how does orthodox econ use utility in
risk/uncertainty
time

Answer 9

• risk uncertainty = maximise expected utility
• time = maximise exponentially discounted utility

Question 10

what are the general assumptions of orthodox maximisation

Answer 10

1. there is a function that captures individuals objectives and can be evaluated for each option
2. individuals maximise the function

Question 11

what are the 3 ways that behavioural economics tries to improve psychological assumptions embedded in orthodox economics

• what ways can we pursue more psychological realism assumptions

Answer 11

1. maximising something else
2. maximising but imperfectly - makes errors
3. not maximising at all

Question 12

1. maximising something else

how does this improve standard econ?

Answer 12

• making a more realistic form of preferences

Question 13

2. maximising with error

Answer 13

• economic behaviour may be as a result of people making errors
• or people allowing for errors they expect other people to make
• BE tries to be more realistic by allowing for people making/anticipating errors

Question 14

how does BE try to be more realistic than orthodox economics

3. not maximising

Answer 14

• maybe individuals find an option that is ‘good enough’ dont strive to maximise
• maybe individuals evaluate options in other ways than just by consequences (like orthodox)
• maybe individuals objectives are not really formed until they act on them - orthodox suggests that preferences dont depend on the task just the agent