1. Thinking Like an Economist Flashcards
What is economics all about?
The study of incentives – how people get what they want and need, especially when other people want or need the same thing. We all learn to respond to incentives, positive and negative.
What are 2 tenets that economics is concerned with?
efficiency & rationality.
How does behavioral economics differ from traditional economics?
Traditional economics is concerned with the price mechanism. Behavioral economics is concerned with non-monetary situations because it can explain unexpected outcomes.
Explain the sudden decrease in crime rates in the US in 1997.
Legalization of abortion in 1973.
Children in 1973 would have been teenagers/young adults in 1997, the peak age for committing crime. These unwanted and aborted children were more likely to become criminals. People who get abortions are usually women who were not married, poor, and not able to provide proper upbringing for their children. In the 1990s, when these kids would have been in their “prime”, crime rates fell.
Parents and child-care case study: why did the small fine of $3 backfire and increased late pickups instead?
Parents previously felt guilty about picking their children up late. But incentives have now changed from guilt/politeness (moral incentive) to a fine (economic incentive). Since they now pay the fine, they no longer feel guilty. Hence they feel it is ok to be late since they pay for it anyway, so they will be late more. Parents could buy off their guilt. Small fine also signaled to parents that late pickup was not a huge problem.
Only worth $3 which was too small. If it was raised to $100, it would have reduced the late pickups, but will also result in upset from parents. Every incentive has a trade-off. When fine was eventually eliminated, late pickups still persisted because parents can come late, pay no fine, and not feel guilty.
What are the 3 basic flavours of incentives?
Economic – monetary
Social – they don’t want to be seen by others as doing something wrong.
Moral – people don’t want to do something they consider wrong
What does the estate and attention example demonstrate about incentives?
For families with more than 1 child, children who visit their parents more are more likely to inherit the estate. They have to compete with siblings so they give more attention to their parents to gain their favor.
Both kids and parents respond to incentives.
Kid’s incentives – estate
Parents’ incentives – attention
What does rationality predict about cheating behavior?
Anyone can cheat when the stakes are right. Cheating is a primordial economic act – getting more for less.
Why do teachers cheat? (2 reasons)
1) When their students do well, they get promoted, or at least they get to keep their jobs.
2) Teacher cheating is rarely looked for, hardly ever detected, and just about never punished!
Teachers in the lowest-scoring classrooms were most likely to cheat
What is the difference between younger and older children when responding to rewards?
Younger children: Respond to non-financial rewards, and don’t care about the size of the reward
Older children: care about the size of reward
Why do people get married despite diminishing life satisfaction over the years?
Marriage as a form of insurance.
They expect a lonely future without that many companions as now. They don’t want to risk being alone in the future. Hence, risk aversion will lead them to give up the opportunity to find a new partner even when one’s prospects have declined, or when one’s current companion has declined in value.
How do sumo wrestlers respond to incentives?
Rigging of matches to maintain their rankings.
8–6 wrestler might allow a 7–7 wrestler to beat him
Forms of rigging:
- Accepting a bribe
- Quid pro quo agreement: you let me win today, when I really need the victory, and I’ll let you win the next time.
What is a social/moral incentive for sumo wrestlers to stop cheating?
social incentive – media scrutiny
