Ch 17 Behavior economics

Question 1

behavioral economics

Answer 1

field of economics that draws on insight from experimental psychology to explore how people make economic decisions p542

Question 2

bounded rationality (AKA limited reasoning)

Answer 2

proposes that although decision makers want a good outcome, either they are not capable of performing the problem solving tradition economic theory (because of limited information or time constants) assumes or not inclined to do so . p532

Question 3

framing effect

Answer 3

happens when people change their answer depending on how the question is asked or decision is influenced by the way alternatives are presented. p546

Question 4

gamblers’s fallacy

Answer 4

belief that recent outcomes are unlikely to be repeated and that outcomes that have not occurred recently are due to happen. Ex) too many heads after 5 coin flip, tails is due to happen. p545

Question 5

hot hand fallacy

Answer 5

belief that random sequences exhibit a positive correlation. Ex) Heat check in basketball. Person is in a streak, cant loose p545

Question 6

intertemporal decision making

Answer 6

planning to do something over a period of time. Requires the ability to value the present and future consistently. Ex) 401k p550

Question 7

preference reversal

Answer 7

occurs when risk tolerance is not consistent. Perception of possibilities add to preference reversal p554

Question 8

Priming effect

Answer 8

occurs when the order of questions influence the answer. p547

Question 9

risk-averse people

Answer 9

prefer a sure thing over a gamble with higher expected value. p552

Question 10

risk-neutral people

Answer 10

Choose the highest expected value regardless of the risk. p552

Question 11

risk-takers

Answer 11

prefer gambles w/ lower expected values and potential higher winnings, over a sure thing. p552

Question 12

status quo bias

Answer 12

when decision makers want to maintain their current choices. Makes people stick to their choices even when welfare can be enhanced. p547

Question 13

Ultimatum game

Answer 13

an economic experiment where 2 players decide how to divide a sum of money $$$. Game shows that traditional economics where any money offered is better than no money, yet people will fixate if the offer is “fair” p550

Question 14

Prospect theory

Answer 14

investors value gains and losses differently, placing more weight on perceived gains vs perceived losses. p556

Question 15

Positive expected value

Answer 15

odds of winning are higher. Value of winnings are higher than initial investment. Ex) $10 buy in, 1 in 2 chances of winning $25. Meaning 25/2= $12.5 > $10

Question 16

Negative expected value

Answer 16

odds of winning are lower. Risk takers will go for high pay out, but low winning odds.