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Economics > Choice > Flashcards

Choice Flashcards

1
Q

Axioms of Utility theory

A

Completeness
Transitivity
Continuity
Probabilistic Consistency
Independence

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2
Q

Completeness

A

If a data set contains (x,y) then x>y, y>x, or x~y

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3
Q

Transitivity

A

If x>y, y>z, then x>z

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4
Q

Continuity

A

If x>y>z then there will be a combination of xz in which (xz)~y

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5
Q

Probabilistic consistency

A

An individual will be indifferent between x and y, if x and y produce the same outcome with the same probability

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6
Q

Independence

A

If there are some states that lead to the same outcome under all decisions then it will not effect the individuals decision making

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7
Q

Endowment

A

The initial allocation of economic resources before any economic decisions

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8
Q

x≥y

A

x is at least as good as y: weak preference

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9
Q

x>y

A

x is strictly preferred to y: strong preference

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10
Q

x~y

A

Individual is indifference between x and y

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11
Q

Aspiration treadmill

A

Process where increasing endowments lead to rising aspirations

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12
Q

Status quo bias

A

Tendency to prefer existing states of affairs

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13
Q

Reference point

A

A point in which individuals view economic decisions

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14
Q

Factors effecting reference point

A

Level of endowments
Social comparisons
Adjustment time to wins or losses
Expectations

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15
Q

Opportunity cost

A

The value of the next best alternative forgone because of a particular choice: Implicit cost

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16
Q

Explicit cost

A

Monetary cost of an action

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17
Q

Sunk cost fallacy

A

The continuing investment in an action, even if it does not maximise utility, due to the high previous investment of said action

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18
Q

Expansion condition

A

If x>y then the addition of z would not lead to the consumer picking y from the data set (x,y,z)

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19
Q

Menu dependence

A

The evaluation and relations between choices is dependant on the alternatives offered

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20
Q

Decoy effect

A

The addition of an alternative product in order to change consumers actions

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21
Q

Compromise effect

A

Tendency to choose an alternative that represents a compromise

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22
Q

Extremeness aversion

A

Tendency to avoid extreme options

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23
Q

Endowment effect

A

The greater utility given to items which an individual already owns

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24
Q

Framing effect

A

A change in an individuals actions from the change in how a situation is presented

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25
Q

Risk

A

Outcome is unknown but probability of each event is known

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26
Q

Uncertainty

A

Probability is unknown

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27
Q

Maximin rule

A

Best worst possible outcome

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28
Q

Maximax rule

A

Best best possible outcome

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29
Q

Hurwics rule

A

Weighted average of all possible outcomes

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30
Q

Laplace rule

A

Assigns same probability to each outcome

31
Q

Minimax regret rule

A

Minimise possible regret

32
Q

St Petersburg paradox

A

The expected value of a game in which a player can win 2^n monetary value will be infinite

33
Q

Von Neumann-Morgenstern utilities

A

Utility numbers that describe an individuals preference over risky outcomes. Only unique up to positive affine transformation

34
Q

Utility Calculations

A

EV(x)=pw1+(1-p)w2
EUi(x)=Upw1+U(1-p)w2
Ui(CEi(x))=EUi(x)
RPi(x)=EV(x)-CEi(x)

Risk premium
+ : risk adverse
- : risk loving
0 : risk neutral

35
Q

Outcome space

A

Set of all possible individual outcomes

36
Q

The Equiprobability rule

A

Equal probability of each of the outcomes

37
Q

The Everything rule

A

The probability of the entire outcome space is equal to one

38
Q

The not rule

A

The probability that an event will not occur P(¬a)=1-P(a)

39
Q

The And rule

A

If A and B are independent of each other, than the probability of A and B is the multiplied probability of each
P(A&B)=P(A)*P(B)

40
Q

Conjunction fallacy

A

A fallacy of judgement that occurs when a combination of two or more attributes is judged to be more probable or likely than one of them on its own

