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business
behavioral economics

Questions and Answers of Behavioral Economics

How might policy- makers take into account the finding that poverty impedes cognitive function when designing policy?
Discuss ways in which we could try and discern whether the automatic process is to be selfish or ‘kind’.
Given that brain activation is constrained to fall within a fixed range, how can activation be in proportion to the reward? What does this suggest about our differing ability to distinguish relative
Relate reward prediction error to reference dependence.
to 9.7?
Why is reward prediction error relevant in interpreting Figures
When does Rob feel the value of winning at roulette: when the wheel stops, when he collects his money or when he eats the burger he buys with the money? Relate this to hedonic editing.
Do you think the brain’s reward systems react to expected value or ‘expected utility’?
Why does the brain interpret money as a reward? Is it a primary or a secondary reinforcer?
In Chapter 6 we briefly looked at the role of networks in facilitating coordination in groups. Discuss the consequences of assortative matching for network structure.
Is informed consent necessary to run an experiment?
Why should development economics take account of cultural differences?
Why may there be conflict within the household as to how to allocate resources?
Why does it not make evolutionary sense for a young person to support an older parent? Why could it happen because of cultural influence?
Why do many people save money all their life in order to bequeath it to their children?
Does it help a person to be overconfident of ability?
How can confirmatory bias help explain the gender gap?
What do you think is the main cause of the gender gap?
Does maximizing utility mean maximizing happiness?
Discuss reasons why we might observe antisocial punishment.
Why is it so hard to get cooperation to emerge in the haystack model?
Is natural selection relevant in understanding modern economic behavior or is it only culture that matters?
Design an experiment to find out whether people dislike aggregate risk compared to idiosyncratic risk.
Are present bias and time inconsistency good evolutionary strategies?
How can evolution explain reference dependence? How about loss aversion?
Let’s go back to the first example of long and short winters. Suppose there are 1,600 adults of type L, 1,600 of type S and 1,600 randomizer types. The randomizer types decide at the start of each
Give some examples of intermediate goods that may enter the utility function.Is money an intermediate good?
There is some evidence (see Chapter 8) that men are more overconfident of ability than women. What consequences might this have in the labor market if employers offer optimal contracts?
Discuss different reasons why performance- related pay may not incentive a worker as much as a flat salary.
Suppose that someone donating to charity is told ‘Most people give $10’. Why might this influence how much the person gives?
Explain how we can distinguish warm glow giving from purely altruistic giving.
What can we learn from the ultimatum game about the interaction between a buyer and seller of a good?
Should employers fine poorly performing workers or give bonuses to wellperforming workers in order to provide more effective incentives?
Why can loss aversion help explain why a cut in wages is worse than a rise in wages is good? How is this related to wage stickiness and habit formation?
Is it better to be in a firm in which you earn $50,000 and the average salary is$80,000 or in a firm in which you earn $45,000 and the average salary is $30,000?
What is the difference between psychological game theory and ‘standard’ game theory?
Is strong reciprocity a form of altruism?
In the intentions- based model of section 7.3.1, the equitable payoff was derived looking only at Pareto- efficient outcomes. Why is this sensible?
How can an intentions- based model of fairness be adapted to take account of earned versus unearned payoff, and social norms?
Why can punishment work in a linear public good game according to the Fehr–Schmidt model if only one person is willing to punish, but in the ERC model only if two people are willing to punish?
Find the general conditions such that punishment can work in a linear public good game in the ERC model and the Fehr– Schmidt model. Hint: for the ERC model, find the level of punishment such that,
Should we equate material payoff with money?
Carefully explain the differences in incentives for the proposer in a dictator game, ultimatum game and dictator game with third- party punishment.
In section 7.1.5 I mentioned a study by Andreoni and Miller (2002). They asked subjects to play 11 different dictator games. In each game the proposer was given a number of tokens, from 40 to 100,
Why might payoffs be lower in a public good game with punishment even if punishment increases contributions? Is it good to have the threat of punishment or not?
What is the Nash equilibrium in a dictator game? What about the trust game and the ultimatum game? Be careful to distinguish sub- game perfect Nash equilibria from other Nash equilibria.
In a market with two firms in which firms sequentially choose quantity of output(i.e. the Stackelberg model), is there an advantage in being the first firm to choose quantity?
What factors might influence a firm’s decision whether or not to enter a new market?
Why might a person’s position in a network influence the choices they make?
