Behavioural Economics

Question 1

Does B.E reject Traditional Approach such as Utility Max. and Equilibrium etc.?

Answer 1

NO - B.E recognises that Behaviour Deviates in Systematic + Predictable ways

Question 2

What are the 3 Criteria to judge Econ. Theories?

Answer 2

1. Congruence w/ Reality
2. Generality
3. Tractability
   B.E greatly improves 1. but worsens 3.

Question 3

Does B.E give more precise Predictions + Equilibria?

Answer 3

YES

e.g. can rule out some N.E w/ Realistic Assumptions

Question 4

What is the Methodology of B.E?

Answer 4

1. Identify Anomalies + clear Violations of an existing model
2. Use Anomalies –> Create Alternative Theories (Generalise existing models)

Question 5

What are 3 methods to Identify Anomalies?

Answer 5

Lab Experiments
Field Experiments
Process Measures - Combine Lab + Field results w/ Brain Scans + other data – Provide model of decision-making process

Question 6

What are the Assumptions of Standard Econ. Model?

Answer 6

1. Agents are Rational - Complete + Transitive
2. Agents are Bayesian Prob. Operators + Updaters
3. Agents Max. Utility
4. Consistent Time Preferences
5. Utility governed by Pure Self-Interest

Question 7

What do you call an Agent who satisfies all Standard Econ. Model Assumptions?

Answer 7

Homoeconomicus

Question 8

What does B.E say about Standard Model?

Answer 8

People are NOT always Rational - Preferences are NOT always Transitive