Measuring Behavior and Preferences Flashcards
Treatment effects of poverty refers to the fact that:
Poverty itself can cause sub-optimal behaviors
How can scarcity affect performance at cognitive tasks?
There is evidence that poor are more rational when it comes to financial choices and are more focused when it comes to decision making. However, scarcity affects bandwidth and cognitive capacity which deteriorates performance at cognitive task
Inhibitory control
Inhibitory control refers to the ability to control one’s attention, behavior, thoughts, and emotions. It overrides internal predisposition or external lure and enables one do what is (more) appropriate or needed.
Working memory
Working memory is the ability to hold information in the mind and work with it
Example: Memorizing the information on the slides and lectures and using this information to solve finger exercises
What were the findings of the Mall study?
The mall study finds that the poor perform worse on cognition when presented with the hard task where the stakes are higher i.e. USD 1500 to fix the car vs. the easy task where the stakes are lower i.e. USD 150 to fix the car. These effects persist even when the cognition tasks are incentivized.
The harvest study was designed to ask the question:
Does poverty lower cognitive function?
By measuring difference in cognitive function pre-harvest (when farmers are poorer) versus after-harvest (when farmers have money), the study was meant to determine whether poverty has an impact on cognitive function.
Discount factor
delta; measures how utility in later periods is discounted relative to earlier periods
Discount factor is usually less than equal to one as people tend to care more about the present relative to the future.
Discount factor equation
(Y/X) ^ (1/t)
Y = today
X = tomorrow
t = time
Calculate the one-year discount factor () if individual A is indifferent between $40 today and $80 in two years
Y = 40 X = 80 t = 2 years
delta = (40/80) ^ (1/2) = 0.71
We observe that people tend to discount utility in the near future (e.g. between now and a year from now) much more than utility in the distant future (e.g. between 10 years and 11 years from now). Frank uses this evidence to make the point that:
The standard exponential discounting model cannot explain these facts since it uses a constant discount factor
This model cannot explain the evidence that people tend to discount near and distance future differently, so we might want to extend it, i.e. allow for the discount factors in the short and long-run to differ. This is what the beta-delta model does.
Dynamic inconsistency
Our current preference is to do something in the future, but when the future comes, that future self does not want to go through with it
quasi-hyperbolic discounting
The idea of quasi-hyperbolic discounting is that we discount the future relative today. But we do not discount two different points in the future relative to each other.
In a trust game, Person A receives $100, and can give any amount to Person B. The amount Person B receives is tripled, and then Person B can choose to give any amount back to Person A.
If Person A believes that people act solely in their own self interest, what amount would person A give to person B to maximize the money he (Person A) receives?
If Person A assumes everyone acts in their own self interest, he would assume Person B will give nothing back, and therefore to maximize his own wealth, he would simply not give Person B any.
Which of the following games measures whether people are willing to pay money to penalize others for being unfair?
Ultimatum game
The ultimatum game allows the recipient to punish the first player for an unfair allocation by deciding no one gets anything. They may pay a cost by foregoing whatever money the first player gave them.
Trust game
• Similar to the Dictator Game, but with an added first step.
• One participant given endowment (e.g. $10).
• Participant decides how much to give to the second participant.
• Amount is then (typically) multiplied by researchers.
• Second participant now acts as a dictator.
• Decides how much of the increased endowment to keep and how
much to allocate to the first participant.
• Measures how much people care about each other, but also trust