Week 5: Non Standard Beliefs

Question 1

State and explain the three types of nonstandard preferences

Answer 1

1. Reference dependence preferences: Utility from an outcome depends on the comparisons to relevant ‘reference levels’ or ‘reference points’
2. Time preferences: Preferences change over time (dynamic inconsistency)
3. Social preferences: People not only care about their own well-being but also about that of others. (Fairness, equity, status, reciprocity)

Question 2

What is projection bias?

Answer 2

• Projection bias occurs when individuals may change their own future preferences because they project their current preferences into the future sonf underestimate how much they will change.

Question 3

Projection bias example: Read and van Leeuwen (1998)

Answer 3

Question 4

Remark about projection bias:

Answer 4

Individuals may act according to current preferences not because they mispredict future preferences but because they deem current preferences more valid

Individuals may even be ignorant of current true preferences and may mistakenly project current context.

Question 5

Empirical example: Projection Bias in Catalogue orders: Conlin, O’Donoghue, and Vogelsang (2007)

Answer 5

Ordering clothes on a day with a Lower temperature is associated with a higher probability of returning the item.

Snowfall on the date of order is associated with a higher probability of returning the item.

Question 6

What is the Bayesian Probability estimation

Answer 6

• Probabilities are estimated correctly given the relevant information
• E.g if a fair coin is tossed 20 times and lands on head each time a bayesian believer will still believe the probability of tales is 0.5 since prior outcomes have no effect on future outcomes.
• Many tend to assume that the probability will be less than 0.5

Question 7

The gamblers fallacy

Answer 7

Question 8

Overinference: The hot hand effect

Answer 8

Question 9

Overconfidence and the problem:

Answer 9