How can leadership help people coordinate in the weakest link game and threshold public good game? You might want to think about forward induction.
Why do you think it matters if there is the possibility of a refund or rebate when contributing to a threshold public good?
and 6.19, which auction format do you think will raise the most revenue?
Given what we see in Figures
Discuss why the strategy of teams may differ from that of individuals.
Explain the difference between best reply learning and fictitious play.
What do you think are the consequences of the law of small numbers and confirmatory bias for learning in games?
How can we change the models of reinforcement learning and belief- based learning to take account of loss aversion?
I said that it does not always make sense to set the probability of choosing a strategy proportional to its attractiveness. Can you explain why?
Look back at Table 6.9. What would happen if ρ = 0 or ρ = 1?
Look back at Table 6.8. I assumed an initial attractiveness of 30 for both strategies.What happens if the initial attractiveness of both is 10 or is 100? What has this got to do with initial beliefs?
Explain why sub- game perfection rules out non- credible threats. What about forward induction?
Does risk dominance or Pareto dominance seem more relevant to you in predicting what people will do? What about forward or backward induction?
Does a sophisticated person behave consistent with the empirical optima (see Research methods 5.1)?
Carefully explain the difference between the cognitive hierarchy model and klevel reasoning.
Does it make any difference if people can communicate with each other before playing a game?
we saw that the winning number in the 0.667- beauty contest fell over rounds even though no feedback was provided to subjects. Why might this be?
In Figure
Suppose you are playing the p- beauty contest with a group of people who have only just been told about the game. Is what you have learnt in this chapter any help to you? What about in the simple
When is the best time to sell an asset as a function of what other investors will do?
In 2017 the phrase ‘alternative facts’ was used following disagreement over attendance at President Trump’s inauguration. Why may it be difficult to resolve conflicting opinions and reach a
Will the rise of social media lead to more or less bias in voting decisions?
Provide examples from health care, finance and voting in which the availability heuristic may influence decisions.
Come up with a list of reasons why a person’s opinion of electoral candidates may be biased. On what basis should the person decide whom to vote for?
How does the buy– sell imbalance relate to the ostrich effect?
Given that double auctions are known to be efficient in the lab, is it possible to create bubbles in the lab without subjects being confused?
What do you think happens if some traders have experience of bubble and crash but some do not?
A standard asset market experiment involves choice with risk because the probability distribution of future dividends is known. What do you think would happen if the probability distribution over
Why do we see bubbles and crashes in the housing market?
When should someone buy an asset that is rising in price? When should they sell it?
Carefully explain why small area variation is evidence of inefficiency in health care?
How can we address the problems caused by biases in the interpretation of new information in health care, and more generally?
Consider reasons why confirmatory bias and the law of small numbers may matter in health care.
Can we trust people’s opinions? Why might people trust friends over expert advice?
Carefully explain the difference between a signaling equilibrium and pooling equilibrium in a signaling game.
Why might people be overinfluenced by what others do in some situations, and underinfluenced in others?
There are no experiments to test for confirmatory bias in economic behavior.Design one. And then do one to test for the law of small numbers.
Think back through some recent decisions you have made. Were they choices with risk or uncertainty?
Why might someone who is ambiguity- averse delay making a decision? How does this relate to procrastination because of a present bias?
Ellsberg (1961) suggested another box in which there are 90 balls. You know that 30 of the balls are red and the other 60 are some mix of black and yellow.One ball will be randomly drawn from the
Why might people dislike compound lotteries or uncertainty?
To what extent do you think that present bias is a factor in combating climate change?
Compare the three approaches, looked at above, for deriving an intergenerational discount factor. Why is it so difficult to agree on the best approach?
How can people overestimating how much they will use the gym and underestimating how much they will use the telephone both be caused by time inconsistency?
What strategy can firms use to take account of other cognitive biases and heuristics that we have looked at, such as loss aversion and risk aversion?
Is there a difference between firms exploiting a customer’s bias and changing their strategy to take account of a customer’s bias?
Why do many firms, such as gyms, charge a two- part tariff with a zero user fee?
Discuss reasons why a person may simultaneously be borrowing money and putting money into savings.
What is the relationship between a model of habit formation and referencedependent utility?
What evidence do we have that people do not maximize discounted expected utility?
If a person is risk- loving, will they appear more patient?

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