Neoclassical V Behavioral Economics Flashcards
Behavioural Economics
A recent phenomenon, deals with human behaviour’s deviations from the ‘rational’ man
What are the assumptions of Rationality? (4)
Agents choose independently
An agent has fixed tastes and preferences
Agents gather complete information on alternative choices
Agents always make optimal choice given his/her preferences
Assumptions of Behavioural Economics (6)
Agents reason poorly, act intuitively and have limited computational capacity
They are strongly influenced by social norms
They act reciprocally by making kind gestures
Lack self-control, tend to be present-biased
Strongly attached to existing default choices
Loss adverse
Case Study 1: Retirement (present-biased)
Growing concern people not saving adequately for retirement.
Switching to an opt-out system increases participation from 20% to 80% in 401(k) retirement plans in the U.S.
Case Study 2: Electricity Consumption
Randomly chosen households sent letters informing them of their electricity use compared to the average household. Classification as ‘great’, ‘good’ or ‘below average’.
Impact of letter on household electricity use
Approx 2% overall. 0% for households with lowest initial consumption and 6% with highest initial consumption.
Case Study 3: Hotel participation programme in environmental conservation
Subjects randomly assigned and given 2 potential messages. ‘Help save the environment’ or ‘Join your fellow guests in saving the environment’.
Descriptive norm condition had a 44% higher towel reuse rate.
Case Study 4: Disposable bag use (loss aversion)
U.S study of 5 cent tax on disposable bag vs 5 cent bonus for bringing own bag.
Tax had large effect, bonus had no effect.
Case Study 5: Broken windows theory-spreading of disorder
Signs of disorderly and petty criminal behaviour trigger more disorderly and petty criminal behaviour. Field experiments with 2 conditions A and B. Observed that littering much greater in area B (69% compared to 33%) where there were already signs of graffiti and litter.
Case Study 6: Financial/non-financial rewards for HIV protection/selling condoms
Field experiment randomised across Cusaka, Zambia. Barbers were put in 4 groups and recruited to sell female condoms. Control group, large financial reward, small financial reward and non-financial reward star treatment (public recognition). Barbers in star treatment sold twice as many condoms as any other group, on average.
