empirical evidence Flashcards
notion of bounded rationality
herbert simon
individuals simplify their problems by:
narrowing the set of possible choices,
narrowing the characteristics they consider,
simplifying the relationships between choices and outcomes.
what did Arkes and Blumer find in their experiment
- Randomly offered 60 people different prices for theatre ticket bundles after they decided to order tickets.
- One group just got the full price.
- Some received a $2 discount (13%).
- Others received a $7 discount (47%).
- During the first five plays of the 10-plays season, those who paid more attended more plays.
- Effect vanishes for the last 5 plays.
- showing sunk cost fallacy, loss aversion
what is thaler’s model of transaction utility
U(x1, x2, z(x1, p0)) = u(x1, x2) + z(x1, p0)
s.t. p0xbar1 + p2x2
what is Kahneman and Tversky’s Model of Prospect Theory
Utility is measured using gains and losses rather than on an absolute scale.
Utility is concave in gains, i.e. diminishing marginal utility.
Utility is convex in the region of losses, hence increasing marginal utility in the region of losses).
This is typically called loss aversion.
what did Prelec and Loewenstein hypothesize, when, and what did they find
1998
people are more likely to pay with instalments for durables that give repeated pleasure (e.g. washing machine) than for one-off consumption such as holidays
On average participants wanted to prepay the vacation but wanted to buy the washing machine on credit
- showing mental accounting and payment decoupling
what is the easterlin paradoz
in any cross-section people are happier than poor people but within a country, over time, there is no relationship between GDP and happiness
what does decancq argue
peoples happiness depends on their consumption bundle and scaling factors (preferences and reference points) –> panel data could be used to observe the same individuals over a period of time
what did falk and herme test for
they tested whether development leads to a wider gap in gender preference (or not)
what did frank (1984) observe
wage distribution was more compressed than the distribution of marginal productivity
speculated that workers of low productivity want to be compensated for being lowest in rank
people at top pay a price for being highest in rank
how did clark and oswald (1998) model how a utility function depending on status can explain herd behaviour
a: action of social or economic kind that gives utility (e.g. running a marathon or wearing expensive clothes)
a: mean of other peoples actions
U = v(a-a) + u(a) - c(a)
utility status + utility from action - cost of action
what does blanchflower et al. (2009) argue
part of the obesity issue is explained by caring about status
- if utility is linear in status: people do not change their eating behaviour based on others
- if utility is convex: people invest less in status when others around them are obese
- if utility is concave: people act in the opposite way (anorexia)
what is hirschmans tunnel effect (1973)
imagine two drivings lanes
1) fast
2) stand still
those in lane 2 will begin patient but then will become frustrated due to comparison
what did card et al do
they carrie dout an experiment to look into comparison effects on income
- one group (treatment) recieved an email prior to answering the survey, the control group did not
- those with a higher relative salary to their own job description were less affected than those with a low relative wage
- most people only compared within their own department (relevant comparison group)
those with low relative wage were significantly less happy than their control counterpart group
- if unsatisfied, women were more likely to express desire to search for a new job
what were the main findings from kuhn et als atudy (2011)
participants could win a BMW or cash
those who won a BMW mostly sold it within 6 months
winning postcodes have a higher car consumption
those who live next to a BMW winner are 7% more likely to buy a new car
high implications for public policies (can make stimuli packages for durable goods)
what were the main findings from breza et al’s study
as people compare about relative income, companies could utilise this to increase competition to increase productivity (however this could reduce morale, cause resentment and conflict and maybe cause lower productivity)
experiment in india, people grouped in three’s, in either a compressed or dispersed wage group, in their training period they were ranked based on productivity within their group and their productivity determined their wage
after sharing pay between peers, lower ranked individuals in the dispersed pay group produced less output than their counterpart compressed wage group
on their last day they played two games in teams
those in dispersed wage groups built a tower 17.5% smaller than the compressed wage groups
2nd game: those who were from a dispersed wage group built a puzzle better with strangers than someone from their own unit
