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behavioral economics

Questions and Answers of Behavioral Economics

Carefully explain why risk aversion can make a person seem impatient.
What are the implications of habit formation for the life cycle hypothesis?
What context effects do you think make it more likely that someone will think of a series of events as a sequence rather than separated?
What is the expression for D(t) with quasi- hyperbolic discounting?
Looking back over this chapter and the previous two, come up with examples of context effects.
Looking back at Table 4.10, what would happen if Maria’s reference point was to do her homework on Saturday, and what if it was to do it on Monday? How is this related to the concept of personal
I showed that δspeed- up > δdelay in the case of a receipt. Show thatδspeed- up < δdelay in the case of a payment.
In section
Explain the difference between time- consistent and present- biased preferences.Why is this distinction not important in a model of exponential discounting?
Inter- temporal utility (as defined in equation (4.1)) is about measuring streams of utility over time. To make life easier for themselves, however, economists normally think about streams of money
Is prospect theory an example of over- fitting?
If loss aversion can lead to risk aversion, how can we tell the difference between loss aversion and risk aversion?
In many court cases there is no clear- cut defense and prosecution (e.g. divorce disputes). What does the fourfold pattern of risk attitudes predict in such cases?
Carefully explain why the overweighting of small probabilities can lead to tax evasion and frivolous litigation.
Why may a person’s decision to evade taxes be influenced by what his friends and colleagues are doing?
Carefully explain how we can estimate a person’s risk aversion by their choice of insurance deductible.
Is expected utility theory of any practical relevance?
and γ = 0.61, a person would pay $110 for an extra deductible of $500 if the claim rate was 4 percent. How much would a person be willing to pay to reduce the deductible by $165 if the claim rate is
that, applying the standard formulation of prospect theory, with λ = 2.25, β =
I argued in section
Are preference reversals caused by intransitive preferences or procedural invariance?
Is regret theory the same as a model of reference- dependent utility with a stochastic reference point?
What would happen to the equity premium if investors were less loss- averse or the evaluation period was longer? How often should you evaluate your investments?
One set of prospects considered by Loomes, Starmer and Sugden (1991) was the following: A = (0, $10; 0.6, $3), B = (0.7, $7.50; 0.3, $1) and C = (1, $5). What would you choose between A and B, B and
What do you think is the relevant reference point of a prospect? How might the certainty effect be related to reference dependence?
In 1963 Paul Samuelson wrote about a colleague who said that he would turn down the prospect (0.5, −$100; 0.5, $200) but would accept 100 such prospects.Suppose that his utility function is u(x) =
Using prospect theory, say whether a person would prefer prospect I or prospects J to N from Table 3.6.
Using the model of disappointment with θ = 0.002, consider the following three prospects: A = (0.5, $2,400; 0.5, $0), B = (0.7, $2,400; 0.3, $0) and C = (0.3,$2,400; 0.7, $0). Work out the utility
Show why it is inconsistent with expected utility that most people choose prospect F over E, and prospect G over H, when the prospects are as in Table 3.5.
Explain why the indifference curves in a probability triangle diagram are straight lines if preferences satisfy expected utility theory. [Hint: we can write the expected utility of a prospect as U(x)
What are the advantages and disadvantages of using the 1/ n heuristic to choose investments?
Suppose that Anna owns her own house and house prices go up. Should she spend more? Now, suppose she has money invested in the stock market and share prices go down. Should she spend less?
Give reasons why fungibility may not hold.
Using search, contrast effects and reference dependence, suggest why a person who lives in an area where apartments cost around $200,000 may be reluctant to buy when she moves to an area where
Does the fact that a taxi driver works nine hours a day mean he has a reference level of hours he wants to work?
What is ecological rationality and why is it important in understanding the efficiency of markets?
What effect do you think the internet has had on the validity of the law of one price?
How is it possible to detect lying in the lab when subjects are given tasks to do and self- report their success?
Write down a list of occasions when you could have gained from lying or deception. Why can context influence whether or not you lie?
Suppose someone’s willingness to pay for a good is $10 and their reference point is $20. If the good is $13, will they buy it? What does this tell us about sales and ‘bargain buys’?
Why would we expect EG to be greater than WTA?
Argue that, if true, the ‘no loss in buying’ hypothesis means the WTP valuation is more reliable than the WTA valuation.
List all the heuristics that have appeared in the chapter.
