Behavioural Economics Key Concepts Flashcards
Define Bounded Rationality
The idea is that individuals are not perfectly rational decision-makers BUT instead limited by cognitive abilities, time constraints and asymmetric information.
Define Prospect Theory
Individuals focus on the potential gains and losses of a decision instead of the actual value.
What is a Social Dilemma?
Situation in which individuals acting in their own self-interests collectively produce a suboptimal outcome for the group as a whole.
What is a Public Goods Game?
Individuals are asked to contribute a common good which will be available to everyone regardless of contribution. If everyone contributes, welfare is maximised. If some decide not to contribute, the good is not provided and everyone will be worse off.
What is a Trust Game?
The trustor is given money and can either keep the money or send it to the trustee. The trustee can either save the money or send some/all of it back. The optimal outcome relies on trust and the suboptimal outcome is no cooperation.
What is the Fair Wage Hypothesis proposed by Akerlof & Yellen?
Workers are more likely to exert effort when they feel they are being paid fairly. The hypothesis is based on the idea that people have a sense of what they deserve, and they are more likely to be motivated to work hard when they feel they are being compensated fairly.
What is a Gift Exchange Game?
A social interaction in which two or more parties exchange gifts with the expectation of receiving something of equal or greater value in return.
What is Reciprocity?
We reward the positive actions of others with equally positive behaviors. Similarly, negative actions are punished with negative behaviors. Reciprocity is a powerful force that can influence our behavior in many different ways.
What did Charnes (2004) & Offerman (2002) test for? What were the results / findings?
Tested for Reciprocity in Gift Exchange Games. Findings include that players are more likely to reciprocate gift exchanges if players had previously engaged in gift exchanges.
What is a Ultimatum Game?
A two-player game in which one player, the proposer, is given a sum of money and must decide how to split it with the other player, the responder. The responder then has the option to accept or reject the offer. If the responder accepts, the money is split as proposed; if the responder rejects, both players receive nothing.
What is a Dictator Game?
One participant (the dictator) receives an endowment of money and is then given the option to share some or all of it with another participant (the recipient). The recipient has no say in how much money they receive, and they must accept whatever the dictator offers.
What does the Ultimatum Game suggest?
Players are willing to punish those who they perceive as being unfair. This suggests that fairness is an important value to people, and that they are willing to take action to uphold it.
Proposers generally offer around 40%-50% of the money with Responders typically rejecting offers that are below 30%.
What do the findings of the Ultimatum Game and Dictator Game suggest?
People are not always rational actors and are often motivated by factors other than self interest.
What is anonymity in the context of experimental economics?
Participants are not aware of the identities of the other participants in the experiment.
Pros and Cons of Anonymity in experimental economics?
Pro: It can help to reduce social pressure and the desire to conform to the expectations of others.
Pro: It can promote prosocial behavior.
Pro: It can help to ensure that participants’ behavior is not influenced by the experimenter.
Con: It can promote unethical behavior.
Con: It can make it difficult to track participants’ behavior over time.
Con: It can make it difficult to identify participants who are cheating.
