Div Flashcards
Behavioural economics
Limits to Rationality: People don’t always make fully logical decisions due to cognitive constraints.
Biases and Heuristics: Mental shortcuts and biases often lead to predictable errors in decision-making.
Social and Emotional Influences: Decisions are influenced by social factors and emotions rather than just pure logic.
Behavioral economics explores how these psychological and social elements shape economic choices, diverging from the assumption of perfectly rational decision-making in traditional economics.
Neoclassical economic theory
Rational Decision-Making: People act to maximize their satisfaction given their preferences and constraints.
Supply and Demand: Markets find balance through the interaction of supply and demand, determining prices and quantities.
Utility and Profit Maximization: Consumers seek maximum satisfaction, while firms aim to maximize profits.
Competition and Equilibrium: Markets tend toward equilibrium, assuming many buyers and sellers with no one influencing prices.
Efficiency and Property Rights: Emphasis on efficient resource allocation and the importance of clear property rights for functioning markets.
Currency appreciation
There are many factors that can cause a nation’s currency to appreciate or depreciate, but the basic laws of supply-demand apply. If the demand for a nation’s currency increases, that nation’s currency will appreciate, and vice versa if the demand drops. If the supply of currency increases, it will depreciate, and if one country’s currency appreciates, some other country’s currency will depreciate relative to it
Midpoint formula
Prospect theory
Abehavioral economic theory suggesting people are not making decisions based on rational expected utility theory.
Value Function: It proposes that individuals evaluate potential losses and gains from a reference point rather than final wealth. Losses and gains are not considered equally; losses typically have a larger psychological impact than equivalent gains.
Diminishing Sensitivity: People exhibit diminishing sensitivity to changes in wealth or value. As the magnitude of gains or losses increases, the emotional response diminishes, leading to risk aversion for gains and risk-seeking behavior for losses.
Decision Weights: Probability weighting suggests that people do not perceive probabilities in a linear way. They tend to overweight small probabilities and underweight moderate to high probabilities.
Risk Aversion and Risk Seeking: Individuals tend to be risk-averse when facing potential gains (preferring certainty over a risky option) and risk-seeking when confronted with potential losses (preferring risk to avoid certain loss).
