General Terms

Question 1

Anchoring Effect

Answer 1

Anchoring effect is a cognitive bias that occurs when individuals rely too heavily on the first piece of information they receive (the “anchor”) when making subsequent judgments or decisions.

Question 2

Present Bias

Answer 2

Present bias is a cognitive bias in which individuals give greater weight to immediate gratification over long-term rewards or consequences.

Question 3

Impure altruism

Answer 3

Individual cares more about what they give rather than what the other individual is consuming

Question 4

Pure altruism

Answer 4

Individual cares about what the other individual is consuming

Question 5

Non paternalistic pure altruism

Answer 5

Individual cares about what the other individual is consuming/welfare as defined by the other individual

Question 6

Paternalistic pure altruism

Answer 6

Individual cares about what the other individual is consuming/welfare as defined by themselves

Question 7

The social motives of altruism

Answer 7

Fairness, Retaliation, and Social Visibility

Question 8

Mental Accounting

Answer 8

Mental accounting refers to the tendency of individuals to categorize money and other resources into separate mental accounts based on their source, purpose, or timing. For example, a person may categorize money received as a gift differently than money earned from work, or may view money set aside for a vacation differently than money in a savings account. Mental accounting can lead to suboptimal decision-making when it results in individuals making decisions based on how they have mentally categorized the resources, rather than on the overall value or opportunity cost of the decision.

Question 9

Narrow Framing

Answer 9

Narrow framing refers to the tendency of individuals to focus narrowly on a single aspect of a decision or problem, rather than considering the broader context or implications. For example, a person may focus on the immediate financial costs of a decision, such as the purchase price of a product, while ignoring the long-term costs or benefits of the decision. Narrow framing can lead to suboptimal decision-making when it results in individuals overlooking important factors that should be taken into account when making a decision.

Question 10

Weak Axiom of Revealed Preferences (WARP)

Answer 10

if x is preferred over y, then x is chosen in all sets that include x and y. Economist’s assumptions about rationality require that for a person to be rational they must satisfy WARP.

Question 11

Generalized Axiom of Revealed Preference (GARP)

Answer 11

Unlike the WARP, which only considers pairwise choice comparisons, the GARP considers choice sets that contain more than two alternatives. Specifically, the GARP states that if an individual chooses a bundle of goods A over a bundle of goods B, and chooses B over C, then it must be the case that the individual prefers A to C.

Question 12

Endowment Effect

Answer 12

The endowment effect is a cognitive bias in behavioral economics that describes the tendency for individuals to value a good or object more highly if they own it, compared to if they do not own it. In other words, people tend to attach a higher value to an item simply because they possess it, regardless of its actual market value.

Question 13

Loss Aversion

Answer 13

Loss aversion is a behavioral economic concept that refers to the tendency of individuals to place more weight on losses than on gains of equal magnitude.

Question 14

Time Inconsistency

Answer 14

Time inconsistency is a concept in behavioural economics that describes a situation in which an individual’s preferences change over time in a way that is not consistent with their original intentions or goals. Suppose someone has to choose consumption at date(s)
t ≥ T. If they make one choice at some date r ≤ T, and a
different choice at another date s ≤ T even though no
pertinent information is revealed between r and s, we
say their choices (and preferences) are time-
inconsistent.

Question 15

Sophisticated Time Inconsistent Decision Maker

Answer 15

Understands that they can’t necessarily trust themselves to
follow through on her intentions; they properly anticipate their
future actions. We expect people to acquire sophistication as they become
more experienced with particular types of choices. A sophisticated has an incentive to make commitments that restrict future opportunities.

Question 16

Naive Time Inconsistent Decision Maker

Answer 16

Falsely believes that they will follow through on their intentions; they
forecast their future actions incorrectly.

Question 17

Discounting

Answer 17

People value delayed rewards less than current rewards. The ratio D(k)/D(k– 1) tells us the rate at which the individual, as of period t, is willing to shift reward between periods t + k– 1 and t + k.

Let’s say ut+k increases by one unit. By how many units does ut+k-1 need to decrease for discounted rewards to be unaffected? Answer: ut+k-1 must decline by D(k)/D(k– 1) units.

The ratio D(k)/D(k–1) is used to determine how much the individual values rewards in period t+k compared to period t+k-1. If the ratio is greater than 1, it suggests that the individual values rewards in period t+k more highly than in period t+k-1, and is therefore willing to delay gratification and shift rewards to the later period. Conversely, if the ratio is less than 1, it suggests that the individual values rewards in period t+k-1 more highly than in period t+k, and may prefer to receive rewards earlier rather than later.

Question 18

Geometric Discounting

Answer 18

For time consistency: D(r –t)/D(r– 1 – t) = D(r –s)/D(r– 1 – s).

Then D(k)/D(k– 1) = δ – in other words, the individual is always
willing to trade off rewards between any two successive periods at
the rate δ, no matter when he makes the decision.

Question 19

Quasi-hyperbolic discounting (Time Inconsistent Discounting)

Answer 19

The model is the same as the standard model of geometric
discounting, except that the individual always discounts the entire
future by an additional multiplicative factor β < 1.

So D(k) = βδk instead of just δk

Question 20

Optimal Two-part Tariff

Answer 20

A pricing strategy used by a company or seller to maximize profits by charging a fixed fee (known as the access fee or subscription fee) in addition to a variable fee based on usage or quantity purchased. This strategy is often used by companies that provide a service, such as utilities or telecommunications providers.