41
Q

Independence

A

The probability of two events are not related
P(A|B)=P(A)
P(B|A)=P(B)
P(A&B)=P(A)*P(B): The and rule

42
Q

Dependence, Conditional Probability

A

P(A&B)=P(A)*P(B|A)

43
Q

Mutually exclusive

A

P(A&B)=0

44
Q

Bayes’ Theorem

A

P(A|B)=P(B|A)*P(A)/P(B)

45
Q

The Mere exposure effect

A

The tendency for individuals to form a liking or disliking for things merely because they are familiar with the thing

46
Q

Assumptions of Exponential discounting model

A

Preferences are time consistent: Hold the same 𝛿 when evaluating options
Preferences do not vary with stakes: 𝛿 is the same regardless of the value of the utility
Preferences are not reference-dependent: same 𝛿 regardless of whether consumption is in gains or losses

47
Q

Hyperbolic discounting

A

Time inconsistency: Preferences change with time, individuals are impulse and lack self-control

48
Q

Types of time-inconsistent individuals

A

Naïve type:
They are unaware of their self-control problems. They make decisions based on the inaccurate assumption that their preferences are time-consistent
Sophisticated type:
They are aware of their self-control problems. They make decisions based on accurate predictions of their future

49
Q

Commitment device

A

Restricting one’s choice set or menu in order to prevent unwanted behaviour

50
Q

Disjunction Fallacy

A

The tendency to underestimate the probability of a disjunction of events (A or B occurring)

51
Q

Planning Fallacy

A

Tendency for individuals or organisations to overestimate the probability of conjunction in relation to stages, components, or time

52
Q

Confirmation bias

A

The tendency for people to seek out information which agrees with their point of view

53
Q

Representativeness Heuristic

A

The tendency to estimate the probability that some outcome was the result of a given process by reference to the degree to which the outcome is representative of that process

54
Q

Base rate fallacy

A

The tendency for individuals to ignore the base rate probability

55
Q

Regret aversion

A

The tendency for individuals to behave in a way to minimize anticipated regret

56
Q

Allais paradox

A

Shows individuals do not behave in line with expected utility theory

57
Q

Attraction effect

A

The addition of a decoy to make another alternative look more attractive to individuals

58
Q

Loss aversion

A

The tendency for individuals for individuals to have a greater change in utility for a loss than an equal size gain

59
Q

Value Function

A

Measures the change in value relative to a reference point
Find utility in each time period and weight it for the value function and whether it occurred

60
Q

Exponential discounting model

A

Delta Model
Assumes time consistency

61
Q

Hyperbolic discounting

A

Beta-Delta Model
Individuals lack self-control

62
Q

Gambler’s Fallacy

A

The tendency for individuals to see two independence events as related

63
Q

Overconfidence

A

Tendency for individuals to over-estimate their own abilities

64
Q

Availability Bias

A

The tendency for individuals to place importance on information that comes easy to mind

65
Q

Maximin criterion

A

Greatest minimum payoff

66
Q

Maximax criterion

A

Greatest maximum payoff

67
Q

Minimax-risk criterion

A

Lowest maximum risk or regret

68
Q

Mental Accounting

A

The tendency for individuals to view the spending of money differently depending on how it is spent

69
Q

Integrated Outcomes

A

When outcomes are combined
Integrate losses

70
Q

Segregate Outcomes

A

When outcomes are separate
Segregate Gains

71
Q

Sure-thing principle

A

Individuals who decide they would take a certain action in case of an outcome whom would also do the same in neglection of the outcome, should do the same action is they knew nothing of the event

72
Q

Certainty effect

A

The tendency for individuals to predict disproportionally better outcomes than the probability

73
Q

Probability Weighting

A

Individuals assign a higher weight on low-probability events whilst assigning low weights on moderate or high-probability events

Economics (21 decks)

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