Decision making Flashcards
How do we show pessimism?
Person puts a higher decision weight on the worst outcome
How do we measure optimism?
Person puts a higher decision weight on the best outcome
If someone doesn’t report their income, they “” what they would’ve “” in tax
- Gain
- Loss
Why is tax a loss for someone who hates tax?
Their reference point is their final non taxed wealth
What are the best and worst outcomes for a tax hater?
- Worst = Gets audited
- Best = Doesn’t get audited
Why would a tax hater still report their income?
They place a higher decision weight on being audited
What is exponential discounting?
When someone gives a discount to future utility
What does an inter temporal utility function do?
Combines utility from each period to one measure of overall utility
Discount rate of 0.x means:
A person would require an interest rate of x% to delay until the next period
The larger the sum of money, the “” the discount factor, meaning people are more “” in smaller amounts
- Larger
- Patient
What is gain-loss symmetry?
When the estimated discount factor is smaller for gains than for losses
What does it mean when someone has a preference for improving sequence?
When someone prefers a less “fun” event now and then a better event later
Exponential discounting predicts people are Impatient for:
Higher utility with a discount factor less than one
