2 - why hasnt economics been experimental and behavioural all along?

Question 1

what is behavioural economics

Answer 1

making economics more psychologically realistic

Question 2

what was economics in 20th century

Answer 2

orthodox economics

Question 3

what were the 3 key features of 20th century economics

Answer 3

1. purge economic theory of unobservable concepts = unscientific
2. found economic theory on a formal model of rational agents
3. choices are observable, but psychological experiences (happiness) is not

Question 4

what was orthodox economics thoughts on realism?

what didnt it seek…

Answer 4

1. didnt seek psychological realism
2. realistic underlying assumptions

didnt include psychology

Question 5

how did the 19th century involve psychology into economics

Answer 5

used concept of utility
* utility was psychological experience (happiness, pleasure)
* definition of utility = happiness
* using science of pleasure - how they measure happiness

• diminishing marginal utility?

Question 6

why did science of pleasure end
early 20th century

Answer 6

• doubts possibility of measuring happiness or comparing across people
• unobservable psychological experience

Question 7

what did the definition of utility change to in 20th century

Answer 7

utility = a representation of complete and consistent preferences

utility = preferences of outcomes

Question 8

what are complete preferences

Answer 8

an individual can always compare 2 outcomes
- they prefer one over the other
- or they are indifferent

• there isnt a case where they cant compare 2 options

Question 9

what are transitive preferences

Answer 9

reflects consistency in decision making
- if a preferred over b, and b preferred over c - then a must be preferred over c

Question 10

what does a utility function show
what does maximisation of utility function represents

Answer 10

utility function represents rational preferences = representation of preferences

maximisation represents satisfaction of the preferences - provided they are complete and transitive

Question 11

what does maximising utility mean

Answer 11

agent chooses actions that best satisfy their preferences over outcomes

• concept of rationality - not realism

Question 12

what is the pareto criterion - how are preferences used in welfare economics

Answer 12

pareto - improvements without harming anyone
* welfare economics

Question 13

what was Militon Friedmans view on realistic assumptions

Answer 13

• methods do not need realistic assumtpions
• as long as they predict successfully what they intended to predict
• theory is judged by its predictive power

Question 14

how does BE build on standard economics

Answer 14

1. explanation is important, not just predictive power
2. greater psychological realism
3. extends existing models - by adding more psychological realism

Question 15

what is example 1 of how BE can be used to extend standard theory

Ernst Fehr and Schmidt

Answer 15

• utility function that combines 3 motivations
• material self interest, envy, guilt
• orthodox model - people are only interested in their self - not others

Question 16

what is example 2 of how BE can be used to extend standard theory

preferences maximisation

Answer 16

• allow for over weighting/under weighting of particular probabilities

Question 17

what is example 3 of how BE can be used to extend standard theory

discounted utility with exponential discountings

Answer 17

• BE model = quasi-hyperbolic discounting model
• adds in Beta, that reduces the weight on all future periods by a constant factor - but not the present

Question 18

why is quasi hyperbolic discounting model a better model than standard exponential discounting

• people exhibit time inconsistency

Answer 18

• exponential discounting assumes that individuals discount future rewards at a constant rate,
• quasi-hyperbolic discounting recognizes the tendency for individuals to exhibit time inconsistency in their decision-making
• higher weight placed on present - immediate
• creates potential for procrastination, self control problems
• by this small change by adding Beta - can introduce more complex and realistic psychology