Behavioural Economics

Question 1

Preferences

Answer 1

strict preference relation

indifference

Question 2

Rationality

Answer 2

completeness

Transitivity

Question 3

Choice based Approach

Answer 3

Revield preferneces or something is revealed to be prefereard to.

Question 4

Weak axiom of reviled preferences

Answer 4

if x* reviled preferred over y* then y* can’t be reviled strictly preferred over x*

Question 5

Reference-Dependent Preferences

Answer 5

u(c|r) = m(c) + n(c|r)
consumption utility + gain-loss-utility
where n(c|r) = \mu(m(c)-m(r))

\mu has
Loss aversion
diminishing sensitivity

Question 6

Empirical Evidence for Reference Dependency

Answer 6

Taxi drives
Decoy-Effect
Endowment effect

Question 7

Endowment Effect

Answer 7

Willingness to pay < willingness to accept

WTP < WTA

Question 8

Limited Attention

Answer 8

The consideration set does not change if the irrelvant alternative is taken away.

Question 9

Empirical Evidence Limited Attention

Answer 9

Left digit bias in the car retailer market.

Question 10

Bayesian updating

Answer 10

P(A|B) = P(B|A)*P(A)/P(B)

Question 11

Confirmation bias

Answer 11

Over weighting information that confirms the prior belief

Question 12

Choices under Risk: Lottery

Answer 12

contains payoffs with associated risks

Question 13

Preferences over lotteries

Answer 13

Continuity

Independence Axiom

Question 14

Expected Utility in discrete case

Answer 14

sum over

Question 15

Expected Utility in continuous case

Answer 15

integral with the cdf as dF(x) or with the pdf x*f(x) dx

Question 16

Risk Aversion

Answer 16

C > EV
C = certainty equivalent
EV = expected value

Question 17

Certainty Equivalent

Answer 17

U(C) = EU(L)

Question 18

Prospect Theory

Answer 18

Relaxes the assumptions of the Expected Utility Theory:

1. No-linear probability function
2. utility over changes in wealth levels not over finite wealth levels

V(L) = Sum w(pi)*v(yi)
w(): weighting function
v(yi) value function

Question 19

Allais Paradox

Answer 19

Same difference in prices changes the decission.
p = (25,5,0)
L1 = (0, 1, 0) L1’ = (0.1, 0.89, 0.01) -> choose L1 over L1’
L2 = (0, 0.11, 0.89) L2’ = (0.1, 0, 0.9) -> choose L2’ over L1
That is a contradiction thus not rational and can’t be explained with rational expectations.
Simple prospect theory fails to explain this.

Question 20

Cummulative Prospect Theory

Answer 20

w(.) is applied to cummulitive probabilities.

Overcomes the Allais paradox

Question 21

Measurement of risk preferences

Answer 21

Simple elicitation

Complex elicitation

Question 22

Gneezy and Potters (1997)

Answer 22

initial endowment to be spent by part on a risky but under rational expectations profitable investment. If they did not spent everything they are risk averse.

Question 23

Eckel and Grossmann (2002)

Answer 23

list of gambles each with 50% chance for high/low payoff.

Assuming a certain utility function allows - using the switching point to estimate a range for the risk parameter.

Question 24

Holt and Laury (2002)

Answer 24

List of paired gambles with same payoff but changing probabilities.
Again flipping point gives the rage fro the risk parameter.
Problem, how to deal with inconsistent behaviour i.e. more than one switch?

Question 25

Holt and Laury (2002)

Answer 25

List of paired gambles with same payoff but changing probabilities.
Again flipping point gives the rage fro the risk parameter.
Problem, how to deal with inconsistent behaviour i.e. more than one switch?

Question 26

Decissions under Uncertainty

Answer 26

S: finite set of states of nature
A: finite set of actions
f:AxS -> R is the outcome function
regret f(a_i,s_j) - max_s f(a_i,s)
Maxmin criterion
MaxMax criterion
MinMax regrett criterion

Question 27

Ellsberg Paradox

Answer 27

Urn with 90 balls 30 red 60 blue and green
Gamble 1:
1.L 100 if red
2.L 100 if blue

People tent to choose 1

Gamble 2:

1. L 100 if ball is red or green
2. L 100 if ball is blue or green

Most choose 2

This is inconsistent again. By choosing 1L in G1 they assumed implicit, that there are less then 30 blue balls., thus more then 30 green. But then red + green is more then 60 and blue and green is less then 60.

also called ambigiuity aversion

Question 28

ambigiuity aversion

Answer 28

People don’t like gambles an prefer a smaller certain outcome.

