Chapter 2: Theories of economic decision making Flashcards
Labour theory of value means?
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
Marginal revolution in price setting?
The price is not determined by its average value but by the marginal value. The marginal value increases/decreases with scarcity or overstock
Why is utility important and what has the st petersburg paradox to do with it?
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
What is external uncertainty?
Uncertainty based on frequencies or propensities
What is internal uncertainty?
Uncertainty based on arguments or knowledge
MISS OPZOEKEN OOIT ALS JE KAARTJE LEES: ALLAIS EFFECT + ELLSBERG EFFECT
What are the 2 phases of decision making according to prospect theory?
- Editing phase –> assigning a subjective value by coding them in relation to a reference point and translation of probabilities into decision weights
- Evaluation phase: choose the highest evaluation
Prospect theory bias: loss aversion
People see losses as having more impact than gains. Losses loom larger than gains
Prospect theory bias: framing effect
- Loss frame –> people will have to pay extra
2. Gain frame –> people will receive an additional bonus
Prospect theory bias: endowment effect
The effect of owning something increases the asking price (because we have to compensate for a felt loss)
Fourfold pattern of risk attitude
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
According to economists, how do people act?
- As rational agents
- As homo economicus
- As people always aiming to maximize utility and/or benefit.
- Calculation and choose the option with most utility
Heuristic approach of decision making is different from Subjective expected utility in what way?
People don’t have to calculate value. Rather, valuation is a consequence of simple comparisons
Decision-by-sampling (e.g. comparison) decision making is what?
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
Reason-based decision making is what?
Choice is the balance of reasons for and against various alternatives. Typically seen in politics
OPZOEKEN DECISIONS FROM EXPERIENCE< SAMPLING EN DESCRIPTION_EXPERIENCE GAP
What is the relationship between emotions and decision-making?
the relationship is bilateral, both influence the other.
What is the risk-as-feeling hypothesis/affect hypothesis and how does it help in decision making?
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.
Does valuation of price depends on someones mood?
Yes
- feeling mood = people only pay attention to basic scope differences
- Calculative mood = people show full sensitivity to scope
What are some of the negatives about thinking in a calculative mode?
- Can make people less receptive o other people’s suffering
- Thinking about large numbers of suffering leads to insensitivity towards to total amount of people involved, thus mitigation emotional reactions (psychic numbing)
What are empathy gaps?
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)
What is an interpersonal empathy gap?
Predicting how one would feel in a different situation
What is an interpersonal empathy gap?
predicting how others would feel in a certain situation
What is the Hot-cold empathy gap?
- People in an emotional state underestimate the extend to which their predicted preferences are influenced by that present emotional state
- THUS people overestimate the stability of their own current preferences
What is the cold-hold empathy gap?
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
What are 4 characteristics of prospect theory?
- Diminished sensitivity to accumulating outcomes
- prospects evaluated relative to reference point
- Steeper loss function
- Diminishing sensitivity to probabilities
What is the status-quo bias?
People like to keep things just the way they are. There is no effort and no risk.
What is the expected utility theory?
People aim to maximize utility: value/price follows an individual’s strive for happiness maximization
What is the principle of deceasing marginal utility?
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
