Internalities

Question 1

3 Assumptions about Rational Thinking

Answer 1

1. Individual is well-informed about her options
2. She has well-defined preferences that are stable over time
3. She has the capacity to reason through her problem

Question 2

Daniel Kahneman

Answer 2

came up with the idea of automatic vs reasoned thinking

Question 3

Automatic Thinking

Answer 3

Aka fast thinking, or “system 1”
→ Thinking that is intuitive and involuntary
— Doesn’t take up mental resources

Question 4

Reasoned Thinking

Answer 4

aka slow thinking, or “system 2”
→ Thinking that requires conscious and deliberate thought
— Takes up mental resources that cannot be spent on other activities

Question 5

Automatic thinking comes in two types

Answer 5

Instinct & Heuristics

Question 6

Instinct

Answer 6

an innate reaction to an external stimulus

Question 7

Heuristics (rule of thumb)

Answer 7

A mental short-cut that produces a solution to a problem that is not
guaranteed to be optimal but that is often sufficient
– Deal with a hard problem by solving an easier side problem

Question 8

Advantage of Automatic Thinking

Answer 8

we can do it quickly

Question 9

Disadvantage of Automatic Thinking

Answer 9

systematic biases

Question 10

Internality

Answer 10

An externality where the external damage/benefit falls on the person who created the externality
- internal damages and benefits
- create a deadweight loss

Question 11

Salience often arises

Answer 11

due to hidden costs and fees

Question 12

market eq

Answer 12

PMC = MB

Question 13

Efficient eq

Answer 13

SMC = MB

Question 14

Paternalism

Answer 14

People may not like when others make decisions for them—even if the decisions are in their best interest