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ESHPM - Jaar 3 > Minor - Week 2 > Flashcards

Minor - Week 2 Flashcards

1
Q

Interest rate

A

How high the costs are of borrowing money or rewards for saving

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2
Q

Interest rate higher results in

A

Becoming more attractive to consume later on
- Most likely induce a subsitution effect

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3
Q

Discounted utility

A

-People care about consumption more now than in the future.
- Weight added to utility

VB: 50 min now or 60 min later

50 kost minder moeite

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4
Q

Time preference

A

Positive time preference (prefer consumption today rather than in the future)

Because
- Income can be higher in future
- Chance not able to consume in future

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5
Q

Link time preferences and interest

A
  • Spend tomorrow, can not earn interest at the bank (opportunity cost of spending now)
  • The more impatient the more they spent
  • For firms harder to lend money
  • Interest rate will be higher
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6
Q

Classic exponential - Theoretical function of discounted utility

A
  • Formula: Ut = ut + delta^1 (ut+1) +delta^2 (ut+2) + delta ^3 (ut+3) +

Discount function does not decline more quickly in the short-run
than in the long-run. (neemt constant met bv 10 % af) itt tot hyperbolic discounting

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7
Q

time inconsistency

A

People tend to be not consistent with decisions for the future.
- Change our mind often

They change their mind due to a higher weight on utility in the present

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8
Q

The beta delta discounting

A

Uoverall = U0 +β [δ^1* U1 +δ^2 *U2 +…]

  • beta= present bias parameter
    β<1 (present high evaluation
  • Delta = regular discount factor δ ≤ 1
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9
Q

Delta

A

Discount rate utility incrementally more in each period
- Time dependent
- Discounting factor showing how impatient somebody is
δ ≤ 1

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10
Q

Beta why smaller than 1?

A

Because future is less utility, if it was 1, then rewards in the future would be the same

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11
Q

Beta

A

Present bias parameter, discounts utility in all non-current periods
- 0 < β
- Utility in the present is valued especially highly
- Utility from any future period receives an extra devaluation
- Special value of “now”

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12
Q

beta delta discounting model - Sort of discounting

A

Hyperbolic discounting
- First period high decline
- Lower decline if you go futher into the future.

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13
Q

When are you time inconsistent ?

A
  • When beta is lower than 1.

Less value in future than initially thought

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14
Q

Hyperbolic discounting also known as

A

Myopic preferences

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15
Q

Uoverall = U Thursday + β δ UFriday + β δ^2USaturday+

A

Here it seems logic to quit smoking on saturday, your utility is at is lowest point

  • But there will be a saturday when your utility is high
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16
Q

Why time inconsistent preferences are self destructive

A

myopic preferences lead to a cricle of postponing, because utility in the future is always lower

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17
Q

Implications time inconsistency

A
  • Costs are mostly reaped in future periods (health consequences, are less negative than at the present)
  • In contrast: doing exercises has costs today and benefits much late
  • Laying in bed costs is present and not discounted
  • benefit of going to lecture is discounted due to present bias

Cost benefit analyse is different

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18
Q

Overcome hyperbolic discounting?

A
  • Commitment contract; brings costs of smoking forwards
  • Money on the bank for 6 months otherwise to charity
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19
Q

Higher discount rates

A
  • Relation with money stronger than health outcomes
  • Hyperbolic more unhealthy behavior than constant discounting
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20
Q

Other effects hyperbolic discounting in constract to constant discounting

A
  • Sign effect
  • Magnitude effect
  • Sequence effect

Discounting depends on consumption!

