WEEK 6 BEHAVIOUR

Question 1

Name 4 types of utility: PADT

Answer 1

Peak End Rule: People view the same events differently and judge utility differently based on how they remember

Anticipatory Utility: Utility gained may be more or less depending on what you expected, if expected loads of fun and got boring then the utility would be even worse

Diagnostic Utility: People think what utility they deserve and compare it to what they actually got

Transactions Utility: People judge their utility based on the factors and resources needed to obtain that, if buying a good resulted in the death of millions the utility gained from that good wont be very high

Question 2

What are the four criteria’s rationality: BEALA

Answer 2

Bounded Rationality: Humans can only handle limited amount of info Simons (1955)

Empirical observation should logically change or affirm your decisions

Attitude should not change if based on irrelevant factors

Logical

Attitudes are coherent

Question 3

Behaviour: Explain the difference between the standard model and the Behavioural model

Answer 3

The standard model describes the utility people should get, the behavioural model describes the utility people actually get

Question 4

Explain how reference points determine our utility and provide the equation

Answer 4

Reference points are what we use to compare an event and determine our utility, if event A happens and i assumed i would get 4 utility but felt like i got more then overall ill have more utility vice versa

U(x)= £U(x)+v(X-r) with £being the weight on total income/wealth/event and v(X-r) being the expectation function - if expected 100 pounds and got 125 my utility would increase perhaps more than proportionally

Question 5

Name 3 Factors that affect utility

Answer 5

Attraction effect - if A is wayy better than C im more likely to choose A and also choose B if B is closer to A

Menu Effect - if there are many options and i choose one the utility may not be as high as i may be thinking what if i chose another one

Anchoring Effect: People respond more positively or negatively if they have been approached positively or negatively

Framing effect: Peoples attitude and beliefs frame their world and so utility is different, fat people want big plates for more food so a smaller plate may instantly reduce utility

Endowment Effect: Owning an item may make it more valuable to you thereby increasing its utility to you

Question 6

What is heuristics

Answer 6

Making a decision that may not be the most optimal but it achieves the short term goal satisfactorily

Question 7

There are three heuristics, availability, diversification and representative. Explain and example all

Answer 7

Availability: Relying on what you remember and using it as a basis for whatever decision you’re about to do - seen something happen to ted on the news about x and use that as reference

Diversification: People tend to diversify their holdings across all given options even if it is not optimal

Representative: Judging an event based on how similar it is to a sterotype

Question 8

Bayes Theorem, explain and formula and doctor example

Answer 8

A mathematical theorem for determining conditional probability.
Can be used for vaccines for example say there is a sickness than only gets 1% of the population there are 1000 people and 51 people get tested positive but only 1 of that 51 is actually sick you can use bayes theorem

P(H|E) = (P(E|H) P(H) )/ P(E)