Chapter 2: Theories of economic decision making

Question 1

Labour theory of value means?

Answer 1

The price of traded goods depends on the number of labor hours that it takes to produce a good. However, value does not only accrue from labor

Question 2

Marginal revolution in price setting?

Answer 2

The price is not determined by its average value but by the marginal value. The marginal value increases/decreases with scarcity or overstock

Question 3

Why is utility important and what has the st petersburg paradox to do with it?

Answer 3

In this game, 4K could be won. Every rational gambler would pay any less sum that 4k to participate. However, because utility was hidden, people did not actually want to participate

Question 4

What is external uncertainty?

Answer 4

Uncertainty based on frequencies or propensities

Question 5

What is internal uncertainty?

Answer 5

Uncertainty based on arguments or knowledge

Question 6

MISS OPZOEKEN OOIT ALS JE KAARTJE LEES: ALLAIS EFFECT + ELLSBERG EFFECT

Question 7

What are the 2 phases of decision making according to prospect theory?

Answer 7

1. Editing phase –> assigning a subjective value by coding them in relation to a reference point and translation of probabilities into decision weights
2. Evaluation phase: choose the highest evaluation

Question 8

Prospect theory bias: loss aversion

Answer 8

People see losses as having more impact than gains. Losses loom larger than gains

Question 9

Prospect theory bias: framing effect

Answer 9

1. Loss frame –> people will have to pay extra

2. Gain frame –> people will receive an additional bonus

Question 10

Prospect theory bias: endowment effect

Answer 10

The effect of owning something increases the asking price (because we have to compensate for a felt loss)

Question 11

Fourfold pattern of risk attitude

Answer 11

High probability:
1. fear of disappointment–> 50% chance to win 100K (risk averse)
2. Hope to avoid loss –> 95% chance to lose 10K (risk seeking)
Low probability:
3. Hope of large gain (5% chance to win 10K) –> risk seeking
4. Fear of large loss (5% chance to lose 100K) –> risk averse

Question 12

According to economists, how do people act?

Answer 12

1. As rational agents
2. As homo economicus
3. As people always aiming to maximize utility and/or benefit.
4. Calculation and choose the option with most utility

Question 13

Heuristic approach of decision making is different from Subjective expected utility in what way?

Answer 13

People don’t have to calculate value. Rather, valuation is a consequence of simple comparisons

Question 14

Decision-by-sampling (e.g. comparison) decision making is what?

Answer 14

Make as simple, binary, ordinal comparisons that you can. Direct comparison over value. Think of a scale that is used to see what item is heavier

Question 15

Reason-based decision making is what?

Answer 15

Choice is the balance of reasons for and against various alternatives. Typically seen in politics

Question 16

OPZOEKEN DECISIONS FROM EXPERIENCE< SAMPLING EN DESCRIPTION_EXPERIENCE GAP

Question 17

What is the relationship between emotions and decision-making?

Answer 17

the relationship is bilateral, both influence the other.

Question 18

What is the risk-as-feeling hypothesis/affect hypothesis and how does it help in decision making?

Answer 18

Basically you can ‘feel’ risk inside you. That feeling is based on all negative/positive tags you have in your brain regarding a certain decision or action. It is the equivalent of ‘going’ with your gut and allows for quick-decisions.

Question 19

Does valuation of price depends on someones mood?

Answer 19

Yes

1. feeling mood = people only pay attention to basic scope differences
2. Calculative mood = people show full sensitivity to scope

Question 20

What are some of the negatives about thinking in a calculative mode?

Answer 20

1. Can make people less receptive o other people’s suffering
2. Thinking about large numbers of suffering leads to insensitivity towards to total amount of people involved, thus mitigation emotional reactions (psychic numbing)

Question 21

What are empathy gaps?

Answer 21

We have difficulty predicting future feelings following from a decision when test feelings are different from current feelings (e.g., you’re happy know but you predict sadness)

Question 22

What is an interpersonal empathy gap?

Answer 22

Predicting how one would feel in a different situation

Question 23

What is an interpersonal empathy gap?

Answer 23

predicting how others would feel in a certain situation

Question 24

What is the Hot-cold empathy gap?

Answer 24

1. People in an emotional state underestimate the extend to which their predicted preferences are influenced by that present emotional state
2. THUS people overestimate the stability of their own current preferences

Question 25

What is the cold-hold empathy gap?

Answer 25

People are not aroused, but must predict their aroused behaviour
People tend to underestimate the motivational forces of their own future hot status, thus often failing in self-contorl

Question 26

What are 4 characteristics of prospect theory?

Answer 26

1. Diminished sensitivity to accumulating outcomes
2. prospects evaluated relative to reference point
3. Steeper loss function
4. Diminishing sensitivity to probabilities

Question 27

What is the status-quo bias?

Answer 27

People like to keep things just the way they are. There is no effort and no risk.

Question 28

What is the expected utility theory?

Answer 28

People aim to maximize utility: value/price follows an individual’s strive for happiness maximization

Question 29

What is the principle of deceasing marginal utility?

Answer 29

The effects of new stuff or money soon ware out because you get used to new standards. Things will have les and less marginal utility compared to before because you have it all