Why is time important in reference- dependent utility? Compare how happy Carol and Amanda will feel the day they get the report from their broker, the next day, after a month, etc.
Is it possible that Anna could be influenced by both trade- off contrast and extremeness aversion simultaneously?
Why might a company wanting to advertise a product be interested in the trade- off contrast hypothesis and extremeness aversion?
If you wanted to find a new mobile phone, outfit, car, house or job, how would you search for one?
What is bounded rationality?
What are the main differences between Homo economicus and Homo sapiens?
Why should economics pay attention to ecological rationality?
What is the methodology of positive economics and why is it controversial?
Why is there a danger that behavioral economics will over- fit experimental data?
What is the discovered preference hypothesis and why does it matter?
What are the objectives of studying the standard economic model?
What are the objectives of behavioral economics?
Is it good that experiments usually involve students as subjects?
Why does it make sense to mix up experimental treatments and sessions –i.e. to have multiple treatments in each session and multiple sessions for each treatment?
Why does a heuristic usually come hand in hand with a cognitive bias? Should we emphasize how clever people are for having good heuristics, or how dumb they are for being biased?
Why do we need to run economic experiments?
Why is the standard economic model a good thing, and why is it a bad thing, in trying to understand economic behavior?
What do empirical studies indicate regarding the use of incentive contracts in the labor market?
Explain why the difference between social norms and market norms is important for public policy. What sort of mistakes do governments tend to make in this regard?
In what way are spiteful preferences asymmetrical?
What is meant by costly signaling theory? What may it help to explain?
What do behavioral studies indicate regarding IA models versus reciprocity models in terms of explanation and prediction?
Explain the features of PGT, giving two examples of situations where it is relevant.
Explain what is meant by the crowding out of intrinsic incentives, giving two examples.
Explain the difference between IA models and reciprocity models.
Explain the differences between the Fehr–Schmidt and Bolton–Ockenfels models of inequality-aversion.
Explain the term ‘strong reciprocity’, and why it is an important concept.
What factors are relevant in determining the fairness of a transaction?
What are social preferences?
Explain what is meant by EWA learning.
Explain what is meant by a pooling equilibrium and the circumstances under which it may occur.
Explain the role of signaling in games.
Explain why equilibria in bargaining games are often different from those predicted by SGT.
Explain the meaning of focal points, and the strategy implications.
Explain the main findings of the study by Goeree and Holt (2001).
Explain what is meant by a mixed strategy equilibrium, and its implications for optimal strategy.
Explain the structure of the prisoner’s dilemma (PD) game, and show how its equilibrium is determined in SGT.
Compare the concept of dominant strategy equilibrium with Nash equilibrium.
Explain what is meant by a dominant strategy equilibrium.
Explain what is meant by the term ‘nudge’ as far as government policy is concerned, giving examples.
Discuss the role of neuroeconomic evidence in understanding and developing models of intertemporal decision-making.
Explain the meaning of the term commitment in connection with self-control problems, and discuss its role in addressing these problems.
Explain the nature of multiple-self models and how they address preference reversals.
Explain the contribution of prospect theory models to understanding intertemporal preferences.
Compare and contrast hyperbolic discounting and visceral factor models as approaches to explaining preference reversals.
Discuss the advantages and disadvantages of hyperbolic discounting.
Explain how the (b,) model of quasi-hyperbolic discounting can explain preference reversals, using a numerical example.
Explain the meaning of temptation and procrastination in terms of how they relate to inconsistent time preferences.
Describe the various confounding factors involved in the concept of time preference.
Explain what is meant by a violation of independence in intertemporal choice, giving an example. What might cause this violation?
Explain what is meant by ‘delay-speedup asymmetry’, and how it is related to prospect theory.
Explain what is meant by a negative discount rate; under what circumstances might people have a negative discount rate?
Explain what is meant by ‘front-end delay’, and the advantage of using this experimental method.
Describe the method of using matching tasks, discussing any problems that tend to arise in practice.
Describe the method of using choice tasks to elicit information, discussing any problems and how they may be overcome.
Explain the difference between stationary discounting and constant discounting.
Explain what is meant by consumption independence, giving an example.

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