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21
Q

Sign effect

A

Losses are treated other than gains, hyperbolic (constant discounting says this shouldn’t matter)
- Losses in future are more bad than losses now (not in line with consistent theory); that says all outcomes are less worth in future!
- Gains are discounting in future, less worth
-Constant discouting says equal not the case

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22
Q

Magnitude effect

A

Large outcomes discounted at a lower rate than small outcomes
- Individuals may not want to wait too long for small amounts

  • For example: prefer 1-, now to 2-, in a year but also prefer 200,000-, in 1 year to 100,000- now (not consistent, than there is no discounting)
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23
Q

Delayed speed-up assymetry

A
  • Delay from some temporal reference point.
  • Acceleration from some temporal reference point.
  • Different discount rate

Ex; 100 euro in a week, but now month later. Discount rate is higher and otherwise

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24
Q

Sequence effect

A

We often prefer improving to declining sequences.
Explanations

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25
Q

Time inconsistency perspective from pyschology

A
  • Intention behavior gap
  • Habits
  • Self- control
  • Dual systems
  • Ego depletion
  • Self licensing & confabulation
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26
Q

Theory of planned behavior

A
  • Attitude
  • Subjective norms
  • Percieved behavioral control (influences intention and behavior)

Leads to intention

Leads to behavior

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27
Q

Attitude

A

“how do I feel about exercising?- values/characteristics etc.

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28
Q

subjective norms

A

what do others do?”,- conformism/normative beliefs

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29
Q

Percieved behavioral controo

A

“to what extent do I feel like I can
influence the behavior in question, do I have the skills or resources to do it?”

  • Skills and resources
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30
Q

Habits

A

=automatic behavior

Definition: learned sequences of acts that have become automatic responses to specific cues and are functional (successful) in obtaining certain goals or end-states.

  • Easier to form than to break
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31
Q

Contextual cue

A

A stimulus in your surrounding that is linked to a behavioral response, with no deliberation needed
- Work –> bike

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32
Q

How to form habits

A
  • a contextual cue in the same stable context
  • leads to a behavioral response frequently
  • it leads to a positive experience/reward
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33
Q

Breaking a habit

A
  • Easier to break than to form
  • Simple behavioral responses are easier to become a habit
  • easy when followed by reward
  • breaking habits requires deliberate action
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34
Q

Hot cold gap

A

Hot environment; high emotional and arousal (likely to act on impulses)

Cold environment; low emotional and arousal

Hot cold gap; trouble imaging what we would do in hot environments

  • Need self control
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35
Q

Self control (hoffman, Friese en strack)

A

Capacity to resist impulses
- Reflective precursors
- Impulsive precursors

36
Q
  • Reflective precursors
A

Components of self-control that
we have our own control through logic.
- Restrain standards
- Deliberate eveluations

37
Q
  • Impulsive precursors
A
  • Automatic affactive response
    -Automatic approach-avoidance reactions
38
Q

situational or dispositional boundary conditions

(kind of a slope between reflective and impulsive precursors)

A

so the outcome depends on the situation and position people are in, do I generally have high self-control?

39
Q

Dual system theory (Kahneman)

A

System 1 - Automatic: Fast, automatic, acts on impulses, error prone (Homer economics)
(automatic system)

System 2 - Reflective: Slow, conscious, reliable, older, captures cold cognition (deliberate system)

40
Q

Ego deplation

A

Self control is a limited resource, especially when:
- Suppressing emotions
- Choosing healthy in the face of temptation
- Under cognitive load
- After a boring task or challenging task

People are less motivated to control their impulses

41
Q

Self-licensing & confabulation

A

Ego depletion and dual systems looks like automatic system always lead to bad health behavior.

  • Not the case

Self licensing; Feeling like you deserve a reward after exertion, which can lead to unhealthy behaviour. Example: “I worked hard, so I deserve these biscuits.”

42
Q

Risks in health economics

A
  • Diagnostic risk (screening)
  • Treatment risk
  • Effectiveness medicine
  • Risk of disease
  • Risk of outbreaks
43
Q

Calculation EU

A

EU= p1U1+p2U2

44
Q

Expected Utility of wealth

A

E(U(W)) = (1-p) * U (Wh) + p * (Ws)

  • Wh = wealth healthy
  • Ws = Wealth sick

U(w)= Wortel (w)

45
Q

Insurance utility maximizing
- Expected utility of wealth is 97,24
- Wealth sick = 2000
- Wealth healthy = 10.000
- Prob sick = 0.05

  • Would you insure?
A

Loss of wealth (income) = 8000
- Probabilty of this loss = 0,05 * 8000 = 400

  • Insurance offers premium for 9600 (10.000 - 400)