Question 29

Halevy (2007)

Answer 29

Four lottereis of which two are just compound lotteries that gice the same lottery as the first. Thus all three should be evaluted the same.

Results:
People showed ambigiuity aversion and not all valued the three same lotteries the same way.

Question 30

Exponential Discounting

Answer 30

time consistent discounting process but does not explain emperical findings

Question 31

Quasi-Hyperbolic discounting

Answer 31

Like exponential with an additional constant discount factor from t >1 onwards.

Question 32

Loewenstein and Kalyanaraman (1999) Movie Rental

Answer 32

When people where to choose movies in advance vs. on that day.
More likely to choose “high brow” movies when choosing in advance.

Question 33

Van Leenwen (1998) Snack Choices

Answer 33

People had to choose snacks. There were different treatments. Choosing when hungry or satisfied and in advance or at that time as well as all combinations.

Results:
healthier chices in advance when people where satisfied

Question 34

Niederte and Sprenger (2015) Allocation Effort

Answer 34

Effort fro simple tasks

1. Allocation is made on the first day
2. Allocation sunsequently on each day.

Result in the subsequent allocation treatment the individuals got less work done.
=> make a plan and stick to it.

Question 35

Measuring time preferences - Double Multiple Price listing

Answer 35

price pairs one small-soon and high-late payments

the switching point from small-soon to high-late gives the interval for the estimation of the time preference parameters

Question 36

Time independent constant rat of risk aversion

Answer 36

CRRA

Question 37

Convex Time Budget (CTB)

Answer 37

Allowing subjects to choose any payoff between the tow boundaries of the experiment.

Question 38

Degree of Self Awareness

Answer 38

What is the discount factor in the future, compared to today.
ß = ^ß = 1 -> exponential discounting
ß < ^ß = 1 -> Naive quasi hyperbolic discounting
ß = ^ß < 1 -> Sophisticated quasi hyperbolic discounting

Question 39

O’Donoghue and Robin (1999) Procrastination

Answer 39

percetion-perfect strategies solved with backward induction and gives the optimal strategy.

Even when the path ends early the strategy includes actions for all possible periods.

Question 40

Gul and Pesendorfer (2001) Temptation and Self Controle

Answer 40

Two choices:

1. Menu choice in advance which restaurant to go to
2. Choice from the menus available after 1.

three cases:

1. Case no tmptation
2. Case temptation
3. Case self-controle

Question 41

Beck, De Groot and Marschak (1964) WTP elicitation

Answer 41

asking for the valuation and then choosing the price randomly.

causes an incentive compatible result
Individuals have an incentive to report their true valueation

Question 42

Elicitating probabelistic beliefs

Answer 42

how to get the true probabilities people base their actions on?
Scoring rule: Quadratic scoring rule (works only under risk neutrality)

Question 43

Scoring Rule

Answer 43

Relates the reported probability to a given payoff

Question 44

Hossain and Okni (2013) Porb. beliefs elicitation

Answer 44

Binanized Scoring Role
if A:
1-(1-r)^2
(1-r)^2

if not A:
1-r^2
r^2

Question 45

Libertarian Paternalism

Answer 45

soft behavioural interventions that are not interfearing with the individuals liberty but use psychological effects to “force” them to do the right thing.

Question 46

Choi, Laibson and Madrian (2004) Retirement savings

Answer 46

Problem: Present bias leads people to neglect their pension payments. As well as a reference dependency and a status quo bias.

Solution:
automatic enrollment or offer when hired.
both show a significant higher number of participants but the automatic enrollment has the highest.

Question 47

Cooling off periods

Answer 47

Fully ration undertake actions only if y>0
but if we have bounded rationality y + e > 0 where e is a random error

with a cooling off period we reduce the value of the good y* < y but we could:

Potential gain: y+e > 0 > y > y*

Potential costs:

1. y > y* > 0 - action taken anyway just slightly lower value
2. y > 0 > y* will not act due to cooling off but value of good must have been quite small or cool down effect is very strong.