Chapter 1 Flashcards
Introduction
What is the primary focus of behavioral economics?
Behavioral economics focuses on building formal models of economic behavior that generate testable predictions, integrating insights from psychology and sociology.
What is the Endowment Effect?
The Endowment Effect is a phenomenon where people assign more value to items they own than to items they do not.
What is mental accounting?
Mental accounting is when people simplify financial decision-making by creating separate accounts in their minds.
What is the Dictator Game used to study?
The Dictator Game is used to study social preferences and fairness concerns among consumers.
What is the planner-doer model?
The planner-doer model analyzes self-control problems arising from the internal tension between long-term planning and short-term actions.
Fill in the blank: The course aims to help students understand aspects of individual behavior that cannot be explained by _______.
[traditional utility theory].
What is the term used to describe the theoretical individual in neoclassical economics who is fully rational?
Homo Economicus
Homo Economicus maximizes her own utility based solely on her consumption bundles, income, and leisure, and is free of emotions.
What is one of the main criticisms of the Homo Economicus model?
It does not represent how economists think people are, but simplifies reality for analysis
This model is useful for building theories but may not accurately reflect actual human behavior.
What does rationality imply in the context of Homo Economicus?
Individuals perceive a choice as a set, have a preference ordering, and choose the best alternative
This assumes no cognitive boundaries and that decision-making is unaffected by information processing errors.
What is the concept of ‘unlimited willpower’ in the context of Homo Economicus?
Individuals have no emotions or self-control problems
This implies that decisions are made without delay or procrastination.
What does self-interest mean in the context of Homo Economicus?
Individuals maximize their utility based solely on their own payoffs
This includes factors like income, consumption, and leisure.
What is a common behavioral pattern related to willpower?
People tend to postpone difficult decisions, such as dieting or exercising
This reflects the challenges in self-control and immediate gratification.
Fill in the blank: Behavioral economics seeks to explain why individuals might fail to _______.
act rationally
This includes understanding the psychological factors influencing decision-making.
What is the ‘homo economicus’ approach?
A theoretical model of rational economic decision-making.
What is the psychological phenomenon where the joy of winning 10 is smaller than the pain of losing 10?
Loss aversion.
What is an example of punishment for anti-social behavior?
Social sanctions or legal consequences.
What is the focus of Behavioral Economics?
Investigates deviations from standard economic models and augments economic theory
It aims to understand real decision-making processes rather than replace traditional theories.
What is the difference between Expected Utility Theory and Prospect Theory?
Expected Utility Theory: Maximizes expected utility by evaluating outcomes and their probabilities
Prospect Theory: People are loss averse and evaluate probabilities subjectively
Prospect Theory emphasizes reference points in decision-making.
Define Hyperbolic Discounting.
Individuals’ perception of future utility is influenced by the actual point in time
This leads to inconsistent decision-making over time.
What are Standard Preferences in economics?
Individuals maximize their utility based only on their own payoffs
This includes factors like income, consumption, and leisure.
What are Social Preferences?
People consider others’ welfare in their utility maximization
This includes altruism, fairness, and inequality aversion.
What is the purpose of laboratory experiments in economics?
To analyze individual behavior in a controlled environment to identify causal effects
Participants are usually unaware of the hypothesis being tested.
What is a field experiment in economics?
Conducted in a natural environment where participants may not know they are part of an experiment
It manipulates the natural environment to test hypotheses.
What are natural experiments?
Field data used to test hypotheses based on naturally occurring changes in rules
An example is analyzing effects of a temporary alcohol sales ban on crime rates.