EU=U(9,600)=97.98>97.24

Would insure because higher level of certainity

46
Q

Concave graph

A

Risk aversion

47
Q

3 risk types

A
  • Risk aversion; sure outcome above lottery with same expected value
  • Risk seeking; Lottery above sure outcome with same value
  • risk neutral; indifferent to lottery or sure outcome with same value
48
Q

Allias paradox

A

People don’t follow the rules of being consistent as it is in the utility theory

  • Chance to loose small –> don’t take the gamble (choose for the safest option, with less chance to win nothing)

Not consistent with

  • Chance to loose are high people like to take the gamble even it is not the safest option.
    (choosing not for 89% nothing but for 90% nothing)

People dont take rationality in to account but more the perception and weight of losses and wins

49
Q

Allias paradox violation of

A

independence axiom

50
Q

independence axiom

A

If a choice has the same outcome in both scenarios, you can ignore that part of the gamble because it doesn’t add any new information or change the odds.
- score out the same chances

51
Q

Elements in prospect theory (Kahneman & Tversky)

A
  • Reference dependance (framing)
  • Loss aversion
  • Overestimating small probabilities
  • Overvaluing certain events
52
Q

Reference dependance

A

Attitudes might be different in the gain and in the loss
domain
- gains strictly prefered to the reference point
- Losses strictly less prefered to the reference point

53
Q

Examples of reference dependance

A
  • Sticking to current health insurance
  • Patients in very poor health may take more risk as their reference point is
    death
    -
54
Q

Status quo bias

A

This knowledge can be used to construct clever default options to ‘nudge’ people
- Vaccinations the norm
- Organ donation the default

55
Q

Diminishing sensitivity

A

the higher the number is absolute value, the less sensitive the individual is
- valid for gains and for losses

  • Gains; reinforces concavity of the utility function
  • losses; induces convexity of the utility function
56
Q

Loss aversion

A

More sensative to losses than to gains

57
Q

v(x) = u+(x) if x > 0
V(x) = -λ*u-(-x) if x ≤ 0

A

Formulas loss aversion
- x are gains and losses relative to the reference point
- Loss averion is increased by lambda
- Steeper for losses

58
Q

Consequences of loss aversion

A
  • Disparity to willingness to pay and willingness to accept; WTP is much lower than WTA en eventually to loose
  • Endowment effect; more valuable when you poses certain goods, harder to loose for people.
  • Incentive framed losses are more effective in prevention health
59
Q

Basic elements of probability weighting:

A
  • Reference dependance; w + (p) and w -(p) (different function for gains and losses)
  • Overweihting small probabilities;
  • Underweighting of large probabilities

Linked to pyshological phenomena
- optimism; underweighting; character treat
- Insensitivity (all p weighing as 0,5); cognitive bias

60
Q

Underweighting

A

w(p) < (p)

Percieved smaller than actual

61
Q

Overweighting

A

w(p) > (p)

Percied weight is higher than actual probability

62
Q

Impossibility effect:

A

overweighting of rare events

63
Q

Overweighting small probabilities

A
  • w(0.01) > 0.01
  • People overestimate the (low?) probability
    of illness, p
  • This implies that they may accept an
    actuarially unfair premium (r > p*q)

Experience more risk, and are willing to pay for their percieved risk

64
Q

Overvaluing certainty

A
  • 1−w(0.9999)>0.0001
  • Percieve this the high chance as a small chance
  • smaller than a 0.0001 chance, because of the overestimation
65
Q

risk averse

A

= means mostly case of overweighting

66
Q

Framing

A

People tend to be response in framing with the same outcomes and not just the end to end results in their decision
- Not accounted in expected utility function

67
Q

Fourfold pattern

A
  • Prospect theory predicts four distinct patterns of risk attitudes, eg. EU function just one

Small probability, gains; risk seeking
Small probability, losses; risk averse

Large probability, gains; risk averse
Large probability, losses; risk seeking

68
Q

shape diminishing sensivity

A
  • Concave (gains) to convex (losses)
69
Q

Examples calculations - steps

A
  • Look at percieved risks
  • Look at utility alternative
  • losses are negative
70
Q

Three pilars prospect theory

A
  • loss aversion (a pure psychological phenomenon, an extra)
  • Reference dependence (a value function instead of standard utility function)
  • Probability weighting (instead of probabilities)
71
Q

They can pay a lower premium (smaller certain loss) if they choose a gamble with paying nothing (probability 1-p) or paying their higher voluntary deductible (probability p)

A
  • Status quo bias
  • overweighting of low probabilities,
  • fear of regret
72
Q

small risks

A

Risk aversion
- Weighted high

73
Q

Representativeness heuristic

A

is a thinking shortcut where people judge if something (A) belongs to a group (B) based on how similar A is to their idea of that group, without using logic or statistics.
- overestimate probabilities when something fits a stereotype.

Problems;
- Prior probabilities
- sample size
- Randomness of outcome; something looks more random than other sequences

74
Q

Regression to the mean bias

A

If one of the outcomes of an experiment is extreme, the next outcome will be
closer to the population mean

  • Moving back towards the mean
75
Q

Availability heuristic

A

= a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method, or decision.

If it comes easier to mind the probability must be higher, more common or more likely

76
Q

Anchoring (and not enough adjustment) heuristic

A

= a cognitive bias that causes us to rely too heavily on the first piece of numerical information we are given about a topic.

77
Q

Systems and biases/heuristics

A
  • Automatic system; relies on biases and heuristics
  • Deliberate system; relies on rationality
78
Q

affect heuristic

A

The affect heuristic is a mental shortcut where people make quick decisions based on their emotions or feelings (positive or negative) about something, rather than on logical reasoning or facts.

  • Experiences (past products associated with feeling)
  • Evaluability; (how easy/hard is it to judge goodness/badness)
  • Individual differences (like something benefits higher than the risk)
79
Q

simons scissors

A

Human rational behavior is shaped by a scissors whose two blades are the structure of task environments and the computational capabilities of the actor

  • Computational capabilities (to calculate)
  • structure of the task
80
Q

Ecological rationality or bounded rationality

A

what’s rational depends on task and environment, not on laws/axioms
- Rational decision makers use fast-and-frugal heuristics that work well
- To understand and predict choices we should go beyond ‘as-if’ models (prospect
theory) and study ‘process’ models (take the best heuristic)

81
Q

satisficing

A

Non-compensatory decision rule
- Search for passes aspiration and that is good enough
- rather than maximizing (costs time and energy)

82
Q

Take the best heuristic

A

considering a task or choosing proces
- Search rule; Look at cues (characteristics or information) one by one, starting with the most relevant or valid.
- Stopping rule; Stop searching as soon as you find a cue where the two options differ. This difference indicates a potential decision point.
- Decision rule; Choose the option with the better value on that cue

83
Q

Experiential Sampling Paradigm

A

In experiential sampling, individuals explore outcomes by sampling. They receive:

Partial feedback: Only informed about the outcome of the chosen option.

Full feedback: Informed about both the chosen outcome and what would have happened with the unchosen option.

84
Q

Description-Experience Gap

A

The tendency for people to make different decisions when risks are described vs. when they are experienced.

  • Described risks: People choose riskier options with small chances for good outcomes.

-Experienced risks: People choose safer options after sampling the outcomes.

85
Q

description-experience gap why?

A
  • Incomplete sampling; People tend to sample too few times (median: 16 samples), leading to incomplete information. Rare outcomes may be overlooked, assume the same outcomes
  • Recency Bias in Decision Making; rare bad outcome more risk averse
86
Q

Prospect Theory: Described Alternatives

A

When risks are described:

  • Certainty Effect: People prefer certain outcomes in gains.
  • Risk-Seeking in Losses: People take risks when faced with losses, even for unlikely outcomes.

Example: People buy insurance for unlikely losses, even if the risk is very small, because described losses feel more significant.

87
Q

Description vs. Experience-Based Decisions

A

In described decisions, people follow predictable patterns. In real-world decisions, they often make the opposite choice, relying on experience and choosing safer options.

ESHPM - Jaar 3 (9 decks)

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